FinTech companies take on banks, telcos with Big Data arsenal
Google, Apple, Facebook, and Amazon have all gone into the digital payments game. As have China’s Alibaba and WeChat.
Developing markets such as Kenya do not yet have the levels of Internet penetration and e-commerce sophistication to attract these online giants turned fintech entrepreneurs.
However, if WeChat’s entry into South Africa is anything to go by, it is only a matter of time before international fintech begins to challenge traditional digital finance offerings such as M-Pesa.
At the same time, a stable of local fintech companies are sprouting and they are expected to mature as fast Internet becomes more affordable and as Kenyans embrace shopping and banking online.
The entry of these firms into a field that has been monopolised by banks and telcos is causing jitters in some quarters.
“The vast majority (88 per cent) of participants indicated that they are worried that part of their business is at risk to standalone fintech companies,” writes audit firm PwC in a recent global survey of financial service firms.
But what should local banks and mobile network operators do to prepare for the onslaught?
Experts agree that companies should position themselves as useful partners for fintech firms and if necessary, worthy adversaries.
A key part of this strategy will be a fundamental shift in the revenue models used by digital finance companies in our part of the world.
Rather than focusing on earning money from transaction fees, they should turn their eyes to selling other financial products — loans and insurance, for instance — on top of the mobile money platforms.
They should also prioritise data harvesting and analysis as a way to fuel more sophisticated financial products.
“Therefore, if there is the willingness, we think there is the ability, and enough time, for digital finance providers to make these necessary changes now, so they can meet fintech companies on an ‘even playing field’” writes the Helix Institute of Digital Finance in a recently released report.
Helix distinguishes between fintech firms and digital finance which it says have “completely different corporate DNA”.
Digital finance companies often have a core business in telecoms or in banking. Technology is not their primary business but they use it to deliver services to customers.
They are likely to be averse to risk, conservative in innovation. An archetypal digital finance provider would be the KCB Group.
Fintech firms, according to Helix, are primarily technology companies. Their corporate structure emphasises innovation, technological research and risk taking.
Helix says that fintech firms are more likely to be found in the developed rather than developing world. Examples of fintech firms are PayPal, Kenya’s KopKopo or Google Wallet.
But this distinction is hard to keep straight. Even companies that would fall firmly under the digital finance definition as fronted by Helix are realising that they have to innovate and make technology a core component of their operations.
But even if one does not parse between digital finance provider and fintech, it remains that the fintech start-ups and the Internet giants that are moving into this space have a technological nimbleness that is often lacking in your average bank.
Another major advantage is access to a wealth of customer data, beyond information on transactions including behaviour as exhibited in the goods they buy, the websites they visit or even their location.
What this means is that while a Kenyan bank may know the frequency with which a customer transfers money from their bank account to their mobile money wallet; Google is privy to not only the transactional data but also information on customer preferences and perhaps even their movements.
On the other hand, companies like KCB and Safaricom have home advantage, especially over the international newcomers.
They know the local financial industry well and they have an in-depth understanding of the transactional behaviour of their customers.
These strengths and weaknesses position the local companies to be partners of newcomers, which PwC and Helix argue, is a better position than the adversarial stance.
But the first step to becoming true partners — or competitors if that is the chosen path — is to grow the customer base.
To do this, digital finance companies should borrow a leaf form the world’s Internet giants.
Google and Facebook offer their core services for free. This draws millions of customers and it is the data that these customers generate that is then used to sell additional products and to fuel payment innovations.
Soon, the days when companies like Safaricom can rely on fees to make money from mobile money will be gone.
Rather, the services built on mobile money, the data generated by customers, will be the big earners.
A move that may be painful in the short-term but one which will pay-off in the long term is to lower transaction costs thereby drawing in that last bit of the population that is still left out of digital finance.
“Currently, the transactional business models being used, and the shallow datasets being collected, are of little long-term value,” writes Helix.
Lowering transaction costs will also encourage customers to do more than just send or withdraw money, meaning that companies will be better positioned to collect data that goes beyond the financial to behavioural.
However, more aggressive data mining by digital finance firms could have scary implications for consumers.
Technology users have enough reasons to fear “big brother” while using Google and digital finance providers using similar tactics is only bound to compound those fears.
Companies will need to be very careful navigating the regulatory and ethical hurdles associated with expanded data collection.