It has become a norm to hear murmurs regarding how traditional financial institutions, most particularly the commercial banks, would be destroyed in a couple of years by the rapid rise of modern technology that offers more innovative financial products.
With these giddy projections, one would expect an environment filled with collaboration between Fintech companies, but alas! The reverse is the case. Beyond a few business relationships and partnerships here and there, the entire sector is fragmented in its practices and approach to business.
While commercial banks have worked together in the past and in the present towards guaranteeing interoperability and improving the ecosystem through joint efforts, the Fintech industry has been struggling to create sustainable value-adding models amongst themselves. Hence, fintech companies still have a lot to learn from traditional financial institutions if they want to build an ecosystem where business growth potentials can be fully realized.
Traditional commercial banks have always been an integral part of the Nigerian financial system. Though fintech companies may be afraid to admit it, many are still relying on the bank infrastructures and practices to build their businesses from scratch today!
Shockingly enough, these traditional financial institutions provide a much-needed foundation for Fintechs looking into innovation in the financial services sector, especially given how they’ve had such success drawing investors who tend to base their judgment solely on the accessibility to the infrastructures provided by the seemingly ‘antiquated’ banks.
Financial institutions are often at odds with one another but the traditional financial system has always been able to work together for a greater good. Their ability to leverage strategic business partnerships to share information and resources effectively makes them an unparalleled group in today’s industry.
Although they may have different business models, there is no doubt that organizations operating within the same sector can collaborate when needed most and produce fruits that benefit everyone involved. For instance, traditional banks apply better due diligence on their clients/customers, and this creates room for more opportunities being made available through strategic partnerships. This can also increase the confidence that the regulatory authorities have in fintech companies offering banking services and in turn create better regulatory climates for the fintech industry.
Fruits of collaboration enjoyed by all
When the Nigeria Interbank Settlement System (NIBSS), for instance, was created, it became a vital component of all transactions. Nowadays, over 95% of interbank transfers happen through NIP, RTGS, and NEFT platforms owned by NIBSS which was established and completely owned by all licensed banks and the Central Bank of Nigeria (CBN). Today, all Fintechs offering transfer services move it through NIP directly or indirectly through a bank then at a point, route that through NIP.
This is not the only time banks have collaborated to create a legacy system. Again, after years of battling issues emanating from the absence of a trustworthy identity network, all Nigerian banks, in a joint effort with the Central Bank of Nigeria created BVN, a unified biometric ID framework. The BVN gives every individual a unique identity across the Nigerian financial industry that can be utilized for identification and checks. The BVN thus empowered easy verification that permitted most Fintechs to scale up—the biggest fruits of collaboration enjoyed by all.
The banking industry in this country has been able to do so much more due to the collaborative efforts between various parties. They have been able to offer their customers products and services that are far better than what is available in other parts of the world. But I’ll let you in on a little secret: there’s more where this came from!
Let’s talk about lending. In 2007, with help from nine Nigerian banks and Dun & Bradstreet (D&B), a credit data provider based worldwide, IFC created the country’s first-ever Credit Reference Organization or CRO for short. Today, the biggest tech-enabled lenders in Nigeria rely upon the information from these credit agencies to guide their loan portfolios. Fruits of joint efforts and collaboration, if you ask me!
The huge success experienced by super agents and mobile money operators for doorstep delivery of financial services is fueled largely due to the efforts put forth in developing Shared Agent Network Expansion Facilities (SANEF). This initiative was created by all deposit banks, which has allowed them to play an important role when it comes to promoting inclusion across society through increased access to financial products along with other benefits like improved cost efficiency or risk management capabilities that come from being able to have multiple points-of-contact within one organization. Today, digital mobile money agents are driving almost N100B a day in transaction value—a fruit of collaboration.
What if we delve into payments? Interswitch, which was founded as a national ISO switch for cards and ATMs, and then grew to include bills payment processing, was partly funded by commercial banks. The company has served Fintechs by routing their transactions through POS terminals or web-based implementation services with ease so they can focus on creating innovative products—another fruit of a joint effort.
The Fintech industry has been built on the backs of Nigerian banks who have collaborated many times to create an ecosystem whose structures are key foundations for any company looking into developing their product or service.
Germaine questions to be answered
The Fintech industry thrives on the collaborative efforts of others. Yet, what happens when these commercial banks decide not to accommodate their demands anymore? Wouldn’t it be great if they work together to build financial systems and infrastructures that will stand the test of time? How will traditional financial institutions as well as the regulators react when Fintechs begin to encroach greatly into their market share? Case in point, the recent CBN circular asking third-party verification companies to stop servicing non-bank institutions. More and more policies of this nature are sure to come soon. And what will happen then, we can only guess at present!
How unhealthy competition is breeding a stunted fintech industry
As a young, vibrant, and growing industry in its early developmental stage, there is this propensity to compete rather than to work together. However, it makes more sense to collaborate as your competitor isn’t your enemy.
Look at digital moneylenders, for instance, a large portion of whom get fleeced each day by borrowers but never share this information amongst themselves or with credit departments. They are so filled with malicious intent with regards to their misfortunes that they would prefer other lenders like themselves to go through a similar experience rather than come up with a central database of credit score ratings to rid the industry of unscrupulous individuals. In any case, the terrible borrowers are having a field day looting all of them while the market battles to develop—a story only to be told by unhealthy competitors.
Even with web payments collections, the effects of non-collaboration have affected the industry’s development. Nigeria is overflowing with lots of criminals utilizing stolen identities to attack bank accounts and consequently routing their loot through electronic wallets provided by Fintechs. While banks commonly have a BVN blacklist and effectively help each other with account blockage and funds repatriation, Fintechs don’t collaborate. As a result, similar groups of fraudsters go around pillaging the Fintechs while perilous chargebacks are imposed against them—once again, a fate only reserved for unhealthy competitors.
The most hilarious for me has always been pricing. Fintechs continue to sacrifice profit margins for the sake of the higher transaction counts and superior bragging rights it gives them. While banks regularly join forces to increase their bargaining power when it comes to common services and products (POS, ATMs, USSD, and so forth), the Fintechs keep on sabotaging each other with pricing. Hence, every time there is a crash in product pricing, the Fintechs take a large portion of the trade haircut. For what reason would they not be able to settle on a common industry price and stand their ground? The appropriate response is straightforward—gloating privileges. Not only does this habit lack any mode of business sense, but it is also a laughable misfortune only to be experienced by unhealthy competitors.
Learn from the wolves
The Fintech world is a competitive one, with many start-ups competing for limited resources. A wolf pack has been noted as an effective organization that helps its members work better together by organizing themselves and maintaining accountability over time. This could be similar to what we need in our industry!
Based on the foregoing, it is trite to assert that Fintech companies in Nigeria, and indeed entire Africa, will thrive better if they take advantage of strategic collaborations and partnerships. Therefore, the focus right now should be encouraging meaningful collaboration because it will make their businesses more sustainable.
Finally, there is a need for the rise of higher perspective and liberal thinking among Fintech companies. Now is the time to band together to lobby for favourable government policies, and create interoperable systems that will stand the test of time. The opportunities are limitless when you have a strong Fintech community!
About the author
Oluwatobi Towoju is a seasoned professional in the banking and financial services sector. He has about six years of experience with expertise spanning various areas including internal control, compliance, audit, governance, and risk management. Oluwatobi’s passion for process automation led him to develop an interest in how to introduce tech into risk management. This paved the way for his current role as Convener, Fintech Risk Managers Network (FRIMAN). FRIMAN is a community for professional risk managers within the African FINTECH space. Established to be a volunteer group of risk industry professionals, FRIMAN’s mission is to provide a free and open forum for the promotion of sound risk management standards and practices within the financial technology ecosystem.
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