Evans Woherem, PhD, is a highly respected industry professional and an alumnus of Harvard Business School with extensive experience in Executive Management, Project Management, Metrication, Expert Systems, Business Intelligence, Business Process Modelling and Re-Engineering, as well as in Strategic Planning and Execution. He has successfully implemented global mission-critical business processes in IT, Engineering and financial Industries across Europe and Africa. As a recognised thought leader, industry expert and C-level executive of multi-billion dollar corporations, Dr Woherem has a vantage point and the know-how to help financial organisations, IT organisations, global corporate organisations, as well as government institutions in creating lasting and profitable solutions to management and business process challenges. He discusses financial inclusion through Fintech with African Leadership Magazine. Excerpts.
Financial inclusion has quite lingered as a problem here in Nigeria with millions of unbanked citizens. But one of the drawbacks of FinTech is that it is to address a large mass of individuals in a developing country with limited access to technology. What are the measures aimed at improving this?
Financial technology (FinTech) has the potential to benefit underserved individuals and communities through some of its key salient features: mobile money and e-wallets, crowdfunding (P2P lending and equity crowdfunding platforms), alternative credit scoring, cross-border remittances, payment technologies using digital KYC process, and Regulatory Technology (RegTech). Generally, FinTech is helping in increasing access to financial services by the unbanked. Here in West Africa, some progress is being made but more needs to be done to increase access to the masses of those that are 16 years or above.
Fintech innovators are the main drivers of this revolution, in some cases leapfrogging the traditional industry with new services and innovative products. The surface has barely been scratched in relation to what fintech can do in the future. Emerging markets will experience rapid growth in financial service provision in substantially less a time than it took developed markets to achieve. Financial services over the next 10 years will experience a higher degree of change than in the last 100 years.
In order for this to be better and more satisfactorily carried out, there is a need for certain technologies, policies and frameworks to be put in place, as follows:
- Providing an underlying telecommunications infrastructure, broadband network for telecom systems, not only in the urban cities but also in the rural areas.
- Putting in place an enabling policy and regulatory framework to guide all the pillars of financial inclusion as follows:
o Building Digital Identification and eKYC (electronic Know Your Customers) systems, to simplify access to financial services.
o Digital Payment infrastructure and open electronic payments systems
o Electronic provision of government service, e.g., for public transfers and payments
o Design of Digital financial markets, e.g. commodities trading, securities trading, clearing and settlements
While improving banking access and boosting liquidity, we must also recognize the fact that some loans are not backed up by adequate repayment securities (collateral). How does this address the likely default risk by borrowers?
FinTech helps reduce default risks by borrowers by using advanced technology and non-traditional processes in credit decision-making, such as utilizing alternative data about consumers (including utility payments, medical payments, rent, etc.).
Big Data and Advanced AI Technology helps to elicit alternative data. These data tell a lot about a consumer’s life, such as wealth (assets, equity, loan to value, tax payments, cars [brand, age, how many]), cash flow (salary, rental, utility, medical payments), lifestyle (education major, grade point average, school attended, occupation, appearance [weight/height], number of dependents), digital footprints and web tracking (where the consumer has visited, shopping habits), and social profiles (network, topics that a person is engaged in). Over time and with technological development, an increasing amount of information becomes available and could potentially be used for credit decisions with rich-enough models.
There have been growing concerns about the use of alternative data in predicting a borrower’s ability and willingness to pay back a loan. These concerns involve privacy and discrimination. One must balance them against the opportunity of expanding access to credit, which is valuable because many people have been left out of the financial system. It is also envisaged that through the introduction of Blockchain Technology and eKYC, Financial Institutions would better know their customers, provide much better credit evaluation of customers, credit scoring of customers, and better decision making on whom to approve a loan for.
There is clearly more room for collaboration in this sector. How do you think banks and FinTech startups in West Africa can benefit from working together?
The FinTechs are here to stay and are making rapid progress with their products disrupting the traditional domains of banking.
The first reaction of some big banks was to fight back and try to beat the FinTechs at their own game. This, however, was bootless. The big spend of the banks never stopped the progress of the FinTechs nor from growing their customer base. So the future of both lies in collaboration, which is now happening in four major areas or models:
- Channel Partnering – i.e. when banks use the FinTech to sell their products to the bank customers, e.g. Royal Bank of Scotland (RBS) and Funding Circle collaborated to provide loans to SMEs.
- Supplier relationship – in which the bank operates using a FinTech to provide services for the bank behind the scenes
- Satellite Model – in which the bank acquires a FinTech and treats it as one of its satellite components enterprises.
- The Merger – in which the FinTech is acquired and integrated into the bank.
The rationale for any strong collaboration is the ability to bring a synergy of strengths together that create an entity stronger than either individual unit could bring on their own. For most fintech organizations, the primary differentiators are an innovation mindset, agility (speed to adjust), consumer-centric perspective and an infrastructure built for digital. These are obvious advantages that most legacy banking organizations don’t possess.
Alternatively, most fintech organizations lack the ability to scale adequately due to brand recognition and trust. They also usually lack capital, knowledge of compliance and regulations and an established distribution network. These are inherent strengths of traditional banking organizations.
How is FinTech influencing the landscape of the financial services industry, and how can traditional financial players embrace the rise of FinTech companies?
FinTech is now enabling us to revisit some existing financial and banking processes and automating them to be more efficient, effective, agile and with shorter circle times. It also balances market integrity, financial inclusion and economic growth, while also meeting international financial standards like Basel II, Financial Action Task Force (FATF) and Financial Stability Board (FSB) Standards.
How can traditional financial players partake in the rise of FinTech?
This can be achieved through:
- Automation of major processes
- Introduction of Big Data and Analytics urgently
- Introduction of AI and Machine Learning
- Introduction of Blockchain in various parts of their operations
- Ensuring that they have or belong to at least one mobile money scheme
- Implementation of eKYC and Digital ID schemes
What do you believe the next major innovation in financial technology will be in the coming months and why?
Most of the innovations in financial services are not coming from traditional banking organizations. Rather they are coming from the FinTech companies. Apart from the use of exponential technologies like Artificial Intelligence, Big Data, Cloud Computing, Mobile telephony, Machine Learning, Blockchain, Quantum Computing, etc., the following are some of the key areas of innovations or disruptions that would be caused by FinTechs:
Peer-to-peer Lending/Investment Platforms: Instead of going to banks, many SMEs and individuals are now turning to peer-to-peer lending for funding. This includes crowdfunding.
Digital Wallet: This is an electronic device carried by an individual which enables an individual to make payments and carry out other financial transactions. Things like health cards, driver’s license, loyalty cards, ID documents, etc, can be stored in the Digital Wallet. Examples are as below:
- Android Pay – a type of digital wallet that can be used to store debit /credit card information and other types of information
- Apple Pay – which is an Apple variation of Android pay that works only on Apple devices.
- Crypto Currency Wallet for storing and spending with cryptocurrencies like Bitcoin.
- Cognitive AI – Tools that make use of AI, machine learning, deep learning technologies to carry out the operation as well as help in decision making by being used to analyse and make sense of huge amounts of data.
- Digital only banks
- Mobile Payments
- White label banking, e.g. where a company can provide some of the products and services which banks provide but without a banking license
- Telematics Insurance – A device that is installed in a car to monitor the car, the driver, and occurrences when the car is being used for insurance purposes.
- RegTech – These are systems that assist in cutting out wastes or mistake in credit card frauds detection and in performing KYC checks and monitoring of financial risk thresholds, etc.
- Virtual/Cryptocurrencies – used in payments, smart contracts and decentralized storage
- Web-based financial planning tools
- Financial learning tools, e.g., used by potential traders
- RoboAdvisers – Systems that now advise traders and other decision-makers in financial organizations.