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3 April 2023
This article first appeared in The Business Weekly & Review on 10 March 2023
Fintech: How they are shaping financial services (Part 1)
By Kefilwe Mokgosi and Neo Kootsholetse
From mobile payment apps to digital-first customer solutions, fintech is combining cutting-edge technologies and financial intelligence to better serve consumers and businesses. Africa is no exception to this. In fact, with African consumers being avid adopters of mobile technologies, the opportunities are endless. In recognition of the changing financial landscape, FNB Botswana (FNBB) is set to enhance the automation of its current product base, with a focus on improving lending platforms and personalised transactional banking offerings. The Bank is doing this as it traverses the growing world of fintech.
The rise of fintech
According to McKinsey 2022, the number of tech start-ups in Africa tripled to almost 5,200 enterprises between 2020 and 2021 and indicate the rapid penetration of the market in years to come. Just under half of these are fintech companies whose goal is to replace and improve traditional financial services.
The growth of the fintech sector is bolstered by rising smartphone ownership, falling data and Wifi costs, expanded network coverage, and a rapidly urbanising population. The path to digitisation was also accelerated exponentially by the social distancing restrictions required during the COVID-19 pandemic.
Fintech’s investment potential
With rising percentages of fintech funding in Africa increasing over the course of last year, African fintech is emerging as a hotbed for investment, delivering growth and jobs to African economies. African countries, if their infrastructure and appetite for innovation supports it, could take advantage of the momentum of recent years to unlock more potential in the sector as financial services on the continent reach an inflection point as fintech grows.
The impact of fintech on banking
Traditional banks are significantly impacted by the evolution of fintechs as they pose a formidable rival to their customer base. The consumer, who today has greater freedom and flexibility than ever before and can choose the financial services they require without having to make compromises, will be the only party to gain from this competition. Citibank estimates that when customers transition from traditional banks to fintech services, jobs in the banking industry may decline by at least 30%.
However, banks remain reputable institutions, with decades of experience and infrastructure that gives them the edge on fintech growth. With a whole new ecosystem of competitors, they need to innovate in order not to fall behind. Numerous banks have responded to this challenge by creating their own services, for example, apps that enable users to move money instantaneously to clients from the same bank and online loan calculators and investing or partnering with fintechs themselves.
Fintech through a supply and demand lens
Taking the current financial market dynamics into perspective, it is evident that the adoption of fintechs in the financial sector has been largely influenced by both demand and supply variables. These include profitability requirements, business competitiveness, regulatory requirements, technology advancements, as well as the availability of financial sector data and infrastructure. Examples of current and future applications for fintechs include the adoption of Artificial Intelligence (AI) and machine learning in credit assessment, pricing of financial products, optimisation of scarce capital, trading and signal enhancement by broker-dealers and hedge funds.
The data processing opportunity
A more efficient financial system may result from the effective processing of information. For instance, in credit decisions, insurance contracts, financial markets and consumer interactions may improve the efficiency of the financial market. In addition to this, the use of previously unrelated data sources by different financial institutions could lead to new and unanticipated interconnections between financial markets and institutions as a result of applications of AI and machine learning.
Potential fintech risks
On the flip side, these innovations also pose a threat to the security of the financial market. There are significant concerns around effective risk management and oversight, just as with any new product or service. It will be crucial to evaluate how AI and machine learning are used in light of the risks involved, including adherence to any applicable regulations regarding data privacy, behaviour hazards and cybersecurity. Applications must be properly tested and monitored with objective data and feedback mechanisms in order to function as intended. Moreover, the inability to evaluate or ‘audit’ AI and machine learning techniques could end up being a major problem.
Similarly, frequently using opaque models, which are a large part of the AI and machine learning techniques, could have unforeseen results if not closely monitored. That being said, if the specific risks associated with AI and machine learning applications are appropriately managed, these techniques show a substantial amount of potential that can enhance the financial system.
How FNB Botswana is responding to global fintech trends
Similar to global fintech trends, FNBB is moving to a single platform from fragmented systems. As a global financial institution, this will permit the Bank to provide increased efficiency, leverage off platform principles to remain competitive i.e., single view of customers, create a better customer experience and grow network efficacies. FNBB has already begun to design products that are based on customer data insights in line with changing customer lifestyles through the utilisation of big data and AI analytics. As a result, in the short to medium term, FNBB is looking at enhanced automations of its current product base with the focus on improving lending platforms and provision of personalised transactional banking value propositions. This will allow superior customer service aligned to current customer needs. With the world we know becoming more and more digital, we at FNBB are embracing this changing landscape to advance and maximise client satisfaction and reach in Botswana.
Mokgosi is Relationship Manager and Kootsholetse Transactional Banker at RMB Botswana.