Digitised Bank Payments – Their Struggle Saga with Friend FinTech

Abstract – This article is neither a conclusion nor a claim by any means this is just an assumption and current picture focused on African markets. Idea for this write up is to explorer, read, enjoy, deliberate and put suggestions or new thoughts/ideas on table offcourse comments in agreement/disagreement are welcome. The evolution of financial systems has been a long but interesting journey characterised by sudden changes in underlying technology. Retail banking in Africa is far from where it should have been never followed the natural progression. Just one or two out of million of banks are getting disruptive. These model of banks with no physical branches, conducting all business through apps and websites. Incorporating chatbots and video calls for client communications, chatbots and robotic advisors.

Financial payments and banking started in a very inefficient and traditional way which was slow but still acceptable to the customers due to the stage in the information age. Experts in any form of payments like mobile, Internet, paper or card should not get disappoint after reading this as said its not meant for detailed or deeper understanding. Focus here is on high level discussion and showing what is happening payment industry and contribution/future impact by FinTech, MNO, MFS Companies and Banks well known campuses for all type of payments i.e mobile, internet, paper, plastic cards and even vouchers. There are lucrative but under-utilised banking opportunities in Africa and banks in the region need to step up and grasp these opportunities to succeed.

Introduction – Initially, almost all the fun & joy in the financial banking services (except non-banking services) space was attributable to banks with all the revenue being collected by the same entities. With advancement in technology, organisations outside the banking industry diversified into financial services targeting margins in the space. These were organisations servicing millions of customers through broad distribution channels, be they mobile operators, retailers or on-line merchants. If we had any global ministry of innovation for regulation and control then for sure on date cash will be only the single king.

A small study on Informal Financial System of Indonesia depicts very clearly; there are three products/services which are key in Indonesian market “Savings, Loans and Remittances (Domestic[Money traveling from cities to villages & International)” which are also a key products for banks but due to bank mind set of playing with BIG/LARGE figures this will never rise up well. If Reserve Banks, Regulator, Fintech companies and MNO plays well then this market size can grow up to approximately for about billion USD a month and can grow to even much higher. Following few crisis, most countries have increased monitoring and regulation on banks.

Main Story – Africa is dealing with the challenges of putting in place efficient, secure, low cost operating models, centralised operations, multichannel and multi-product capabilities coupled with low price, lighter and lean operating models. According to a study by Google available on various links, 80% of Africa’s total adult population do not have access to any form of formal financial services. FinTech’s (Under cover by MNO’s) in Africa are winning the race due to their focus and attitude of “be my customer” as opposed to the banks “who is eligible to be my customer” approach.

MNO’s speed to achieve their goal to standardise, automate, digitise, remove boundaries by brining cross order financial/remittances service in form of payments, cash, airtime, paperless and online. At the same time banks are still in their canteens with their coffee mugs without any sign of worry but in reality all African banks face tough challenges from MNO’s & Fintech players.

The role of informal institutions in providing financial services to the members of the community, and concludes by highlighting the opportunities these are present for formal financial service providers but in order to ensure accessibility of banking services, a bank has to have a wide branch network of fully branded brick and mortar marble banking halls with all the necessary security systems. The set up costs of these are so high and to recoup the same, the bank has to pass on the cost to the ultimate consumer. Times have changed and with change comes opportunity.

Over the past few years, the face of financial payments in most developing countries has taken a radical change from a bank model to an FinTech (backed by MNO) company dominated model. This change has brought about financial inclusion to most marginalised citizens and has greatly brought efficiency in the payment industry. This article will focus on why banks mobile banking can never out beat MNOs mobile money and happy to get feedback in agreement or against with reasons as these are pure my own views. Accessibility is a critical success factor for any service.

Banks on the other hand have limited operating hours and for those who have utilised technology by diffusing access to service from banking halls have a great limitation of country borders. MNO makes money on transactions but banks earns on money remain in account (Though this model has changed completely for most of African countries). MNOs on the other hand have embraced the concept of an extensive agent network at minimal cost. MNOs agent network is usually dense with at least 1 agent for every 1km radius. Customer does not need to travel long distances or fork out any money access an agent and perform agent centred transactions. Due to the nature of business, FinTech’s have excelled in “24×7, around the globe, use me” phenomena. This assures timeless and borderless access to services which provides for ease of use, more transactions and higher revenue for the MNOs.

In order for any business to thrive, it has to observe a wide cost to revenue ratio, however banks are subject to a high customer acquisition cost at $10 to $100 per customer whereas MNOs stand at between $2 and $10. This acquisition cost has a ripple effect on the charging structure throughout the life cycle of the relationship between the bank and the customer. Naturally, when the cost of customer acquisition is high, the resultant transactional cost will follow the same trend.

The cost of transacting on a banking platform is very high compared to transacting on a Mobile Money platform. – MNO’s interest in retaining subscriber is more then banks by giving service which may or may not generate revenue and always try to run promotions around same to win back. Usually the cost of setup and signage is borne by the agent itself in a bid to be more visible and to attract more customers as revenue is highly dependent on the volume of transactions pushed by the agent.

This is the time when customer centricity, financial inclusion and customer serving infrastructure (Agents, Merchants, Billers, Remittance partner’s network) should be the top agenda for banks in Africa but sadly it is not. Banks wants to run only behind high value with high dollar value transactions not dollar or two dollar value transactions. Banks in the region only continue to develop strategies to achieve sustainable growth which may not materialise as of now since it looks like the only strategy nothing beyond that. At the same time without a doubt I need to be honest as well with specific examples wherein a Bank is trying to jump the MNO’s role with the idea of strengthening and furthering financial inclusion. Kenya’s Equity Bank, Kenya & South Africa’s FNB bank opted to be a Mobile Virtual Network Operator (MVNO).

A few golden rules/bullet points to get quick wins;

• Needs to focus outside “digital and social media channel” i.e focus on radio, road show with village communities, focus on groups with in local language and style
• Trust local people to act as brand ambassadors for increasing customer loyalty and trust
• Focus on creating a cost-effective and efficient operating model is the golden key
• Carefully thought through branch expansion verses setting up an agent network
• Managing risk, security, compliance and bringing it up to global standard
• Leveraging mobile as primary medium for transactions and queries and online banking
• Technology enabled customer engagement and continuous innovation
• A complete set of counter-measures against Money Laundering and the financing of terrorism and proliferation, covering the required legal, regulatory and operational measures through and through knowledge set
• In-depth knowledge & willingness to attain knowledge on principles for mobile financial services Infrastructures.
• Understanding and willingness to attain in depth knowledge and hands-on core banking platform integration with MFS systems, architecture, banking grade switching and rules around same

The world is currently facing an economic crisis and most people are living on a hand to mouth basis. Banks go against the economic tide by encouraging savings (Which is correct and required for country economy and betterment of each person life) while MNOs encourage spending. There is little savings and investment in most countries hence most citizens spend whatever they earn on basic survival requirements. MNOs were quick to realise this and enabled ease of payment for most commodities through merchant payment facilities and payment for most utilities and bills through bill payment services.

In case of New Start up – MNO helped boost GDP by helping people with the will to startup their own business and grow, free consultation and support – “You Grow – I Grow” philosophy. For Distribution Channels Money distribution should be treated as distribution of cigarettes, coke & water bottles; which MNO can do easily with flexibility and Banks never thought of creating Agent networks where MNO’s Key success factor is Agent Banking only, on Limits side MNO Finical services limits set on upper limit and for Banks its on lower values. So MNO whole game is on Volume and Bank only wants value

MNOs run exhibit a high affinity to retain subscribers than banks. This is observed by the multiple promotions which may or may not be revenue generating and encourages customer win back. An MNO can run as much as 3 promotions per quarter while banks could go for a year without any activity simulating promotion. Banks have generally been found lacking in the areas of innovation, technology utilisation and adoption. A typical bank will review the architecture of their banking system once every 5 years while MNOs employ solution architecture who work hand in hand with their product development and innovation arms to deliver efficient and relevant solutions which meet the needs of the market.

Suppliers of core banking systems have kept the system eco system as complex as rocket science which makes integration to other systems a nightmare. This is in opposition to the open API approach adopted by MNOs. Most countries have slackened regulation on MNOs while banks are subject to stringent regulation by respective central banks and deposit protection bodies. Banks were known to be the centre of most economies financial transactions and in order to ensure stability to economies, most governments maintain a close watch on transactions in the formal payment system.

This education encompasses the knowledge, attitudes, skills and behaviours of consumers with regard to managing their resources and understanding, selecting, and making use of financial services that fit their needs. Mobile financial service providers i.e MNOs or Banks or even Independent MFS companies can succeed by focusing on some key areas to hold a much better position from today to tomorrow. Because financial capability is a relatively new area, alternative definitions and approaches to its measurement exist in parallel. The term “financial literacy” refers to one aspect of financial capability—the knowledge and awareness of financial concepts and products.

The framework developed for the financial inclusion and financial services for unbanked communities differ country to country and different service providers (Banks, MNO and FS/FinTech companies). Relaxed regulation allows MNOs to diversify and tap into financial services while banks find it difficult to venture into any other industry outside the usual core financial payments.

Most regulators impose stringent KYC requirements for account opening on banks. These requirements form a wide spectrum spanning from proof of residence, copy of ID, confirmation of employment to assure source of funds and a passport sized photo. Most citizens fall short on some of these requirement and failure to meet any one of the above immediately makes one ineligible to open an account. This places banks at a disadvantage because most people operate outside the formal employment system hence lack part of the account opening prerequisites.

The relationship between customer and bank is a relationship of trust, any customer deposit held by the bank is a liability which has to be honoured whenever it falls due. Some banks have failed to manage liquidity risk resulting in them being placed under curatorship by the respective regulators. Such a move has catastrophic effects of disrupting the banks ecosystem as bank hold cross investments with each other.

The informal trade market size is estimated to be worth around $7.4 billion for most African countries(Based on assumptions and reading on internet articles). Banks have a restrictive approach when it comes to on boarding customers. When one approaches a bank with a request, be it a new account opening or a loan request, they are subjected to rigorous checks and processes which frustrate would be customers. This “who is eligible to be my customer” approach results in a low on boarding rate for banks.

MNOs on the other hand use a “please be my customer” approach which proves to be a hit as they on board multiple subscribers daily. For this reason, MNOs are more inclined to tap into both the formal and the informal sectors of the economy while banks concentrate on the formal sector. Informal sectors prove to be more profitable than formal sectors because they push high volume, low value transactions.

The restrictive KYC requirements can also be applied in a tiered approach depending on the value at risk and the transactional volume of the account. A number of banks in Africa have embarked on agency banking to increase their footprint in the operating countries. MNOs through underlying banks, have started giving instant loans using online credit rating systems basing on credit data, transactional data, tenure with the MNO, daily spend and other conditions. Banks take days to approve loans as they have a low risk appetite. The telecoms business is also characterised by a high rate of churn as subscribers switch operators looking for favourable deals.

Some countries have adopted number portability where subscribers maintain their number when they switch operators. Banked customers on the other hand have a lot of thinking and clearance to do before changing banks because a number of financial services like loans, investments and mortgages are coupled to their bank account number. In order to improve profitability and gain relevance in the mobile payment space, banks should invest more in market research and gather the requirements of the markets they operate in. this is easily achieved by setting up a dedicated R and D division and allocating an adequate budget for this cause. Basing on the closed nature of core banking systems, banks can separate a mobile money system from the core banking system to achieve the flexibility required from a mobile payment system.

Conclusions: Running on unknown path without roadmap or direction with due respect running like a headless chicken often result in disasters. I personally have seen and taken part in programs to build my experience or hands on mastery in such situations where Mobile Payments or Mobile Wallet based Cross Border remittances support country economy and proven in 100% confidence level that when it came to the crunch, many countries including Greece, Cyprus & Italy had no choice but to accept rescue terms that affected not only bank bondholders and shareholders – but many thousands of private deposit holders. Their cash or savings were simply scalped and went to help fund the closure of one bank and the propping up of others. Opportunities are countless; one who seizes them first gets the upper hand. Thanks to regulation and central bank support through the Ministry of Innovation. Get up, spread your wings and grab as much sky (I guess there is no more land left) as you can.

These policies from Ministries of Innovation MNOs are the best admirer and advantage takers. Sadly for majority of the banks this is still unknown path and some not a preferred route. The so-called “haircut” imposes comes along the way that helps in worsening the problem in negative smiley way. Solution that is hastily designed to fall with large sums in offshore accounts can be avoided very well with MFS. Mobile Payments expected to explode beyond 3 trillion euros by 2020 , Mobile Money save 2 billion USD for few African countries , Mobile Money is not just cash in , cash out via agents any more or P2P money transfer Africa have given new and very different dimension and speed of like blink of eyes , getting Money from UK, US or any where in the world within seconds around 24X7 directly to your wallets , all bill payments, merchant payments, loans, insurance …. and never stopping or ending story.

Banks need to take a radical change from their current modus operandi in order to beat MNOs in the field of mobile payments or else take back seat as clerk for reconciliations and accounting units and regulator should allow MFS companies to innovate and bring new solutions and products in no time and make customers life easy, less costly and much faster. I guess banks still looks like banks but shift in paradigm and model so if need to transact more or above $10,000. In nutshell retail division is almost underwater and corporate still have chance and time.

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