COVID-19 is accelerating demands for online banking technologies and cost-cutting efficiencies. It is even changing consumers’ behavior, pushing them to consider new tools and technologies. A March 2020 survey by Lightico found that 82% of customers were concerned about visiting their branch in person and that 63% of those polled were now more willing to try digital applications. These shifts will be long-lasting. Banks and financial institutions are now highly focusing to cut costs and drive efficiencies and redefine their value to customers. Some like Atmos Financial already offer fee-free online bank accounts to all customers. In a shifting market with digital banking, digital financial services need to ensure low-cost customer onboarding and operation cost with high transaction volume. Looking to the future of banking, digital is no longer an option for firms who wish to survive – it is a must.
WAVE OF OPEN BANKING
Around the world, banks are opening up their customers’ financial data (with the customers’ consent) to third parties through application programming interfaces (APIs). The global trend of open banking allows third parties, such as fintech companies, to create new financial products. Open banking responds to customer demand for more choice, better customer experience, and more control over their data. Open banking will lead to the next wave of digitization in payments, reconfiguring age-old value chains and changing business models. Third-party providers (TPPs) can compete with banks to offer new financial products, opening opportunities for new entrants to innovate and compete with incumbent banks. For the customer, open banking means they have the authority to choose who can access their financial information – like account information, transaction details, etc. with other third parties for a service they want, like taking a credit card without filling out basic applicant details such as funding sources, and historical account balances.
Our daily apps like WhatsApp will pop up with financial services or prompt us to do transactions based on shared APIs and we will not need to switch to any other app or website for availing those financial services- be it payment, deposit, lending, or insurance booking. While checking out e-commerce shops, we sometimes get a popup whether we need digital loans on the go to buy the selected products on any marketplace. Some players already adopted it and are growing faster. Others are opting for help from consultancy services like Holland Parker in their digital financial transformation journey. Here, we need to start working on the policy level to make digital conversion thirst work for consumers and banks.
DIGITAL PAYMENT
The e-wallet market got over crowded globally just like ridesharing market in last 3 years; a lot of markets players came and died and clear winners like Alipay or WeChat Pay were very few. Winners did not make money with payment but with digital lending. What was more exciting and amazing was the launching of Unified Payment Interface in India. UPI, an instant P2P, C2B & B2B payment network of NPCI based on virtual payment address (VPA) and zero MDR propositions for merchants, made the disruptive move and got exponential growth. UPI put big e-wallet giant Paytm and card networks (Visa/MasterCard) under huge pressure by making a big hit on their transactions and MDR revenue line. Banking is going to be embedded service and experience by virtue of PSD2 and open banking.
Now a similar big move is coming from the European Payment System. Our market needs a similar Unified Payment Solution to ensure an instant low-cost payment solution for consumers and businesses to bring huge payment space under digital payment, since currently only 1.7% or BDT Tk 500 crore of total monthly MFS transactions comes from merchant payment while 91% is p2p, Cash in/Cash out transactions and all cards combined contribute for monthly around Tk 1,600 crore payment transactions at 60,000+ POS and e-commerce portals. This is still peanut considering USD 150 billion payment market. There are some challenges in current OTC driven or the distribution model of MFS. It is expensive for consumers. Just to cite a case – we could not materialize one of biggest FMCG’s retailer Payment digitization by our own wallet as the wallet transaction charges do not make sense for their FMCG’s cut-throat business model and margin. We had to pivot our business model as we planned to hit the break-even point within 2 years. We got a lot of interesting perspectives from our bank’s own wallet tech team who built our new proprietary wallet, business team and wallet customers and another digital project that will go live this year.
Surely, positive trends or upside of massive mobile money adoption in our market includes consumers’ payment habit has changed, digital adoption and trust in mobile money has been established. We have miles to go to attain the real purpose and make the business model well accepted and sustainable for consumers, business and fintech or banks. Hence a new payment model or unified payment can make a huge difference.
DIGITAL LENDING: A GAME CHANGER FOR MSMEs
Digital transformation has completely changed the lending system in different markets like Nigeria, Kenya, China, India and Philippines. This has become possible with the shrinking gap between the new technologies and the lending system. The rapid development of smartphone users, digital access and a shift towards consumerism has helped fuel the growth of Digital lending. Studies anticipate 15x growth in digital lending to MSMEs by 2023, owing to rapid digitization and access to easier, cheaper credit facilitated by digital lending companies. Digital Lending is nothing but an advancement in the lending and borrowing process where one can borrow within a short duration of time, without any paperwork. FinTech companies offer lending within 24 hours. With this advancement one doesn’t have to spend hours to visit a bank, standing in the bank’s long queues. Digital lending makes one free from the traditional persisting lending process where one has to spend a lot of time collecting and piling up the documents. Your loan is just a click away with the digital lending platform.
Traditionally, loan applications were evaluated based on various types of financial information and documentation to a lender such as tax returns, credit reports, payment history, bank statements etc. With increasing digital transformation of this data, digital lenders are able to quickly determine the type of loan and the interest rate for which the borrower is eligible. Digital data management, alternate credit scores and advanced analytics enable digital lenders in faster processing of loan applications. Also, there are alternative options like getting a title loan, where the borrower must sign their possession like a car, to the loan company, in exchange for the loan. It is not uncommon for many firms (such as https://thenetlender.com/affiliates/) to offer this affiliate program to those in need of emergency financial assistance. During this pandemic, our MSMEs could have taken massive mileage of digital lending if we had a supportive ecosystem and stimulus package-based loans could be disbursed faster.
CHALLENGER/NEO BANKS AND CONSCIOUS VENTURE CAPITAL FIRMS
Now huge noise is taking place for challenger banks and Moven shut down operations in the meantime due to a huge burning rate. We can see so far only two clear winners in challenger or neo bank space due to different business models they adopted. Kakao Bank and OakNorth Bank stood out from the crowd making sensible moves and different strategies. A lot of entrants are coming in this space assuming huge funding trends will continue and without a differentiated business model, Neo bank will not work out well as traditional banks are also launching digital banking wing-like Digibank by DBS or TMRW by UOB.
VCs are now smarter after watching the big debacle of startup poster boy WeWork and its founder Neumann walked out with a billion-dollar cheque after being fired by the board. It was the aftermath of a typical valuation game and it made him a billionaire after multiple charges against him as a founder. Softbank, one of the key WeWork investors, had to take a big financial hit for the scam. Now VCs are pushing portfolio companies not just for huge traction or user base but profitability and sustainability. So, the fintech buzz without a sustainable model will not work anymore. Valuation and real money are not the same – WeWork and some other famous startups’ sudden fall reinforced it. Most of our consumers think MFS players make hefty profit every year with huge transactions, the story is completely different due to business model, distribution model and associated cost.
RISE OF BANKING-AS-A-SERVICE (BAAS):
Banking as a Service (BaaS) is an end-to-end process that allows fintech companies and other third parties to connect with banks’ systems directly via APIs so they can build banking offerings on top of the providers’ regulated infrastructure, as well as unlock the open banking opportunity reshaping the global financial services landscape.
Techy-savvy legacy banks can fend off the encroaching threat of fintech companies by moving into the BaaS space to share their data and infrastructure. In a matter of years, access to this level of information will become table stakes for digitally native customers – so banks that begin now will be ahead of the curve and likely rewarded with high demand. Our fintech companies can explore this area to reduce the initial CapEx and scale it up soon by taking BaaS services.
ARE WE READY AND WHAT ARE DELIVERABLES TO REACH NEXT LEVEL?
This is not rocket science but execution depends on policy issues, mindsets and agility of banks and fintech. We are yet to have a solid ecosystem and the right product. We don’t need to reinvent a new wheel, rather, we need to replicate the best digital model that fits into our consumer behavior, solves pain points and fits the ecosystem. Only 9% of people have access to formal finance and we are way behind in adopting digital transformation to offer digital loans and open a bank account by few clicks from an app or bank fund transfer with mobile number, let alone adopting API sharing based open banking. We sometimes miss the real opportunities and pain points in the wave of distractions and buzz words. What is putting banks behind is the lack of execution and blind spots about real-life customer journey data in the bank’s digital space. Learning by doing is a big mantra for all of us since only learning trends through fintech journals will not pay off.
Banks and NBFIs may take some initiatives for the COVID and post COVID environment:
- Banks or FIs can team up with fintech and approach Central Bank for guidelines to launch digital lending for MSMEs and agent banking customers though alternate credit score model.
- Banks can team up with Fintech and BaaS platforms to offer disruptive solutions.
- Traditional banks can now launch digital banking arm as Bangladesh Bank released a timely e-KYC policy which can be a game-changer.
- As NPSB is in place, banks and Central Bank can work together to build a unified payment system to reduce transaction cost for mass people and offer instant account activation by mobile app.
- Banks or FIs should undertake practical digital projects and make some real customer acquisition and observe the customer experience and impact in overall transactions volume
It is high time we undertook the right initiatives to solve small or big pain points ensuring risk and reward balance. Our consumers love to adopt technology faster and faster adoption of mobile phones, internet or mobile money speaks a lot. That is the spirit to move on to catch up to the trend unless it becomes too late.
Written by,
Gazi Yar Mohammed
EVP, Head of MFS & Agent Banking Division, One Bank Ltd.
