The rise of Fintechs has over the past decade swept the lending business threatening the banking establishment.
Any t-shirt wearing tech gizmo could weld together a mobile application that sucks in data and churns out analytics to separate good borrowers from bad borrowers like wheat from chaff.
With that, they could approach ‘Silicon Valley’ investors and pitch their breakthrough analytics and raise millions of dollars.
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And voila, you have a full-scale bank which has limited costs, completely unregulated so you will not need licensing, approvals for new products or even capping interest rates.
But with the regulatory structures, shareholder demand and corporate governance red tape act as a handicap in this space.
Actually, Banks will have an upper hand in this space especially with the regulatory changes through the Consumer Protection Financial Markets Conduct bill that will work against the startups, ability to scale up and the cost of funds.
The ability to scale up can best be demonstrated by Barclays Bank which was late to get into the party following limitations of being owned by London’s Barclays PLC.
After the British lender scaled down its shareholding following a regulatory requirement, the bank embraced mobile based lending and in just 9 months, Barclays had recruited over 3 million new customers on its Timiza Virtual banking platform and lent out close to Sh10 Billion.
The bank says it is getting 5,000 new registrations per day, and that is just in Kenya. Barclays soon to be re-branded into ABSA has a regional presence that makes it the second largest lender in East Africa with the backing of a continental conglomerate. This means it can easily spread the products to other markets and benefit largely on scale.
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Banks also have an upper hand to Fintechs when it comes to cost of funds, the startups have to rely on loans for onward lending which may be costly whereas banks can use their low-cost deposits and huge balance sheet to get less costly cash to trade with.
This means a higher margin for banks while reducing their costs in terms of the personnel required to market, appraise and process a facility.
Banks also have the money to invest in product development which will be the next big thing on mobile lending platforms.
Instead of just being a channel to disburse loans, mobile lending is set to become the virtual bank with a range of products, increased interaction, and opportunity for inter-linkages.
For instance, Timiza does not just disburse loans, it lets you open an account in less than two minutes beating the experience with tellers, offers you short term revolving loans while at the same time building the quality of your credit history to improve the amount you can get.
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Timiza also offers users a chance to grow savings through the high yielding Zidisha savings account. The platform also helps you manage your bills so that you can settle your utilities on the go without having to interrupt your schedules to attend to the monthly payouts.
The third advantage banks will get over Fintechs will be the ability to operate under a regulatory environment.
Under the consumer protection bill, mushrooming digital platforms will come under the Financial Markets Conduct Authority that will regulate the cost of credit, protect consumers from inappropriate lending practices and regulate the accuracy, availability, and protection of financial information through credit sharing mechanisms.
Banks have set their margins lower than most of the Fintechs, hence will not get a hit on bottom lines if the authority calls for lower rates.
Banks are also more organized to lobby the new regulators, shape the consumer protection bill to have practical clauses such as removing aspects of the bill are impractical such as a letter of offer for mobile phone-based loans.
How do you give a letter of offer on a digital platform for a transaction that happens in a matter of seconds, a written letter will take over a day.