In Africa, traditional branch banking has clearly been a failure in providing widespread access to financial services. As much as 80 per cent of the population does not use formal or even semi-formal banking services.
The potential for financial technologies to improve access is increasingly clear. It began with the advent of mobile money, which has been an extraordinary success in many parts of Africa.
Mobile money transactions in sub-Saharan Africa are projected to hit US$1.3 billion in the next four years.
Further challenges have emerged for banks, however, in the form of even more disruptive technologies being built in various areas of financial services across the continent. These companies are the most attractive for investment, according to the recent Disrupt Africa African Tech Startups Funding Report.
The attitude of banks has become: if you can’t beat them, partner with them.
With that in mind, banks across Africa are choosing to work with startups rather than compete against them. Citibank has run some mobile challenges in Nairobi, Standard Bank has incubators in South Africa, and Barclays has just selected the second cohort to take part in its Cape Town-based accelerator.
Yossi Hasson is managing director of Techstars Africa, which powers the Barclays Accelerator. He says banks are partnering with startups in order to avoid the damage done to companies like Kodak by Instagram and mobile phone cameras and to Blockbuster by Netflix.
“Disruptive innovation is by its very nature, disruptive,” Hasson said. “Smart companies that were innovators of their time don’t see the innovation or threat of a new incumbent that on first appearance seems inferior.
“Banks are no different,” Hasson continued. “Innovation in financial services is happening rapidly and banks need to keep abreast of the movements in technology across the industry by either partnering with new startups, learn from them or incorporate their technology in their offerings.”
These initiatives demonstrate that the industry realizes it needs to change, and that working with innovative startups is a key part of this. Yet there are also major benefits to the startups themselves. Fintech startups are reimagining the concept, delivery and consumption of financial services in ways banks have been unable to.
However, such companies lack the financial clout and access to customers to ensure mass uptake of their solutions. This is what banks can offer them, as well as a better understanding of how banks work.
Hasson says startups have a tremendous opportunity to benefit from such relationships, with bank partnerships that allow them to fast track regulatory hurdles, access experts in the industry, and make use of a worldwide distribution network.
This is a view shared by Ulrich Stark, co-founder of South African fintech startup WizzPass, which works closely with banks as partners and as clients, and has raised funding from the Barclays Seeker Fund.
“Banks in South Africa are some of the most innovative in the world, and this focus on innovation makes them approachable if you are coming to them with a new idea that could benefit their customers,” Stark said.
“Having real conversations about your product or service with a bank can also you provide you with a lot of insight and learning on what you need to execute on before the bank will work with you. That feedback from some very smart people is a great asset — especially for younger startups.”
Stark said most banks first look at their own internal innovation processes, and then they look at startups they want to work with.
Why banks need a policy to work with startups
When a bank has a specific policy to work with startups and learn from startups and the startup ecosystem, then the bank benefits from “being on the ground” and learning quickly from what startups are doing, Stark said. It allows them to be plugged into the ecosystem and form relationships that can turn into partnerships or investments.
“So yes, banks that do not have a policy to work with startups put themselves at a disadvantage compared to banks that do,” Stark said. “They put themselves behind the pack in terms of knowledge and innovation and from there it’s harder and harder to catch up.”
Bright future for bank-fintech startup partnerships
Barclays, aside from investing in WizzPass, signed proof-of-concept agreements with seven of the 10 startups that took part in its first South African accelerator and plans to do something similar again.
With such collaboration becoming the norm, the future is brighter for banks, fintech startups, and — most importantly — those who lack affordable and efficient access to financial services.