By Francis Chinjoka Gondwe, PhD
FINANCIAL TECHNOLOGY
Traditional financial methods no longer enjoy the monopoly of the financial services sector, as new technology and innovation in the name of financial technology (FinTech) have changed the business dynamics. Smartphones have become handy in aiding mobile banking, thus ensuring convenience and faster service delivery in a cost-effective manner—in Kenya, a partnership between Safaricom and Commercial Bank of Africa – introduced M-Swari, leveraging the M-Pesa network to provide deposit and lending products directly on the phone handset. Cryptocurrency is shaking the markets as it keeps on growing outside the regulatory frameworks of reserve banks. Financial technology has seen the automation in service provision in the insurance industry, trading, and risk management.
With financial technology expanding its reach, immediacy and personalization of consumer goods and services have become the norm. Technology has transformed business-to-business and within-business transactions.
EMERGING MARKETS
Financial technology is breaking barriers in service provision in emerging markets. These are markets that have some characteristics of a developed market but do not meet standards to be of a developed market. Renowned economies to have broken into the spheres of emerging markets by either nominal or PPP-adjusted GDP are the BRIC (Brazil, Russia, India, and China). However, as inflation rates fall, many emerging market economies have begun to resemble developed markets
An emerging market economy describes a nation’s economy that is progressing toward becoming more advanced, usually by means of rapid growth and industrialization. These countries experience an expanding role both in the world economy and on the political frontier. Emerging markets have low incomes and high growth prospects
An emerging market economy is a nation’s economy that is progressing towards becoming advanced, as shown by some liquidity in local debt and equity.
Morgan Stanley Capital International’s emerging-market index includes South Korea and Taiwan, but Hong Kong and Singapore are in its developed-markets index. The International Monetary Fund, however, counts all four as “advanced economies.
Peculiar elements that distinguish emerging markets from all other markets comprise of low income but rapid growth; investments that achieve higher returns; youthful and growing populations; massive exodus of its human resources into developed economies; weak infrastructure, such as poor road networks; as well as fragmented markets whereby few national brands have a commanding presence. Emerging markets are also noted through their underdevelopment in technology as well as the availability of weak channels.
EMERGING MARKETS MUTUAL FUND
The emerging markets mutual fund invests in stocks of companies located in emerging markets around the world, such as Brazil, Russia, India, Taiwan, and China. Stocks of companies in emerging markets tend to be more volatile than those in developed countries, which could imply the potential for greater long-term returns.
DEVELOPED MARKETS
In investing, a developed market is a country that is most developed in terms of its economy and capital markets. The country must be high income, but this also includes openness to foreign ownership, ease of capital movement, and efficiency of market institutions. In general sense, developed markets is the dreamland of emerging markets and its characteristics are the opposite of emerging markets
LEAST DEVELOPED COUNTRIES
At the bottom of the market index are the Least Developed Countries (LDCs). These constitute countries that, according to the United Nations, exhibit the lowest indicators of socioeconomic development, with the lowest Human Development Index ratings of all countries in the world. The classification of being “least developed” is on the basis of their low gross national income (GNI), weak human assets, and high degree of economic vulnerability.
IMPACT OF FINTECH ON FINANCIAL SERVICES VALUE CHAIN
Some FinTechs aim to operate separately from – and compete directly with – banks. Some have, however, come to realise that most will not reach scale without leveraging the customer base and capital that banks have already accumulated. The world has seen many institutions racing to combine new technologies, including cloud computing, artificial intelligence, and voice recognition, to help provide financial services.
SPANNERS IN DIGITAL FINANCIAL SERVICES DRIVE
FinTechs are not just finding it easy to roll on the market. There is low penetration of formal financial services—cash remains king in transactions, informal credits, and even savings. Low income and financial literacy levels (low-value transactions, smaller fees, and the need for user education) are also derailing the spread of FinTechs in LDCs.
FinTechs flourish in environments where technology is well established. In most LDCs technology is underdeveloped, and the venture capital ecosystem consists of a shortage of skilled tech/finance entrepreneurs, small markets, and limited revenue potential. In the end, FinTech’s development is derailed. That is even further compounded by relatively weak infrastructure—underdeveloped payment systems, customer credit data, legal enforcement mechanisms for payment obligations, power, and internet coverage.
FINANCIAL TECHNOLOGY – WHAT THE FUTURE HOLDS
Microscoping into the future of financial technology, there appear to be gains and losses. Automation will be widespread, and there is no doubt about that, but perhaps the future of jobs will be put on the cross.
“I do think employment in finance will decrease and those people working in the industry will be doing very different kinds of jobs,” says Ralph Hamers, chief executive of ING, who in the last few months has announced plans to shed 7,000 of the Dutch bank’s 54,000 staff.
Overall, as many as 1.7m jobs are expected to be lost as banks digitize operations over the next decade, Citigroup predicted recently.
For banks dogged by low margins, automation and technology represent a long-desired chance to boost profitability, even if in the longer term they pose a near-existential threat to the banks’ old way of business. Automation would allow financial services groups to cut costs as a proportion of revenues by 15 percentage points, according to a study done by Oliver Wyman.
Bankers predict they will get much better at crunching vast amounts of data to make immediate lending decisions and to provide far more tailored robo-advice to customers.
Eight of the world’s 10 biggest investment banks are expected to use blockchain to cut 30 percent of their costs.
“For the time being, the likes of Facebook and Google are on the fringes of banking because they don’t want to be regulated,” says Francisco González, chairman of Spain’s BBVA. “But sooner or later they will jump into our arena. They will try to take some parts of the value chain. That is the real challenge.”
Banking in Europe is also expected to be transformed by new EU regulations that will force banks to provide third parties with access to the data of any customers who authorize it (this should make it much easier for banks to poach their rivals’ clients and to offer more products from rivals).
The regulatory change could also unleash competition for banks from FinTech start-ups and big Silicon Valley technology groups.
Oliver Wyman sees that many banks will be left as “component suppliers”—producing highly regulated financial services such as loans and savings accounts—while the valuable relationships with their customers are controlled by technology-focused groups acting as “platform providers” and “demand aggregators.”
The technological upheaval will require heavy investment, which is why the final big prediction of the bankers is that there will be big consolidation among banks, particularly in the fragmented European sector. It can be foreseen that there will be fewer layers on the market, as consolidation will be done by those who have mastered technology. The bottom line will be simple, ‘master technology or extinct.’ It will be FinTech that will drive the new business model. The sharing economy will be embedded in every part of the financial system, as blockchain will shake things up.
CONCLUSION
In markets where the formal banking system is well-entrenched and has been providing reasonable services to the mass market, banks may continue to play a dominant role—even where the technology ecosystem can support significant FinTech incursions.
In markets where the banking sector has lagged, FinTechs have a greater chance of taking over functions and market share.
In countries where the tech ecosystem is relatively weak, with only isolated solutions such as mobile money being offered by tech companies, banks have thus far been able to catch up.
Kenya is an example where an extensive FinTech infrastructure for payments was put in place by a telecommunications company, but the financial services value-add has been reclaimed by banks.
Even so, an array of new entrants leveraging that technology infrastructure may shift a portion of financial services out of the banking sector.
China and India offer examples of different potential outcomes in markets where broad penetration of formal banking was low, leaving a large underserved market, while the tech ecosystems were strong. In China, where the regulator has permitted significant innovation outside the banking system, a huge number of marketplace lenders has emerged, and a number of tech companies have made significant inroads into financial services, notably in payments and investments. India has also seen a proliferation of new lenders and payment offerings.