It has become the norm to hear rumors about how traditional financial institutions, especially commercial banks, would be destroyed in a few years by the rapid rise of modern technologies offering more innovative financial products.
With these staggering forecasts, one would expect an environment full of collaboration between fintech companies, but alas! The opposite is the case. Aside from a few business relationships and partnerships here and there, the entire sector is fragmented in its practices and approach to business.
While commercial banks have historically and presently worked together to ensure interoperability and improve the ecosystem through collaborative efforts, the fintech industry struggles to create sustainable value creation models among themselves. Therefore, fintech companies still have a lot to learn from traditional financial institutions if they want to build an ecosystem where business growth potential can be fully realized.
Traditional commercial banks have always been an integral part of the Nigerian financial system. Even though fintech companies are afraid to admit it, many still rely on banking infrastructures and practices to build their business from scratch today!
Amazingly, these traditional financial institutions provide a much-needed foundation for fintechs looking to innovate in the financial services sector, especially given their success in attracting investors who tend to base their judgment solely on the accessibility of the infrastructures provided by the seemingly “antiquated” banks.
Financial institutions are often at odds with one another, but the traditional financial system has always been able to work together for a greater good. Their ability to leverage strategic business partnerships to effectively share information and resources makes them an unparalleled group in today’s industry.
Although they may have different business models, there is no doubt that organizations operating in the same industry can collaborate when it is most needed and achieve results that benefit everyone involved. For example, traditional banks apply better due diligence to their customers and this creates space for more opportunities made available through strategic partnerships. This can also increase regulators’ confidence in fintech companies that provide banking services, and in turn create a better regulatory climate for the fintech industry.
Fruits of collaboration enjoyed by all
For example, when the Nigeria Interbank Settlement System (NIBSS) was created, it became an essential part of all transactions. Today, over 95% of interbank transfers are made through NIP, RTGS and NEFT platforms owned by NIBSS established and wholly owned by all licensed banks and the Central Bank of Nigeria (CBN). Today, all fintechs that provide transfer services move them through NIP directly or indirectly through a bank and then route them through NIP at one point.
This isn’t the only time banks have worked together to create a legacy system. After years of struggling with problems arising from the lack of a trusted identity network, all Nigerian banks, in a joint effort with the The Central Bank of Nigeria established BVN, a unified biometric ID framework. The BVN gives each individual in the Nigerian financial industry a unique identity that can be used for identification and verification. The BVN thus facilitated an easy verification that enabled most fintechs to scale up – the greatest fruits of the collaboration enjoyed by all.
The banking industry in this country has been able to do so much more due to the combined efforts of various parties. They have been able to offer their customers products and services that are far better than what is available in other parts of the world. But I’ll let you in on a little secret: there’s more where that came from!
Let’s talk about lending. in 2007, with the help of nine Nigerian banks and Dun & Bradstreet (D&B), As a global provider of credit data, IFC created the country’s first-ever Credit Reference Organization (CRO). Today, the largest tech-enabled lenders in Nigeria rely on information from these lending agencies to manage their lending portfolios. Fruits of joint efforts and cooperation if you ask me!
The huge success of superagents and mobile money providers in delivering financial services at the doorstep is fueled in large part by efforts in the development of Shared Agent Network Expansion Facilities (SANEF). This initiative was launched by all custodian banks, which has enabled them to play an important role in promoting inclusion across society by increasing access to financial products, along with other benefits such as improved cost-efficiency or risk management capabilities that come from being able to have multiple internal touchpoints to have an organization. Today, digital mobile money agents generate close to N100 billion in transaction value per day – a fruit of collaboration.
What if we deal with payments? Interswitch, which started as the national ISO switch for cards and ATMs and then expanded to include bill payment processing, was funded in part by commercial banks. The company has helped fintechs easily route their transactions through POS terminals or web-based implementation services so they can focus on developing innovative products – another result of joint efforts.
The fintech industry was built on the backs of Nigerian banks, which have worked together many times to create an ecosystem whose structures are an important foundation for any company wishing to develop its product or service.
to answer Germaine’s questions
The fintech industry thrives on the cooperation of others. But what happens when these commercial banks decide to stop meeting their demands? Wouldn’t it be great if they worked together to build financial systems and infrastructure that will stand the test of time? How will traditional financial institutions, as well as regulators, react when fintechs start penetrating their market share heavily? case study, the recent CBN circular Requesting third-party verification companies to stop serving non-bank institutions. More and more directives of this kind are sure to come soon. And what will happen then, we can only guess at the moment!
How unhealthy competition spawns a stunted fintech industry
As a young, vibrant and growing industry in its early stages of development, there is a tendency to compete rather than collaborate. However, it makes more sense to work together since your competitor is not your enemy.
For example, look at digital moneylenders, a large portion of which are fleeced by borrowers every day, but never share that information with each other or with lending departments. They are so full of malicious intentions about their misfortune that they would prefer other lenders to have a similar experience to their own rather than create a centralized database of credit scores to rid the industry of unscrupulous individuals. In any case, the horrible borrowers are having a field day looting them all while the market struggles to evolve – a tale only unhealthy competitors can tell.
Also in online payment collections, the impact of non-cooperation has affected the development of the industry. Nigeria is overrun with many criminals who use stolen identities to attack bank accounts and consequently funnel their loot through e-wallets provided by fintechs. While banks typically have a BVN blacklist and effectively help each other with account freezing and fund repatriation, fintechs do not work together. As a result, similar groups of scammers are plundering fintechs while being subjected to dangerous chargebacks — once again, a fate reserved only for unhealthy competitors.
The fun part for me has always been the pricing. Fintechs continue to sacrifice profit margins in favor of the higher transaction numbers and superior bragging rights they give them. While banks regularly join forces to increase their bargaining power on shared services and products (POS, ATMs, USSD, etc.), fintechs continue to sabotage each other’s pricing. Therefore, every time there is a crash in product prices, fintechs take a large chunk of the trade discount. For what reason could they not agree on a common industry award and hold their own? The appropriate answer is simple – malicious privilege. This habit not only lacks any business acumen, but is also a ridiculous misfortune experienced only by unhealthy competitors.
Learn from the wolves
The fintech world is highly competitive, with many startups competing for limited resources. A wolf pack is considered an effective organization that helps its members work better together through self-organization and taking responsibility over time. This might be similar to what we need in our industry!
Based on the foregoing, it is trite to suggest that fintech companies in Nigeria, and indeed across Africa, will thrive better by leveraging strategic collaborations and partnerships. Therefore, the focus now should be on fostering meaningful collaboration, as this will make their businesses more sustainable.
Finally, there is a need to foster higher perspective and liberal thinking in fintech companies. Now is the time to band together to promote favorable government policies and create interoperable systems that stand the test of time. The possibilities are limitless when you have a strong fintech community!
About the author
Oluwatobi Towoju is an experienced professional in the banking and financial services sector. He has around six years of experience with expertise in various areas including internal control, compliance, audit, governance and risk management. Oluwatobi’s passion for process automation led to his interest in introducing technology into risk management. This paved the way for his current role as Convener, Fintech Risk Managers Network (FRIMAN). FRIMAN is a community for professional risk managers in the African FINTECH sector. Founded as a voluntary group of risk industry professionals, FRIMAN aims to provide a free and open forum for promoting sound risk management standards and practices within the financial technology ecosystem.
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