The most significant transformative force in financial services today is without a doubt technology, Dr Robert Wardrop, director of the Centre for Alternative Finance at Cambridge Judge Business School told a recent GIBS Forum.
“We are seeing an unprecedented rate of change in the global financial services sector,” Wardrop said.
New tech-driven interventions in payments, savings, credit, and lending have the potential to extend financial services to underserved segments of the market and improve both the breadth and depth of financial inclusion.
“We have to approach the financial markets with a sociological bias,” Wardrop explained. “At the end of the day, finance is embedded in a society, people often forget that.”
Extending access to bank accounts, often considered the traditional measurement of inclusion, is, however, a “poor proxy” Wardrop said.
“While having a bank account is supposed to make you financially included, only 5% of people who save use a financial institution to do so. Just because you have an account doesn’t mean you use it, and it doesn’t mean you are able to derisk your daily life or contribute to your prosperity,” he explained.
Growth of fintech and pockets of value
Financial services incumbents “are not interested in disrupting themselves, as the status quo is pretty good,” Wardrop said.
Fintech, alternative channels, and instruments such as crowdfunding, peer-to-peer consumer or business lending and third-party payment platforms are developing as a result, driving the unbundling of financial services.
Pockets in the value chain that no longer deliver value and are open to disruption by third parties and financial services are increasingly transitioning from a vertical to a horizontal model in which financial services becomes an enabler.
The most successful fintech innovations, Wardrop pointed out, are those that have been developed to address a real problem or customer need in daily life.
Regional comparative analysis
Regionally, Sub-Saharan Africa is a leader in mobile money with East Africa particularly advanced in the adoption of tech-based financial services. The Southern and Central regions are lagging, according to research from the Centre for Alternative Finance, as a lack of foundational infrastructure and the legal regulatory framework continue to act as obstacles to innovation.
In South Africa, regulations require any deposit-taking organisation or institution to have a banking license, and 80% of all transactions in the country (volume rather than value) still take place in cash.
South Africa’s well-established financial services environment has acted as something of a deterrent to fintech interventions, as digital fintech solutions in countries such as India and China have occurred as a response to gaps in the banking system.
Regional differences in fintech innovation and adoption are marked, Wardrop said. While in Asia, “payments are booming,” these markets have a distinct preference for mobile payment apps as opposed to the mobile money accounts that are popular in Africa. The penetration of smart phones over feature phones and variability in data costs are all important structural differences across markets.
While current data on global fintech adoption is adept at capturing patterns, it cannot yet explain the reasons underlying these patterns, Wardrop pointed out.
The rise of technologically enabled financial services means “regulators are really challenged at the moment,” Wardrop said. Regulators want a comparative analysis and insight on what other markets have tried and implemented successfully. There is a need for co-operation in the regulatory space as fintech is a cross border activity.
Fintech vs BigTech
Technology firms such as Amazon, Alibaba, Google, Facebook and Tencent have grown rapidly in the past twenty years, Wardrop explained, citing recent research from the Bank of International Settlements (BIS). Some of these have ventured into financial services including payments, money management, insurance, and lending.
The entry of these tech firms into finance presents a number of opportunities and risks.
Credit volume characteristics vary greatly across economies, Wardrop said, as tech firms enter consumer and business lending. Cultural factors such as savings culture and cash economies all have an impact on lending volumes.
Peer to peer (P2P) lending has also had varying success in different markets, and questions remain around its regulation: Is it a substitute or a complement to bank-based lending; and will it enable different consumers? If this is the case, “regulators are willing to create an accommodating environment,” Wardrop said.
The underserved small business community that banks are unwilling or unable to extend credit to due to their risk profiles could act as an important driver for the economy. In such cases, peer to peer lending would be an alternative enabler, and institutional investors have piled into P2P lending in developed markets, Wardrop explained.
“Bank credit models love stability and there are inherent biases in the lending model. While lending to this group would not necessarily enable financial inclusion, good quality candidate SMMEs are an underserved group,” he added.
For financially excluded and underserved market segments, inclusion is important as a statutory and non-statutory objective for the economy at large, Wardrop concluded.