How African fintech is set to challenge traditional banking in 2022

Fintech in Africa versus traditional banking systems - Startup Lagos

The flood of fintech investments

Globally, fintech investments hit a record high of over $132 billion with many pundits predicting that the sector would exceed the $150 billion mark in 2022, especially with the rise and specialization of areas like blockchain and B2B tech firms. With this projected rise in investments in fintech, the world of traditional banking is set to face even greater disruption.

In light of this, traditional banking firms are gearing up for this development. JP Morgan Chase had recently announced at the start of the year, that it will spend more than $12 billion on technology in 2022. These intentions to utilize more of microservices architecture and cloud and modern engineering practices, are to accelerate software development by the firm. The company is also planning to make significant acquisitions of fintech companies, and redesign the way it attracts and retains the best technology people.

These show remarkably how the world of traditional banking is quivering under the fear of fintech usurpation.

The story for African fintech

For Africa, the success story has been no less significant, with African fintech drawing in more than 60% of the total massive investment of $4.3 billion across the continent. African fintech companies also continue to proliferate and multiply continent-wide, with many new financial services sub-sectors being disrupted by technology. Of the eight unicorns and soonicorns spawned so far in Africa, six are fintech companies.

While fintech has grown rapidly on the continent in terms of investment size and attractiveness, little changes have occurred in reaching the objective goal of financial inclusion. There still exist glaring gaps and lacunas that innovative solutions need to address. While this may seem a problem, herein lies also a huge opportunity. Without a doubt, this is one of the motivating factors behind increased investor interest.

As of 2018, records showed that over 1.7 billion adults globally were unbanked, and of this large number, over 400 million were from Africa. In 2019, this figure attributed to Africa is recorded at about 460 million. What this means is that many Africans are cut off from access to financial services. Many factors account for this poverty of access, from poor internet penetration within certain regions, to lack of proximity and access to financial institutions in remote places. Africa especially is in need of the power of interventions that fintech brings along.

As African fintech disrupts, traditional banks are ill at ease

Without a doubt, technology is offering new vistas within different sectors of the global economy. Through technology, we are able to facilitate faster and more efficient responses to issues. Academic scholars aver that in relating with the traditional, the digital either dominates the analog, is resisted by the analog, forms a synergy with the analog, or transforms the analog. This helps us to understand a bit of the way in which traditional and digital dispensations interact. In the area of fintech, technology is playing a role in transformation, offering individuals greater access to financial services at reduced stress and complexity. However, in some other sub-sectors, fintech is totally dominating traditional financial services systems.

Fintech is dominating traditional banking systems in certain sub-sectors.
Fintech companies are appearing to, in some sub-sectors, dominate traditional systems.

However, in this goal of transforming the financial services space, many traditional systems that are unwilling to respond to change, feel naturally threatened. Fintechs are pulling a lot of weight across the African continent, with the bulk of investments that they are drawing in, but even more with the volume of their transactions. While the traditional banks still have an advantage as a bank for the big, wealthy, and influential customers, who give a large weight of support to the banks, they are losing out on the volume of transactions. In this stead, fintech companies are capturing the young, vibrant, and spend-thrift Gen-Z population, which represents a majority of the African population.

Many Nigerians find it easier to run transactions using fintech companies, such as Quick-teller, Baxi, PocketMoni, Unified Payments, Cellulant, Barter by Flutterwave, Remita, MoniDey, etc. These payment solutions are not only cheaper, but they are also less cumbersome and complex.

Late last year, the Chairman of Flutterwave, Tunde Lemo acquired a majority stake in Union Bank, after substantial shareholders exited the Nigerian lender. In what is unprecedented, he had With purchased an 89.39% share of Union Bank from Union Global Partners Ltd. (UGPL), through his investment firm, Titan Trust Bank.

While fintech companies are making significant strides in the industry they are constrained especially in Nigeria by financial infrastructure. As such, it would be a game plan of the fintechs to consider acquiring traditional banks.

Parrying the strokes: Traditional banks on the defensive

To consolidate their presence in the industry, many traditional banks are planning a clap back. For one, a number of these banks are iterating their business models to digital banking solutions. Wema bank introduced Alat, a thoroughly digital platform that helps it to capture the Gen-Z population, and also increase its offerings across digital channels. Standard Chartered Bank also launched its mobile banking app with little or no charges on inter-bank transfers and other banking services.

FirstBank, Fidelity Bank and Union Bank have all initiated partnerships with PayPal to enable online payment alternatives for its customers. Customers can, therefore, register for a PayPal account through their internet-banking accounts, and make payments accordingly.

Uniting interests in achieving financial inclusion

The overarching goals of financial inclusion for every African have remained germane concerns because of the lack of easy access to financial services, a dearth of trust in financial service platforms, and the excessive cost of these services. Many have lamented the bothersome costs and charges for service that many financial institutions levy on them. Others have noted how cumbersome it could be to make simple payments, transfer cash outside of the country, or simply open a bank account. While these concerns may seem little in some quarters, they are enough to disgruntle prospective customers.

Infographic detailing the numbers of the unbanked across African countries.

In 2018, the stat, capturing financial inclusion levels in sub-Saharan Africa nearly doubled what it had been ten years back, at 23%. In Togo, financial inclusion rates further stand at about 82%, especially with the rise of digital financial services. Some other sub-Saharan African countries, like Kenya are blazing the trail in mobile payments. Truly remarkable achievements across the continent.

However, more can be done. More needs to be done.

It is here that traditional and digital banking need to broker a synergy. For the financial services space to make the needed growth, it is important that collaborations emerge to cater for the diverse needs of banking and financial services. Through a collaborative effort of traditional banks, with their elaborate infrastructure and regulatory backing, and digital financial services solutions with their innovative and efficient interventions to the status-quo, things can improve drastically.

It is crucial that African fintech, as well as, traditional banks are paying attention to the opportunties here in collaboration, and not just as any cut-throat strategies to seize back market share. The overarching goal of financial inclusion must not be forsaken on the altar of aggressive competitiveness.

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