The future of financial services lies in a collaboration model between established banks and insurers and new disruptive fintechs. Herman Bosman, CEO of Rand Merchant Investments and Rand Merchant Bank Holdings told a Gordon Institute of Business Science (GIBS) forum: “We are seeing an unprecedented rate of change in the financial services sector. Disruption is inevitable.” The most significant transformative force in financial services today is without a doubt technology, he explained, closely followed by the millennial consumer with different needs and new expectations.
Tech trends and the future of financial services
Technology, regulation, consumer behaviour and cyber-crime will all fundamentally alter the financial services landscape in the near future.
The millennial consumer, with rapidly changing needs and demands, represents a dramatically changing consumer for banks Bosman explained. 33% of millennials believe they won’t need a bank in 5 years, while 50% are counting on start-ups to overhaul the banking landscape.
According to the 2016 Edelman Trust Barometer Report, younger consumers don’t trust financial service providers and don’t consider them as a partner on their financial journey.
While these clients are savvy and communicative and leave a digital footprint, the ethics around the use of client data remains a grey area. Newer entrants have a distinct advantage in their ability to analyse and utilise data, even though they may have less of it.
Social media, mobile, data analytics and cloud banking, otherwise known as the Tech SMAC stack, are all issues which both incumbent financial services providers and newer entrants need to take into account in a rapidly changing ecosystem, Bosman said.
Social media is a useful platform to market to and understand people and can reduce the cost of customer acquisition, and the advent of mobile has seen the rise of the omni-digital banking consumer who is “comfortable to transact over the platform. However, they still expect the service and engagement levels” of traditional banking Bosman said.
Fintech is on the rise globally due to its focus, the cost/benefit disruption to newer systems and the fact that they are driven by hungry entrepreneurs.
However, newer entrants don’t have effective distribution channels, established brands or regulated platforms, which Bosman calls “the Holy Grail.” Collaboration opportunities between financial services incumbents and fintech offerings would deliver these clever, agile and cheaper solutions to the market, while providing the key elements the new entrants lack.
Bosman explained that the majority of fintech start-ups are enablers in the value chain that are not trying to build disruptive businesses. 25% are complementary, while only a small minority are in fact trying to build new businesses. Collaboration is important as it brings the better of the two worlds together, and can change the financial services world, Bosman explained.
Possible models for collaboration include a consortium or an equity driven partnership, or an incubator such as RMI’s Alphacode. This fintech club provides a platform for members to engage and work with entrepreneurs, technology investors and industry experts.
“Fintechs need an experimental playground, be it a client, a license or even capital,” Bosman said.
Dominique Collet, Fintech investment specialist at RMI Holdings said fintech disruptors must be certain their value proposition is at least “ten times better than what the incumbents could do themselves. It can’t just be something they could build in-house in a year - it must be a compelling offering.”
Alphacode members cover the full spectrum of financial services, including; payments, remittance, data analytics and lending. Successfully launched businesses include Prodigy Finance, a lending platform which enables financing for international postgraduate students; and Bankymoon, which provides insight and technical expertise around Blockchain technologies to public and private organisations.
Obstacles to fintech adoption in South Africa
20% of South Africa’s Gross Domestic Product is derived from financial services. The country has the potential to be a good playground for fintech due to its combination of being a high end and a developing market, but has been slow to change and adopt advances.
Bosman said this is partly due to the already sophisticated financial services sector, a lack of skills and a “fear of failure.” The established banking system meant it was difficult for new entrants to gain a foothold in the market.
While Bosman expects multinationals to eventually enter the South African market, the size of the market and geopolitics will keep them away for a bit longer: “There are bigger and easier markets to enter, which are more mobile connected and tech savvy”
The stringent regulatory environment, which had protected the South African financial system from extended exposure to the 2008 financial crisis, was unlikely to be relaxed. “South African regulators have done a lot right, and it is not their role to encourage or stifle growth. Rather, their primary mandate is the stability of the financial system,” Bosman said.
His advice for new disruptive entrants into financial services was that incumbents should not be underestimated: “Incumbents (banks and insurers) won’t sit idly by and wait for it to happen to them.” Conversely, he cautioned established players: “If you don’t disrupt yourself, you will be disrupted by someone else.”