FinTechs, banks forge partnerships

A man operates a point of sale machine. The way financial services are conducted is being reshaped by FinTechs. But some people are concerned over the lack of regulations for FinTechs. PHOTO BY RACHEL MABALA

What you need to know:

  • Players predict that FinTech companies will expand and penetrate every layer beyond the financial space. Uganda could see FinTechs solving problems in agriculture, education, transportation, most of which our big corporates such as banks or insurance companies are failing to solve. They could also take in more independent projects instead of partnering with existing financial service providers.
  • Mr Muzembe believes FinTechs are not disappearing anytime soon. Some FinTechs will probably merge with banks while others will, with time, eat up the market share for instance in the payments space. This will eventually force banks to establish other sources of revenues.

FinTechs also known as companies that use innovative business models and technology to enhance and disrupt financial services are reshaping the industry across the board.
Mr Allan Rwakatungi, secretary of FinTech Association of Uganda, says there are 14 registered FinTechs in the association but estimates that there are at least 50 FinTechs in Uganda. These are working in an industry already penetrated by 24 commercial banks. Majority of the FinTechs are creating solutions that ease payments.
EzeeMoney group general manager Kevin Lubega describes the FinTech space in Uganda as currently “extremely cut-throat” as more players hit the market. Profit margins, just like the market are still small and there is a race for every FinTechs to get as many customers onboard as it can.
Banks, on the other hand, are paying attention to the power that FinTechs have.

Citi Bank’s Esther Chibesa who works in the payments and receivables business for Sub-Saharan Africa, says banks could quickly lose their business to consumers who believe in a product that is serving their need rapidly as that is the power of digital disruption.
Mr Lubega believes initially, banks might have thought FinTechs are here to kill their businesses. Today, he is noticing a change as there is a growing appetite for innovations which FinTechs can do.
Mr Mutsa Muzembe, head Information Technology (IT) at Barclays Bank, admits banks are now looking at FinTechs as partners even as they continue to appreciate that they are serious competitors in certain areas. “We have seen their impact on our revenues and market share in the payments space,” he says.
Banks are realising the financial space is changing rapidly and are at different stages of adjusting to the disruption.
“We know if we are to deliver products quicker and if we are to innovate, it helps to work with FinTechs because their strength is in specialising in an area and be very innovative in it,” Mr Muzembe says.
Institutions such as Barclays Bank are already automating their payments in partnership with FinTechs. This has allowed customers to access their bank accounts online or even do simple things as paying utility bills.

Are collaborations key?
The future of financial services should not be a competition between the two because there are things FinTechs can do that banks cannot even dream of doing, Mr Lubega says. The same applies to FinTechs. “We need each other as there are a lot of possible collaborations that can happen,” he says.
As FinTechs seek to gain market share, they are not well-resourced and bankers believe there is a real opportunity for them to leverage on banks’ huge financial muscle for a longer life span.
According to Mr Julius Kakeeto, managing director Orient Bank, collaborations are key as FinTechs have the advantage of being nimble and therefore faster when it comes to innovation of new ways of offering financial services.
More importantly at the centre of these meetings is the customer who according to Mr Muzembe benefits more from the collaboration. FinTechs have the advantage of being more efficient with money compared to banks. This, he says, means not only will the partnership deliver products that meet consumer needs quicker but also cheaper.
However, the levels of partnership significantly differ.
“The current market trend has been collaboration driven by a specific product or project. For instance launch of a new product by a bank with a Fintech providing information technology back up, or a FinTech fixing a process in the bank,” Mr Kakeeto says.
Ideally, banks want exclusivity of products developed by FinTechs but the latter tend to want to sell the same products to other banks because they benefit more if they open up the innovation to the market.

Opportunities?
The startup ecosystem is growing. Players say personal banking, wealth management, lending, payments, global and investment banking and research are in a total disruption.
Ms Chibesa estimates that the valuations for all these sectors are reaching about $1 trillion.
“This is a lot of money already invested in the startup ecosystem,” she says.
She notes that several industries such as mining, real estate, aviation, agriculture and electricity may point to where opportunities exist for FinTechs and banks to collaborate to provide new value because they are still in a nascent stage of disruption.
In Kenya, banks are looking to see how they can partner with companies that already have marketplaces and are offering the opportunity to go online and do a purchase.
“In this fourth generation phase (e-commerce phase), we see interoperability with banks, a lot of usage of applications programme interfaces and accreditation for business to business transaction flows. This is the space where we believe there is opportunity for useful partnerships,” Ms Chibesa says.

Another area is in trade. In her example, Ms Chibesa says in the sales chain, there has been a producer, wholesaler, retailer and consumer, an ecosystem that she believes is unnecessary today because a producer needs to find the final consumer in real time.
Around East Africa, companies are investing in technologies that allow them to digitally see their market places and change product placement in real time. Citibank Kenya, for instance, has worked with Techno Serve to digitise a supply chain.
“What we did was get all the small shops into one application where we were able to track all their sales. Six months of that study showed us that not only is it possible to get them to digitise their financial flows, you can lend to them, get them to reroute product placement,” Ms Chibesa says.
Mr Lubega says the recent innovation of agent banking is a perfect opportunity for the two to work together to help them extend that service to places where it is not feasible for banks to build a branch.
Mr Mutsa says FinTechs need to play a massive role in wealth management services and enabling transactions within the corporate business space.
Many large scale companies struggle with matching invoices with received cash in real time.
The bank, Ms Chibesa says recently invested to solve the problem and the idea is to use artificial intelligence to match these payments.

Challenges
As much as there are many synergies between the two, some players say there is a bit of frustration when banks and FinTechs meet.
“The issue is the speed at which both of them work. FinTechs tend to be smaller, more agile companies that are ready to innovate and make decisions very quickly. Banks are our large corporate organisations that might have stifling processes that make it difficult for them to move faster,” Mr Lubega explains.|
He says it can take him four months to build a new product whereas in the bank, four months are spent holding meetings to discuss parts of the same product.
True African is one of those FinTechs that has worked with banks, connecting them to telecoms to provide mobile banking services.
Mr Andrew Kasule, operations manager, says banks took long to show interest in mobile banking.
“There are many ideas we sold to them and they took so long like when we started selling mobile banking, they did not figure out what it was,” Mr Kasule says.
Mr Muzembe agrees but says banks are only being security conscious. “Banks are slow in nature because we have legacy systems, tend to be inwardly focused and have a lot of red tape,” he says.
“We deliver applications to a certain standard of security whereas FinTechs tend to want to just deliver things faster and might overlook some of the critical things that need to be in place as a bank.”
Also frustrating for FinTechs is that not all solutions are considered brilliant and will never get anywhere because they cannot get the funding to execute them. The thinking is that banks simply do not understand financial technology needs.
There are also claims that banks are unfairly pocketing majority of the shillings from these collaborations and banks are saying if the customer and the funds are theirs, FinTechs can only take as much as they bring to the table.

No regulation
For Mr Kasule, his concern is over the lack of regulations specific to FinTechs. He is worried that no one can protect them in the event of any setback in collaborations.
FinTech growth?
FinTech players say banks can only frustrate what they are trying to do with them but not what they are doing elsewhere.
Whether FinTechs work with banks or not, they believe they are here to stay. “We will continue innovating and building solutions for mobile money, insurance, utility and tax companies even if banks do not come on board,” Mr Lubega says.

What needs to happen?
For there to be more meaningful collaborations, Mr Lubega says there needs to be an understanding on both sides on how they can speed up the process of partnerships.
But also, banks need to think about unique solutions they can provide for FinTechs to add value to.
“They are stuck in the mindset where they provide very general products such as fixed deposits which might not be relevant in the FinTech space,” he says.

How far can FinTechs go?
Players predict that FinTech companies will expand and penetrate every layer beyond the financial space. Uganda could see FinTechs solving problems in agriculture, education, transportation, most of which our big corporates such as banks or insurance companies are failing to solve. They could also take in more independent projects instead of partnering with existing financial service providers.
Mr Muzembe believes FinTechs are not disappearing anytime soon. Some FinTechs will probably merge with banks while others will, with time, eat up the market share for instance in the payments space. This will eventually force banks to establish other sources of revenues.
In terms of collaborations, he expects to see more work in crypto currencies and virtual banking (digital banking) with online accounts that will be cheaper for consumers.

PARTNERSHIPS
How to collaborate. Mr Lubega advises FinTechs to identify what value they can take to the bank and what they can get in return.
“If you are going to collaborate on a savings product, you need to identify the bank that will give you the best solution. You need to show them how many customers you are going to bring to them, how that will improve the deposits in the bank and the money they will make. If they don’t see that value, they will not take it,” he says.
A viable business is created out of identifying and solving problems. Banks such as Barclays say FinTechs need to clearly explain the problem at hand and sell customer needs.
“If FinTechs are going to partner with us, they need to understand banking,” Mr Muzembe says.
“For FinTechs, it is about being able to demonstrate value through a solution that makes the bank make more profit, cuts costs, increase revenue and customer base,” Mr Muzembe advises.