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Why Digital Banks and Mobile Money Companies are Innovating Faster for Financial Inclusion than Incumbent Banks

The fast change in lifestyle habits in the wake of the Covid-19 Pandemic has resulted in an accelerated adoption of digital banking and mobile money platforms in Africa. Digital platforms are now much-touted to possess the capacity to crack the age-long challenge of improving financial inclusion on the continent. According to the World Bank (2017), more than half of the people over the age of 15 in the continent lack access to a bank or mobile money account.

The rapid adoption of digital banking and mobile money platforms in the continent was further bolstered by the increasing appetite of international investors. According to Disrupt Africa, 397 startups raised an impressive US$701.5 million in total funding in 2020. These figures are higher compared to previous years. The number of funded startups was up by 27.7 percent from the 2019 figures. The funding total was also higher by 42.7 percent compared to the previous year.

This steady advance of challenger banks is fueling an ongoing debate over what it will mean for incumbent banks, customers and regulators. There are signs that the deployment of technology by the Fintech subsector has stimulated an irreversible disruption of the entire Financial Services segment. Specifically, a range of digital technologies such as software as a service (SaaS), application programming interfaces (APIs), artificial intelligence (AI), cloud computing platforms, are stimulating the development of new business models that are upending incumbent banks in Africa.

Incumbent banks are confronted with many legacy challenges. The backend of the industry consists of established infrastructure that banks use to interact and transact with each other. Infrastructure and systems such as the Nigerian Interbank Settlement System (NIBSS), and the universal messaging system (SWIFT), with others, were developed in the pre-internet age and have become industry standards. These conglomerate banking systems and processes were primarily designed for the industrial revolution and the global rise of cross-border trade and finance. They significantly increase the prices and the bureaucracy that consumers face. Financial Services was an industry designed to depend on physical assets to deliver services and to scale (for example branches). It is no surprise that only an estimated 7% of credit protocols in banks can be handled digitally, end to end.

Digital banks and mobile money platforms use technology to unbundle the services provided by banks, contrariwise the incumbents. They may decide to focus only on stored value wallets in mobile phones or simplified channels to allow SMEs to receive online payments from customers, or instant cross-border transfers at a fraction of the cost and delivery time. They may also choose to provide Savings, Wealth Management, or Lending.

Although the incumbent banks and Fintechs share similar revenue models, their operational models are worlds apart. These digital banks and mobile money platforms run on smartphone apps with modern back-end systems that require little or no physical infrastructure. Their lean cost structure enables them to provide much more affordable prices to consumers. Their data-driven due diligence and decision-making processes reduce or in some instances, eliminate their reliance on collateral and formal documentation. These solutions address critical pain points in providing financial services to the huge rural unbanked population in Africa.

With technology-enabled capabilities in product design, user interfaces, integration, and intelligence, digital banks, and mobile money providers can create more varied and personalized value add solutions with better customer experience. Examples are rife all around the world: Renmoney (Nigeria), TymeBank (South Africa), V Bank (Nigeria), Sparkles (Nigeria), N26 (all in Europe), Nubank (Brazil), 811 (India), and Xinja (Australia), to name a few.

While banks are certainly not facing their own Kodak or Blockbuster Video moment, they cannot idle on the yearly profit increases that the industry has so grown accustomed to.