FinTechs pile pressure on traditional banking revenues

The entry of FinTechs such as Payway, have taken away transactional fees that banks used to earn by accepting the settlement of bills. PHOTO BY RACHEL MABALA

At a well-attended dfcu Annual General Meeting in June, Mr William Sekabembe, an executive director in the bank, told shareholders that they are being given a run for their money by Financial Technology (FinTechs).
FinTech is often used to refer to technology that is disrupting traditional banking and financial services. They have been slowly creeping into some of the spaces where commercial banks used to make money.

Pressure
“We are now under pressure from the FinTech companies that are now in spaces we used to occupy. We have to continue investing in technology in order to keep up with the FinTech’s so that we don’t miss-out completely,” Mr Sekabembe said
The entry of FinTechs such as Payway, have taken away transactional fees that banks used to earn by accepting the settlement of bills. Bankers are being forced to rethink their growth models on making money rather than being left behind.
In 2011, dfcu Bank started the investment in a core banking system, spending about Shs10b for the purchase of a core banking system.

Indeed, dfcu has been one of the banks that have an annual expenditure to upgrade their core banking system. In 2016, about Shs3.3b was spent on upgrades to the same banking system, according to dfcu’s financial reports.
“The upgraded core banking platform will give us a firm base upon which to expand, innovate and increase automation of end-to-end customer journeys. We are also using our investment in technology to achieve the broader goal of financial inclusion within the community. This means accelerating our deployment of digital and mobile capabilities to make our products and services easily accessible,” Mr Elly Karuhanga, the chairman dfcu, told shareholders at the 2017 Annual General Meeting (AGM).
And the trend has been visible.

In the last four years, banks have invested billions of Shillings on new core banking systems to cater for mobile banking and internet banking. In 2016 Uganda’s largest bank, Stanbic Bank Uganda spent Shs83.4bn to upgrade its core banking system in order not to be left behind.
“We will continue to leverage technology to simplify our processes and reduce expenses. We continued to invest and upgrade our core banking platform to address interface gaps with other peripheral systems and broaden functionality. We are convinced that these interventions will ultimately improve our efficiency and ability to more cost effectively serve our customers,” Mr Patrick Mweheire, the chief executive officer (CEO) Stanbic Uganda, told shareholders in the 2016 Annual Report.
The most recent upgrade was with Centenary Bank in January 2017 when they went live on a newly installed core banking system called Profits – only. Centenary uses this banking technology in Uganda. The expenditure on the system and upgrades are estimated to have cost about Shs45b by end of 2016.
In August 2016, KCB Group shut down branches for three days across the region in order to upgrade its system.

Global trend
“FinTech disruptors have been finding a way in. Disruptors are fast-moving companies, often startups, focused on a particular innovative technology or process in everything from mobile payments to insurance. They have been attacking some of the most profitable elements of the financial services value chain. This has been particularly damaging to the incumbents who have historically subsidised important but less profitable service offerings,” reads the Financial Services Technology 2020 and Beyond: Embracing disruption report by PricewaterhouseCoopers (PwC).
According to PwC, in 2014, FinTech investments were estimated at $12b whereas banks spent in excess of $200b on technology related items. According to the report, it estimates at 81 per cent of banking CEOs are concerned about the speed of technological change, more than any other industry sector. This explains the increased IT expenditure by commercial banks.
However, as bankers invest, FinTechs also continue to invest in more seamless technology, giving customers a better and more affordable experience.

“Meanwhile, FinTech start-ups are encroaching upon established markets, leading with customer friendly solutions developed from the ground up and unencumbered by legacy systems. Customers have had their expectations set by other industries; they are now demanding better services, seamless experiences regardless of channel and more value for their money,” the report further reads.
For instance, banks were working with money remittance companies such as Western Union and MoneyGram, to allow sending and receiving money across borders. Estimates by Financial Sector Deepening Uganda (FSDU) indicate that to send money from the United Kingdo to Uganda, about 9 per cent of the total amount is spent on costs. About $181m is sent by over 60,000 Ugandans in the UK to Uganda.

However, some emerging FinTechs are changing this, delivery money at a much lower cost and direct to a mobile phone. For instance, Useremit – part of Eversend – founded by Ugandans, is a mobile payments service that allows people to make real-time money transfers from debit or credit card to mobile-money from all over the world to registered mobile money users in Uganda, Kenya and Rwanda. The cost of the transaction is under 5 per cent. That means the traditional commercial banks and money remittance companies are losing out on this space.
Another FinTech startup, PesaChoice allows people to transfer money across the East African borders to any network.

“Our platform allows people to send mobile money to East Africa on any network. The problem we are trying to solve here is that you do not have to be on the same network when sending money to anyone in another East African country,” explains Mr Davis Nteziryayo, the CEO, and co-founder of PesaChoice.

Join them
Tomorrow, the bankers will also be sitting to discuss the future of banking in Uganda at the first ever Annual Bankers’ Conference. One of the key focus areas will be the “Digital Finance Revolution,” that will explore how technology impacts on the banking sector. The bankers, on top of investing in their own technology, are now working with FinTech companies on the backend in order not to miss out on the market.
The most significant partnership so far is CBA and MTN Uganda for the microlending platform, MoKash.

“We’re seeing a conversion of both banks and FinTech companies because the realisation is that more value can be achieved. FinTechs have very strong platforms and technical competence. They are able to collect data and provide a bank with analysis on customer trends,” explains Ms Renita Nabisubi, innovative financial services specialist at FSDU.
The MoKash example here is that technology is used to analyse transactions and one is given an amount they can borrow. This analysis takes only a few minutes, which is what customer’s look out for.
“People want things that are done more efficiently and quickly. They do not want to put up with long lines,” Ms Nabisubi says.

She explains that in the long run if banks partner with FinTech’s, they could see the capital expenditure on ICT reduce. This, as they partner with companies whose core role is providing cloud services rather than physical ICT infrastructure.
According to BoU, the total value of mobile money transactions as at end of December 2016 rose to Sh43.8 trillion from Shs32.5 trillion in December 2015. There are innovations around mobile money that are giving banks a run for their money.
With 24/7 interconnected and on-the- go national/regional/global banking, banks must innovate or die.

Some Ugandan FinTechs

Smart Credit is a business intelligence engine that processes SME transactional data to individualized credit data and financial statements. It started with the aim of helping small businesses access credit. In May 2017, the startup raised Shs360m as investment capital at Smart Africa Summit, in Kigali, Rwanda.
Useremit: This is a mobile payments service that allows people to make real time money transfers from debit or credit card to mobile-money from all over the world to registered mobile-money users in Uganda, Kenya and Rwanda
Awamo: a mobile, biometric banking solution (SaaS) for unregulated microfinance providers in sub-Saharan Africa. Lack of mobility and reliable authentication especially in rural areas are big problems with regards to the financial inclusion of more than 400m people in the region.
Beyonic reduces cash risk and helps businesses go mobile across operations.

They digitize payment workflow for businesses to pay people with mobile money. Additionally, one can start collecting funds via mobile money instantly.
Payway is a brand of African Vending Systems Ltd that started operating in 2009. Its current focus is to facilitate payments ranging from event ticketing, utilities, airtime top-up and Internet data.

Banking and fintech investing in core banking

Banking is changing as competition continues to grow. The rapid branch expansion by commercial banks has slowed down due to the costs involved. Banks are also seeing their margins squeezed as fewer people walk in to pay bills or make withdrawals. The investment in core systems allows them to integrate mobile banking. Here, a customer uses an Unstructured Supplementary Service Data (USSD) code to access their bank account to check balance, make a payment or even transfer funds to mobile money or another account. The same system allows ATMs to become much more than just for withdrawals but also to make deposits. In the long-run, banks will have fewer people working in branches and more transactions moving to the mobile phone and the Internet. Banks will have lower operating costs and higher returns, which could in turn reduce lending rates.

FinTech firms take on banks

Google, Apple, Facebook, and Amazon have all gone into the digital payments game. As have China’s Alibaba and WeChat.
Developing markets such as Kenya do not yet have the levels of Internet penetration and e-commerce sophistication to attract these online giants turned fintech entrepreneurs..
However, if WeChat’s entry into South Africa is anything to go by, it is only a matter of time before international fintech begins to challenge traditional digital finance offerings such as M-Pesa.

Digital revolution

It is clear that the digital revolution in financial services is under way, but the impact on current banking players is not as well defined. Digital disruption has the potential to shrink the role and relevance of today’s banks, and simultaneously help them create better, faster, cheaper services that make them an even more essential part of everyday life for institutions and individuals.
To make the impact positive, banks are acknowledging that they need to shake themselves out of institutional complacency and recognize that merely navigating waves of regulation and waiting for interest rates to rise won’t protect them from obsolescence.

Bank investment in core banking systems & upgrades
Shs83b
Stanbic Bank

Shs45b

Centenary Bank
Shs36b

Crane Bank

Shs22b

KCB Group

Shs15b

Dfcu Bank