The financial services industry – banks, mobile network operators, insurance providers and others – have historically sought to work independently in achieving their profitability goals. With the recent global and regional influx of Fintechs – companies that leverage technology and innovation to compete in the financial services marketplace – this industry is getting significantly more competitive. Working collaboratively with fintechs, these bigger and more traditional financial services providers stand to improve their ability to respond to established and emerging challenges to growing their customer numbers and improving their bottomline performance.
Two key barriers limit this collaborative effort. Firstly, financial service providers (FSPs) have long invested significantly in technology (like core banking systems), distribution (like physical branches) and people (through extensive training). Finance Officers and Executives world over are expected to ensure a return on these investments within a reasonable timeframe. In many instances, the value of these investments may not yet have been fully realized. Partnering with fintech players often calls for a significant write-off of these assets, and sometimes involves even further cost outlays including newer technology and staff-retraining.
Further, the limited understanding of FSPs’ key value-drivers by fintechs (and vice versa) presents some challenges to partnerships. Banks, MNOs and insurers are substantially fixated on ensuring regulatory compliance, better risk management to deliver customer confidence. Fintechs, however, thrive on the flexibility of fast-changing environments – sometimes with poor or non-existent regulation – to attract investment for innovation and extremely fast customer acquisition. These realities are reflected in the type of customer often served by these two industries, with the fintechs largely attracting the younger and more discerning customer base.
To ensure continued existence on behalf of the FSPs and a real chance of survival by the fintechs, a faster change of approach is required. By providing the technical expertise to drive product and service innovation in a low-risk and low-cost manner, fintechs could access the much-needed capital and initial customer base required for easier market entry from the FSPs. In this way, both industries would play a complementary role to one another, presenting various opportunities for long-term sustainability and improved customer experiences.
World-over, various partnerships between financial institutions and fintechs are addressing the key concerns in the financial services industry. With the fintechs, FSPs are developing new products for their current customers, gaining market share by improving their ability to serve new segments and leveraging data to drive improvements in customer acquisition and engagement strategies.
Closer to home, some interesting developments are taking shape. The recent partnership between the banks’ umbrella body, Uganda Bankers Association (UBA), and Eclectics International presents an interesting opportunity for the industry players to quickly embark on making the most of the recently passed agency banking regulations. UBA’s member banks will, using the Eclectics agency banking technology, extend banking services to their customers through over 10,000 remotely located shops up and down the country. While the cost reduction and customer acquisition opportunities in embarking on this initiative are straight forward for the banks, improvements in the products offered and the quality of service to an improved customer base are expected. On its own, this ambitious initiative could change the landscape of banking in Uganda in the next few years and has the potential for much-needed positive spillover effects to the insurance, securities exchange and other retail industries.
The recent visit by Diamond Trust Bank’s Managing Director, Mr. Varghese Thambi to the Innovation Village also provided some insights into the changing tides. As part of his presentation to the early-stage entrepreneurs in attendance, Mr Thambi invited these youthful innovators to work closely with the bank when developing new financial services offerings. Interestingly, Equity Bank has recently provided an open platform (through Application Programming Interfaces (APIs)) where software developers can test innovative products within a safely monitored environment that simulates a core banking system. Lastly, Centenary Bank has recently announced a partnership with the global technology provider, MasterCard, to support the roll out of its digital payment solutions.
The Central Banks, including the Bank of Uganda, are not being left behind in all this. With the recent developments like Mobile Money, Central Banks have now started to adapt to the fast pace of change. Despite some delays in supporting regulation, BOU has shown a clear interest in developments within the fintech – financial services space, and has through guidelines and other supporting policies provided frameworks for supervision. Indeed, our Central Bank is actively exploring improved adoption of technologies, including improving the participation of retail investors in the government securities market by leveraging the mobile telephony network. Supportive regulatory tweaks, such as the soon to be passed Payments System Act should provide an even more improved regulatory environment moving forward.
These partnerships point to a change in the outlook of both the financial services and fintech industries and present cause for excitement for financial services consumers. Our expectation of more appropriate and responsive financial products, delivered to us in more accessible and reliable forms could be around the corner. However, these expectations will only be met by financial service providers that aim to assert their continued relevance as customer-focused institutions with the help of fintech partnerships.
By Peter Kawumi, Innovations Specialist at FSD Uganda