“The traditional banking model is not suited to serving the bottom of the pyramid.”
This is according to Nvalaye Kourouma, chief digital and innovation officer at Barclays Africa, who was taking part in a panel discussion on “Fintech for Financial Inclusion” at last week’s MEST Africa Summit in Cape Town.
He said banks tended to look at people that are outside of the banking franchise as unbanked, but that is not how the people themselves actually see it.
“They have specific needs, they want to buy things, they want to save their money. Once you start looking at the specific needs, then you start looking at how you address these challenges. And a traditional model, unfortunately, because of the way it is designed, is not very effective in doing so,” Kourouma said.
Marc Herson, an investor at Investec, said African banks struggle in reaching more remote, low income populations because they are set up as infrastructure players.
“They are not efficient, they are highly regulated. It is incredible the amount of regulation banks are faced with, which includes the amount of capital they have to hold. Being able to make loans for a bank is almost prohibitive,” he said.
Rostan Schwab, who is head of African fintech investments at the International Finance Corporation (IFC), went further, however, saying banks had not tried to reach such populations.
“The traditional banking sector in Africa has never been interested in reaching out to the low income population or even SMEs. So the gap in terms of reach, and access to credit, is huge,” he said.
African banks, however, know their shortcomings, and are taking steps to ensure they do not fall behind.
“All the big banks are very much aware of the opportunity that lies in serving the mass market. Clearly, it is a very important segment that needs to be served, and they understand the legacy systems, the regulation and everything, will make it very difficult for banks to service this segment,” said Kourouma.
“There’s a whole internal digitisation process to reduce costs internally and have a much bigger reach. So there are new business models that are emerging, agency banking for example. There is a recognition that internally, alone, it is going to be very difficult to get it done, so you need to have an ecosystem and be able to create the right links – with investors, entrepreneurs, governments, regulators. So all the banks now have accelerators or innovation ecosystems. You see that trend happening. That should enable a greater link with the fintech ecosystem so we can serve that segment much better.”
This means new opportunities are opening up to fintech startups across the continent, who are now increasingly engaging with banks in order to spread financial inclusion and roll out innovative products. Segun Adeyemi, chief executive officer (CEO) of Nigerian payments startup Amplify, said startups like his understand the position of the banks, and are coming up with ways of working with them to fill the gap.
“We can start with a fresh slate and can think about it differently, to extend financial services from what they are offering currently,” he said.
“If you want to create financial inclusion there are a lot of players involved, and it makes sense to work with those partners.”
However, it is important to approach potential partnerships in the right way to ensure their success.
“You don’t want to partner with them and offer them something they can do themselves, you want to offer them something it doesn’t make sense for them from a business angle to design, and then extend the service,” Adeyemi said.
“We allow banks and telecoms to offer their services on social media. They don’t typically play in that space because they don’t think of product development from that angle. You are more nimble and you can reach a deeper level of penetration.”
The banks are now more open, Adeyemi said, because they have realised this.
“We have a new product that we have recently launched, and the uptake from the banks has been very impressive. Some of them have told us this was something they tried to do internally and it just took them forever,” he said.
All of this provides ample opportunities for investors in the fintech space, which is already the most attractive when it comes to funding for tech startups in Africa. Schwab said the IFC, which has funded the likes of South Africa’s Zoona and Kenya’s Africa’s Talking, believed the bigger the gap, the bigger the potential for disruption.”
“We see the very low reach of the legacy system, and we see the great potential of fintech plays,” he said. “There are a long series of market gaps that need to be targeted.”
But what will be left for the banks once this brave new world is built?
“Banks in this form are a dying species. If you go outside of Africa, banks are losing a lot on the battlefield,” Schwab said. “They will still remain, because they are the regulated deposit-taking institutions.”
But they risk ending up as only that, unless effective partnerships can be built to keep them in the game. And that is exactly what is happening in Africa right now.