The digital transformation expert and Country Director of Fintech Farm, Damilare Odueso, in this interview with Nosa Alekhuogie, speaks on the importance of integration of fintechs and banks, digital transformation and banking. Excerpts:
Financial institutions are changing due to the emergence of fintechs; the result is an under-explored phenomenon. What can be done?
In general, all industries are undergoing changes. The change is driven by the evolving needs of consumers. There is a greater awareness among consumers today than ever before, and they are demanding more from service providers. In other words, consumer behaviour is changing at lightspeed, resulting in the rise of Prosumers. The financial services sector is one of the industries with the most obvious changes because of its significance to the community. People are looking up to financial institutions to foster their personal economy and help manage their financial wellness. This is what drives the disruptions we see as the needs of the people must be met. Technology only plays a vital role as both an enabler (infrastructure) and channel (mobile, web, and co.) via which services can scale exponentially.
In my opinion, digital transformation is a phenomenon that is still obscure to most organisations. Contrary to the common practice of simply pushing existing products and services of organisations through the web and mobile apps, as observed in most organisations, digital transformation means truly rethinking customer experience, innovating business models, and institutionalising a digital-first capability from a people and culture perspective.
Financial institutions need to understand and accept that customers have a new definition for trust, which is now synonymous with the capacity developed through digital transformation – valuable, cheap, fast, multichoice, reliable, and hyper-personalisation.
Most financial institutions prefer to innovate internally, but integration with fintechs is easier and more effective. How do you think they can key into this space?
Every organisation has the right to choose how it develops its digital capabilities. In my opinion, there are three possible ways to accomplish this. The first two rely heavily on independence and how much capital a financial institution is willing to invest in ventures like this. A financial institution may choose to acquire an existing startup and let it remain independent or build a new startup while giving it total independence from the traditional business.
However, most financial institutions have not been able to fully innovate because of their desire for control and fear of cannibalising their existing business, product, or revenue lines. This is largely what influences the incumbent’s response to disruption, which is a challenge.
Financial Institutions can also develop a robust digital capability through a partnership with existing startups to leverage their technical know-how in the creation of real value for their customers.
Building internally is one of the different ways to innovate and respond to change. As a matter of fact, every organisation should have internal strategies for innovation and digital transformation in today’s clime. However, financial institutions should consider either acquisition of fintechs with complementary value networks or partnership with fintechs – where they cannot afford to buy or are unable to match the value network. In any case, it is important to separate the venture from the traditional business and give it wings to fly; total and true freedom.
From the banks’ perspective, Fintechs aren’t making as much money and lack the proper IT security and regulatory certainty. They equally argue that they do not feel threatened by fintechs. What do you think?
Banks have been in existence for as long as we can remember and have built capabilities over time in banking infrastructures, risk, compliance, and branch networks. In addition to the fact that they have generated tons of customer financial data and gained institutional significance. Fintechs have only emerged recently to bridge the gaps created by the changing consumer sentiments when it comes to financial services and the inability of incumbents to respond to the customer’s needs at the same speed. Consequently, Fintechs are more customer oriented, agile, and focused on a niche service/market.
In my opinion, none poses a threat to the other. Fintechs cannot replace banks, and banks cannot displace Fintechs. Every player in financial services will have their own relevance and, over time, will find a way to co-exist. The heightened competition will increase the value network in financial services altogether, and customers will win in the end.
We cannot deny that, in more ways than one, fintechs and banks can co-exist in an ecosystem. At the end of the day, both players will realise they need one another to deliver the utmost value to the ultimate stakeholder – the customer. This will lead to the synergy required to deliver the bank of the future, and it is at this point we will all witness the full revolution of financial services in Nigeria.
What competitive advantages do fintech firms have over traditional players and vice versa?
Many fintech companies (like digital banks) offer free services as part of their unique selling propositions. The reason for this is that they usually maintain an extremely lean structure even when their revenues increase. Using fintech can sometimes save customers money on services that they had previously thought were too expensive.
Additionally, fintechs have a very nimble operation because they are usually focused on a very specific niche market. From dedicated savings apps to investment apps, lending companies, insurance tech, etc., the segment is quite clear.
Customer-centricity is another advantage of fintechs. In order to succeed, they create services that solve critical pain points in the lives of the customers but are also convenient to use. Customers today expect more convenience and accessibility, and fintechs are great at delivering this.
The traditional banks, on the other hand, have decades of experience operating in the industry and an abundance of customers that have been painstakingly cultivated over the years. A combined customer base of over 50 million people who trust the banks gives them access to big financial data. This data can be harnessed to create even more unique products and services for users.
Banks have built superior risk management and compliance capabilities as well as made huge investments in banking infrastructures (technology and branch networks). In my opinion, the biggest competitive advantage of banks is their regulatory backing.
In what ways can banks collaborate with fintechs?
Today, there is at least one fintech for every product or service offered by a bank in the fintech ecosystem. Technically, banks have been offering these products for ages, but the business models and value propositions are very different today.
Taking the role of an enabler would enable banks to collaborate with fintechs by leveraging their expertise and the investments made in banking technical infrastructures as well as branch network in service of fintech. There is also an opportunity for banks to invest/fund fintechs.
The required support from banks will allow fintechs to concentrate on building niche services and user experiences on a bank’s infrastructure and not have to replicate the services and support enjoyed from the bank, thereby creating a revenue line for banks. A bank can provide everything a fintech needs. This is a “Split” strategy as it enables the banks to share in the successes and profits of Fintechs. For context, imagine there is a bank behind at least one of the fintechs that have grown to surpass unicorn status today.
The longer banks delay synergising with Fintechs, the more opportunities they create for entrants from outside the financial services industry. For example, Telcos are in, Venture Capitalists are on the rise, and the Retail industry is halfway in, to mention a few. All of them are creating value around the utilities of banking.
What do you think are banks’ major concerns about fintechs?
In today’s environment, where everyone competes for the same finite resources, increased competition reduces the market share of players. When a new entrant enters the market, an incumbent may lose market share and stifle its growth if it fails to respond appropriately. It is not a unique problem for the financial services sector.
Any incumbent will likely be concerned about how the introduction of a new entrant will affect its market share and its ability to adapt. As a default, most incumbents will either develop a firewall around themselves to protect their territory or ward off their competition.
Developing proactive and progressive strategies to leverage digital capabilities for business transformation while increasing customer value proposition is crucial for every organisation. Even a disrupter can be disrupted. In my opinion, most disruptions should happen within an organisation or industry, and incumbents should be willing to disrupt their businesses.
What is the future of digital banking in Nigeria?
With the changing expectations of customers and a pandemic-inspired acceleration of digital transformation in the financial services industry, banks are now aware that digital transformation is of utmost importance to remain competitive. They need to leverage data and technology.
Banks will eventually accept their institutional limitations and focus on their strengths by providing a platform that enables them to share in the fintech’s value network. Fintechs will accept their limitations and rely on banks to scale further. Also, the regulator will come to understand that the growth of the financial services industry and the digital future of the Nigerian economy are more important. Ultimately, the needs of all stakeholders will influence and drive the path to the future of digital banking in Nigeria.
I see a synergy between fintechs and banks in a simple, affordable, and trusted ecosystem that leverages customer data to create access to pre-qualified and personalised financial services whilst also giving the customers tools to manage their financial wellness.