Disruptive financial technology: Should Banks fear or is in an inevitable future

The last year has seen a great number of disruptions in many industries mostly attributed to technology. Most recently in Kenya we have seen telecommunication giant Safaricom disrupt the financial sector through its flagship product; Mpesa.

Traditional strategic thinking and rightly so would dictate that a company analyses its strength, weaknesses, threats and opportunities within its perceived industry players/competitors hence few banks had anticipated competition from a different industry such as the telecommunication industry.

Most recently Safaricom announced that its testing a payment card that will be linked to customers’ M-pesa accounts as it eyes a slice of transaction commissions from the multi-billion shilling electronic cash industry.

The big question is, are we resigned to a future where disruption rather than stability is the new normality? We are seeing Uber, Little cab and the likes decimate the cab industry. This fate, presumably, awaits every industry and every occupation.

An efficient finance industry is at the core of a productive economy. But the finance industry has many critics, who might well argue that finance needs disrupting. Fintech is the label given to the explosion of disruptive innovation in the finance sector. This article aims at providing a practical framework for thinking about its role.

There are four core functions of the finance industry in any given economy:

1. Facilitate payments and transactions processing, which is crucial for trade and economic life generally

2. Safekeep assets and the creation of capital

3. Enable the sharing of risk through insurance and pooling

4. Intermediate savings, investment and capital raising

There have been three broad areas of concern about the finance industry. There is continuing concern about what the finance industry did to the global economy in 2008 and whether it could happen again, that is, the concern about systemic risk. There is a belief that some people are not getting the financial services they need, for example, limited access to banking in the developing world, such as the financing gap faced by SMEs. Finally, there is a view that financial services are too costly.

Will fintech solve these problems? Finance has always been an early adopter of information technology such as ATMs, EFTs, Mobile Banking. So the question is whether fintech will reach places that earlier technological innovation didn’t.

Can fintech take us further?

There are reasons to think it will. Fintech automates complex processes, enabling disintermediation. It brings the intensive use of data and analytics giving the customer much better information, visibility, and access to choice. Fintech thrives on relatively low barriers to entry and, mostly, has low capital requirements, suggesting there will be much greater competition in some areas.

Already, in terms of value added, one of the most important fruits of fintech has been the marriage of finance and mobile telephony that is bringing the most fundamental financial services – reliable payments and safekeeping to Africa. Payment systems are subject to a lot of fintech activity everywhere. The lower cost technology will win, though the value proposition of products such as Mpesa.

Peer-to-peer is a good example of what fintech does well – beautifully designed software puts savers directly in touch with borrowers, informing the decisions of each in a transparent information environment, disintermediating incumbent banks, and helped, initially at least, by light regulation.

Fintech has the ability to drive cost out of the finance industry and efficiency in: but to what degree is the question.

Disruption is virtually inevitable for all industries, do not let your company be caught flat footed, get in touch with Viffa Business Intelligence and let us help you prepare your company for the future.