Financial technologies (fintechs) offer Africa’s banks a great opportunity for partnership, especially in addressing many of the continent’s endemic cash management and liquidity challenges.
While fintechs bring both innovation and agility to the payments universe, it doesn’t have scale.
Fintechs also often exist in a legal, legislative and compliance no-man’s land.
Fintechs require the risk management and other back-office capability of established banks if they are to build a recognised and compliant legal identity.
Their small size and start-up nature also mean that fintechs need access to the large and established client bases of banks.
Fintechs are especially relevant to Africa’s banks when it comes to evolving digital responses to many of Africa’s traditional banking challenges, including:
Legislation – Each African country has its own banking, exchange control and general business rules and legislation, presenting challenges to moving goods and money across borders.
Geographic diversity – Because Africa is made up of so many countries, businesses operating cross-border end up being multi-banked.
Using different banks in different markets adds expense while also limiting the ability to operate regional treasuries.
Liquidity – Restrictive exchange control regimes mean that businesses can’t move money between their African operations easily.
Cash – Despite the growth of mobile banking in Africa, the continent remains reliant on cash as both a medium of transaction and storer of value.
Payment terms – Africa’s less-developed legislative environment means that contracts may be difficult to enforce.
In this environment a culture of pre-payment dominates. When businesses are setting up in Africa, they need to be guided on what will work as a payment system on the continent – and then be helped to set this up in a largely cash-based trading environment.
To meet many of these challenges, a number of banks already partner with multiple fintechs across Africa – think for example of fintech-developed services like SnapScan, SlydePay and WeChat – providing a range of value-added functions developed to deliver the entire banking universe digitally in ever-easier combinations operated via mobile.
In short, the digital journeys of many African banks have shown exactly how, in Africa, banks and fintechs need each other.
After all, even mobile money needs to be backed up by real money in a bank. Transactions supported by distributed ledger technology, for example, eventually reach a stage where they need to actually buy or sell things, at which stage the transaction needs to dip back into the existing financial system.
To date, fintechs and non-traditional financial service providers have driven the most extreme disruption in Africa’s mobile transaction and mobile wallet environments.
Products like M-Pesa, for example, which provides mobile payments 24/7 in real time, have revolutionised the payments landscape in Africa.
This has prompted traditional financial service providers to develop and implement competing capabilities, such as PesaLink, a real-time 24/7 account-to-account payment system in Kenya.
There has also been a lot of growth in the number of fintechs providing value-added payment capabilities at different stages in the value chain – in addition to standard transfers.
For example, there are a number of fintechs in Africa that enable utility payments in addition to standard third-party transfers.
These platforms are forcing banks to adopt these functionalities in order to ensure that banks are not disintermediated out of the payments system.
Beyond partnering, banks also work with fintechs to develop bespoke services. For example, Standard Bank is piloting a distributed ledger technology payments system aimed at supporting dematerialised trade and payment transactions.
Africa’s development of a digital banking capability, enabled through mobile, has completely changed how banks can access and serve previously unbanked customers and clients.
Both partnering with existing fintechs or developing new fintechs in-house is seeing Africa’s banks expand their customer universe along with the range and relevance of services that banks can provide.
Kent Marais is head of product management, transactional products and services at Standard Bank.
This article originally appeared in the 30 November edition of finweek. Buy and download the magazine here.