The Impact of FinTech on Credit Markets

By: Aleem Kumi   

Keywords: Banks, Loans, Fintech, Mobile Money, Credit Market.

There is a dilemma of whether these tech firms are direct competitors in the most of the services they provide or not. Banks are obviously worried about these large tech firms. The centrality of Banks is normally underlined by deposits-and-loans and now these tech firms are doing same. In furtherance, Banks, as well as Card Providers (Visa and MasterCard), still dominate the market for transaction payments and the credit markets, but in recent times, payment innovations o?en come from nonbanks such as PayPal, Fido, MTN Mobile Money, Vodafone Cash, Facebook, Apple Pay, Cash App, Mpesa, or Google. For example, if you can use mobile money to buy call credit and data for your tech devices, pay your utility bills, stake a bet or purchase a lotto ticket, would you not trust them to transfer money to your love ones and your business partners as well?

When a GHC100 is transacted on the MTN Mobile Money platform a hundred times, that GHC100 will therefore belong to the service provider because the cost of transmitting such an amount on their platform is GCH1. Moreover, the introduction of Mobile Money Interoperability System sounds like music to the ears of mobile money service providers. A bank has to wait and charge a client monthly or annually for numerous transactions made. It is worth noting that mobile-based payment schemes have a great impact in countries where the share of people owning a current account at a bank is small. For instance, whilst some countries in Africa have just one in four people have bank accounts, many more have access to mobile phones and they are becoming testing grounds for new payment systems as well as for loans for consumers with little credit history.  

The Competitive Advantages of Tech Firms

The competitive advantage the tech firms have in the short-term credit market over the Banks is accessibility. It is much easier accessing a mobile money loan or an online platform loan such as Fido, than to access a loan from a retail, commercial or a rural bank. Banks are accused of putting up tight credit analysis schemes that consist of mammoth collateral demands. This sometimes sets a precedent that the Bank is more interested in the collateral than the performance of the loan.  Specifically, this deters Small and Medium Scale Enterprises to borrow from Banks. To borrow on a mobile money platform, you do not need any collateral or good credit history. The things that matter most are volume of transactions and no loan default history on that particular platform. The more volume you transact, the more entitled you are allowed to borrow bigger amounts. From our quasi experiment, most homes and SME’s are moving their domestic and business transactions to mobile money platforms. This would enable them to have access to bigger amounts if they want to borrow. In essence, FinTech leads to transform the influence of remittance and credit in favour of people by prompting them with the opportunities to slash the intermediaries, lower the cost and enhance the transparency. Fintech can be expressed as the marriage of Finance and Technology.

The new Companies Act of Ghana, passed in May 2019 does away with the “Ultra Vires Rule”. The Ultra Vires Rule required Companies registered under the companies act to engage strictly in business they have outlined in their regulations. What this means is that, Companies, like natural persons, can now engage in any activity that they wish to and unlike the previous regime, are not limited to only activities stated in their regulations. That said, it is important to note that regulatory restrictions will continue to apply to companies operating in restricted areas where special licenses are required. The goodbye to the “Ultra Vires Rule” sets the tone for tech firms in the credit market to give long term credits to clients or to finance commodity trade, international trade and other forms of trade in the future. 

Business fintech has the potential to lower the cost of intermediation and broaden the access to finance, increasing financial inclusion by opening the doors for untapped markets of the population and for less developed countries in Ghana and other continents. In Ghana, it is estimated that, there is about 11 million Internet users. The country’s population which is estimated to be 29 million Ghanaians uses 34 million mobile phones. It can be agreed that, as remote Internet-enabled mobile phones become available, the base of M-Commerce customers will grow with an enabled mobile money purchasing mode.

The result of the application of the new digital financial technologies could be lower costs of financial intermediation and improved products for consumers. For example, Fintech can act as a third party with facilities may help to better assess the creditworthiness of loan applicants when an institution screens them, and improve the interface between financial clients and their service providers. Take as an example the mortgage market in the US where the market share of shadow banks (that is, non-bank lenders) has almost tripled in the period 2007-2015. At the end of the period, fintech firms accounted for close to a third of shadow bank loan originations. The increased regulatory burden on traditional banks, in terms of raised capital requirements and legal scrutiny explains about 55% of shadow bank growth in the period but that 35% of this dynamic is explained by the use of financial technology.

The relationship between FinTech companies and financial institutions

Nevertheless, there exist a profiting relationship between FinTech and Banks. The reasons that make FinTech companies collaborate with banks are three. First, the banks facilitate the way for the FinTech companies to enter the market, since the banks already exist in the market and have their customer bases. Second, the banks boost the FinTech companies’ profitability, third the banks reinforce the FinTech products (Using Banking Apps to access mobile money and also to purchase gift cards, call credits, data and so forth).

On the other hand, the reason why Banks are eager to cooperate with the FinTech companies is because, the Banks need to accelerate innovation process, which consumes a lot of time and monetary and acquire competitive advantage and boost customer value, since the FinTech companies may provide different or better products than the banks. Additionally, the banks attempt to save costs and avoid utilizing their resources on perilous innovations that might lead to unpredictable outcomes, also they can learn from the FinTech companies’ way of thinking and enhance their business module.  

How Banks can Compete with Tech Firms in the Credit Market

The FinTech companies have influenced the banking sector. Specifically, lending and payment system because they could provide these services at lower cost by utilizing innovative information and automation technology. Furthermore, the new entrants create the possibility to disrupt the banking sector by using a sophisticated computing power. Although the Banks have adjusted to digitalization (mobile and web-based banking applications), the new entrants are able to affect the relationship between the Banks and their clients that built on soft information. The Banks are impacted by the new payment system therefore, the Banks need to develop their traditional services, otherwise they will fail in the market.

In addition, the payment service is a challenge for the Banks, and this service stepped into a reshaping phase because the FinTech companies offer easy payment and transformation with a small amount. Hence, the banks need to create a new strategy to handle the FinTech companies booming. The FinTech companies worldwide promote financial inclusion such as Asian countries, which are moving toward FinTech in order to promote digital currency.

It is obvious that, online platforms would disrupt the financial institutions because they can act as a marketplace where customers can interact directly, and the financial institutions may act as the back-office to the platforms. In essence, if Financial institutions such as Banks are not strategic, they might be reduced to mere cash and gold vaults.

The optimal strategy for traditional Banks to be ahead of Tech firms, in providing financial services, is to improve customer experience with deeper engagements and this can be achieved through Business Advisory and Support. This would profoundly help the Banks to gain new clients and also improve client long term viability. It is apparent that traditional Banks are losing volume of personal and domestic transactions because of convenience. It would be astute for Banks to focus more on SME’s and big corporations. Banks can only achieve operational excellence and customer intimacy when they eliminate non-added-value activities from their operational process and being always present for the customer. 21st century banking needs to move further than deposit, loans and technological innovations. These three are not enough for the customer to fall in love with the Banks’ services.

For starters, Banks need to assist their customers to fine tune their business model to suit their customers’ needs.  Banks need to share information including resource articles and referrals especially about the customers operating industry to the customer. Hence, the macro-and-micro economic pointers such as new legislature, forex, interest rates, anticipated demand and supply, taxes and so forth that might impact the customers operational cost and revenue. A typical example is when some rural banks in Ghana were advancing loans to legon 18 chilli pepper farmers in 2016. These chilli pepper farmers main buyers were European pepper spray manufacturing organisations. Most of these Banks themselves were not aware the European Union has banned Legon 18 chilli pepper from Ghana and so could not inform their customers. Most of the loans went bad due to non-awareness of this vital information. A similar incident happened in 2016, when some Banks advanced to loans to cashew nut farmers. It became a bad business for the Banks and the cashew nut farmers. This is because, lot of farmers went into producing cashew nut based on the support from the government and the enticing price per ton as at that time. At the end of the day, there was an abundance produce of cashew nuts on the market last year which led to about 70% decrease of the price in per ton.

Apart from the advisory services, banks can assist their customers to properly set up their internal bookkeeping system so as to have an accurate picture of their customers business’s financial standing. The Banks can further assist their customers with financial and forecasting analysis, digital marketing, social media strategy and strategic planning. At the end of the day, the Banks need their customers to utilize the loans well so they can come back for more.

As a matter of fact, the Bank of Ghana needs to support domestic commercial banks when it comes to financial engineering strategies across borders. For example, if Valco gets a contract to manufacture steel sheets for BMW’s South African Plant, the Central Bank needs to allow Valco to borrow from a Bank in Ghana against the future cash flows of that particular contract.

The impact of digital financial technologies by Telecommunication Institutions are felt in the short-term credit market. It is likely that FinTech organisations such as PayPal, Apple Pay, Cash App, Google, Mpesa and other Mobile Money services firms would enter the Ghanaian market. A question that traditional Banks need to ponder on is that, would Fintech lenders pose a competitive threat to them by taking market share? If this happens, it will force the Banks to lend to riskier customers thereby destabilising the banking industry