Are Banks the Future of Banking? Africa Board Fellows Deliberate

With the growing popularity of fintech companies, it seems inevitable that digital banks will replace traditional banks. However, it is not that simple. Traditional banks are now providing online banking facilities with offline banks open. In-person interactions which banks provide are not available in the case of online banking. 

In the case of online banks, it is quite difficult for them to earn money initially. This also makes it quite uncertain whether digital banks are the replacement for traditional banks.

This article will give you complete information and new perspectives about both traditional and online banks. After reading this, we hope your question about whether banks will survive in the future will be answered.      

Fintech Companies

With the growing popularity of fintech companies, there is no way you may wonder what a Fintech company is. The word ‘fintech’ is a portmanteau of the words finance and technology. As the name suggests, technology is integrated into financial dealings, to provide easy and simple transactions. 

Moreover, fintech is targeting consumers as well as businesses as their clientele. Fintech companies comprise a wide array of applications, products, and services; some provide insurance, some mobile banking, some investment apps, advice, etc., which you can access on your mobile.      

According to financial experts, the industry will grow even more in the future. In the year 2021, the capital raised by fintech companies through venture capitalists was at an all-time high. 

Another reason for the rapid growth of fintech companies is the support they received from traditional banks. Any advice related to finance requires high trust. So, a new start-up would find it difficult to gain the trust of common people, and support from banks has played an important role in that. Some have started acquiring fintech startups and integrating them into their system. This coexistence is beneficial for consumers, as it has both the innovation of a fintech startup and the trust of a traditional bank.    

How Digital Bank Works?

The working process of a fintech app is quite complex. There are a lot of technicalities involved for it to work. Luckily, a consumer doesn’t have to understand any of it, the user interface for the consumer is very easy. In the beginning, you should link your bank account with the app, by sharing your account credentials. Then you can see how much balance you have. To send money to someone you need to have their account number or routing number and then type in the amount and tap send. Money will be transacted immediately.    

Building trust and growing digital financial services can go hand in hand. With the increase in the user base of fintech apps, there has been a concern regarding the security of the app. Although with the growing technological advancement, the developers are trying their best to keep the security intact of any fintech app. However, you should have proper knowledge about the app you are using and not share your credentials with anyone.  

Traditional Banks

Traditional banks are brick-and-mortar institutions that were started in 1900 to store and lend money. Nowadays, these banks have multiple branches in each city and regional headquarters. Banks even have ATM machines across the area, for customers to withdraw money. Traditional banks started with their local branch method to connect with people and give them assistance in person. Every major area had at least 10 banks of different companies.       

A Survey conducted on 55,000 consumers by the Global Consumer Banking Survey in the year 2016, the study showed more than 60% of consumers preferred brick-and-mortar institutions as they require in-person advice when purchasing any policies, insurance, etc. The USP of a bank in today’s world is face-to-face interaction which the consumers prefer.    

However, with the increase in fintech companies, the accessibility of banks is in question. In some areas where physical banks are not present, it becomes really hard for consumers to access banks.  

Pros of Traditional Banks

As we have discussed what a traditional bank and a fintech company do, let’s look at their pros and cons individually to make an informed decision.

In-person Visits

The main USP of traditional banks is face-to-face interactions. Consumers feel comfortable and can ask queries related to their accounts without hesitation. Consumers can talk with the designated officers during office hours. Banks offer ATM services throughout the nation where you can withdraw money. You can use their safe deposit feature to store valuable things such as jewelry, house papers, etc. As you are transferring/depositing money in person, you will not feel uncertain. In the case of online payments, there is a risk of security leaks that are completely avoided in a traditional bank. 

Financial Security

In the case of traditional banks, you can relax about security as your money is safe and insured. Even if the bank is robbed you will get your money as your money will be insured. There is no issue about hackers as the security in a traditional bank is super tight, they have CCTV, security guards, etc. 

Access to Loans

Banks provide multiple options for loans as they have decades of experience. Some of the loans offer low interest and have better benefits. Loans offered digitally have high interest and low loan repayment tenure.   

Cons of Traditional Banks

Traditional banks have a lot of charges that they charge for basic financial services, there is a charge for debit and credit cards, there are maintenance fees, there are transactional fees, and whatnot. You even have to pay a charge for the minimum balance in your account. So, all these increase the cost of using a traditional bank.     

Complexity in Handling Customer Complaints

The process takes a long time even though there is face-to-face interaction. This is not the case with online banks, the process over there works at a rapid pace. In traditional banks to withdraw money or deposit money you have to fill out a series of paperwork to get done with your work. 

Availability

Accessibility becomes a problem for every consumer as banks are not present everywhere and do not facilitate accelerating financial inclusion with new data as they receive limited information. The bank is open only during office hours and remains closed during national holidays. So, if you are an employee, it becomes really hard to go to a bank and use its service. Whereas online banks are always present at any time. You can use its service at any time.

Challenges that the Fintech Industry Faces

The Fintech industry has its fair share of problems such as missed targets, customer acquisition, raising funds, etc. Well, these are some of the common problems that every fintech has faced. There are other problems as well. We have mentioned some of the major challenges that a Fintech Company faces.  

1. Data Security

In the case of a fintech app, data security is the major issue that hovers over a consumer’s head. As sensitive information is shared online it becomes a matter of concern. In terms of traditional banks, they have high security with security guards, CCTV, etc that keep their data protected.   

If there is ever a leak of virtual account details not only your money will be at stake even your personal information too. So data security for an Online bank is very crucial. There are solutions that are there to stay protected from online theft.    

Solution

Before selecting a Fintech app make sure to check for these factors. If they contain these factors then security breach is unimaginable.  

• Two-factor authorization
• Biometric authentication
• Data encryption and obfuscation
• Real-time alerts and notifications
• Behavior analysis

2. Compliance with Government Regulations

Finance will always be regulated by the government. It is quite obvious to expect unwanted interference from the government. Fintech apps that use blockchain in their system are less troubled by the government.  

Solution

Before selecting a fintech app make sure to look for an agreement and check if all the government regulations are maintained. If you are not sure of how to check for regulations you can hire a finance consultant who can guide you through the terms and conditions and the government’s legalities. 

3. Lack of Mobile Expertise

Making a user-friendly interface for mobile applications is a tough task to master. Some banks when they initiate an app for their consumers they try to replicate thriller websites. However, the interface of the website has compatibility issues with mobile screens. So it becomes difficult for the user to use a replicated website on their mobile screen. 

There are some people that lack mobile and tech expertise and find it difficult to unlock their phone’s true potential. Features like NFC transfer, QR code scan, GPS (geolocation features), etc. these features are not that known and user-friendly for every customer.   

Solution

To make use of these features you need to understand how to operate your mobile phone and learn how to use these features. You need to carry a decent Mobile phone that has these features as well. 

• QR-code Scanner, for payments. 
• NFC chips.
• Two-factor authentication, your phone must have a fingerprint scanner.
• If the fintech app is integrated with these features, any consumer can use it smoothly. 

4. Big Data and AI Integration

According to a study conducted by Accenture, 82% of US bankers and bankers present globally (79%) think that AI will change the banking system. With the help of AI, banks can understand their users more personally.

The impact of big data and AI are known throughout the nation and have a positive impact on every organization. Big data enables any organization to track any uses of financial behavior and in-app activity. These data can be used to implement new changes to the user interface.

The data which is collected by big data and the AI is then analyzed by the analytics team of the fintech app. With the help of this data, the app gives credit ratings to their account. The app can make a calculated step on whether to give a high-risk loan or not.  

Integrating big data and AI into an existing system is quite challenging. To implement AI, a Fintech company should have qualified web developers. They need to have good data analytics professionals who can retrieve the exact meaning of the AI’s findings.

Solution

For AI to work, you need to record all the data and then feed it to your AI. Most banks find it difficult to record every detail needed for an AI; however, with recent technological developments, you can train your AI through machine learning by feeding your AI less data.   

5. Blockchain Integration

Blockchain is one more method that ensures security and ease of transaction. Many organizations go for it for its features whereas many other organizations do not use it as it is complex and costly. If a fintech organization has implemented a blockchain method, it can track every phase of the transaction and analyze it. This gives them a lot of data to use in upgrading their app. However, integrating a blockchain system into your existing system is a little tricky. 

Back when the blockchain method was introduced, many organizations refused the method, and some skipped it due to its complexity and cost. However, startups have found this blank space and fill it up with their innovation by implementing blockchain methods in their system. This system will disrupt the market in the coming future. 

Hence, traditional banks should consider this method as they have a large user base, and consumers will benefit from this choice. Consumers who already struggle financially will hopefully benefit the most, as Banana Skins reports reveal overindebtedness as a huge problem in micro-finance that cannot be ignored.

Solution

Some of the fintech companies have integrated blockchain methods into their system. The ones that did not integrate are giving complexity as their excuse. However, before selecting an app check that it is following the government guidelines and policy. As of now, the government is still hesitant on allowing blockchain methods for fintech companies. 

6. User Retention and User Experience

User retention and user experience are major concerns for any fintech company. Acquiring customers and retaining them becomes a task if the interface is not user-friendly. However, an organization should keep in mind that a large user base attracts security issues. So, if an app is not able to provide security to all the consumers, it is recommended not to include more consumers.  

Solution

When selecting a fintech app, look for its reviews. Note its user interface and check if it is updated regularly. An ideal Fintech app should have two-step verification, a pin, and a biometric scan. Avoid apps that ask for bank credentials every time you log in.   

Why Fintech Companies are Sustainable?

To measure how sustainable a fintech company is we have mentioned some of the reasons why fintech companies are the future of banking.

1. Operate a ‘Green’ Supply Chain

Due to the use of big data and AI, fintech companies are prepared for the future and will be relevant also. With the help of AI, the organization can keep track of every consumer’s financial habits. These data can help organizations to sell loans and policies to a set of targeted consumers based on their data.

All this makes fintech companies prepared for the future, as it reduces costs in customer acquisition. The organization hires fewer employees which also saves a lot of money.   

2. Develop ‘Green’ Technologies

Through consistent innovation and upgrades in technology, fintech companies have modernized the payment procedure. Due to this, cash flow has increased, businesses have prospered, and as beautifully explained in the Scarcity why having too little means so much book of how financial crunches get resolved and so on. The habit of carrying cash has diminished and cashless payments have increased.

When an organization uses innovative technology for payments, its brand value increases. The organization becomes more trustworthy as the process is completely transparent. 

3. Innovative Banking and Payment Solutions

The cash transaction method has completely changed after the introduction of fintech companies. Very few people go to traditional banks for banking and use their other services. Online banks have replaced traditional banks, and consumers are getting benefited from this. 

To illustrate, money mobile sprinters adapt to local conditions in Somaliland and provide service to Somalians. Consumers can get instant transactions and check their balances online.

Due to fintech organizations’ transactions of money and getting access to you, credit has become super easy. Methods like blockchain have enhanced the security of fintech apps and have reduced carbon usage. Fintech companies are constantly innovating and getting better.    

4. Data Analytics

Data analytics plays a giant role in the sustainability of fintech apps. The data that is analyzed by the AI give insights about the consumer. It even offers key insight into the various aspects of your organization. With the help of AI, you can track an organization’s sustainability. Big financial institutions like BBVA, use AI to calculate their carbon footprints. Other organizations can do the same. As organizations can use this data to eradicate carbon footprints. 

5. Sustainable Financial Products

A survey was conducted by Statista, and the study revealed that fintech companies have entirely changed the money transaction process of the nation. Even traditional banks have changed how to used to function. According to the stats in the year 2007, only 30% of consumers used online banking facilities, whereas, in the year 2020, 76% of people use online banking facilities. There are even apps that round up your transaction to the nearest dollar and the balance is then invested. Budgeting apps help you save money and spend money in a calculated way. 

Fintech companies can measure the value of sustainable products. It can indicate the value of green bonds, investments, and loans. This allows you to make an informed decision while investing in a sustainable product.       

How Do Banks and Fintechs Will Co-exist? 

Banks will survive for a number of reasons, just because online banks do not charge transaction fees. There is a fundamental flaw in their business model and the way they gain capital. The business model online banks follow is not sustainable. As online banks do not charge fees for transactions, there is no room for profitability. In the case of small fintech companies, the profitability is absolute zero. 

As more and more big companies like Google and Amazon charge no money for their service there will be hesitation in general people to not pay any kind of fees, which will be deadly for small enterprises. Another reason is the capital requirement, to deliver loans any fintech company will require large capital in the long run. For the banks to survive they need to keep updating themselves, with the innovation by the Fintech startups, banks should learn and try to integrate it into their system. 

As mentioned above the business model of online banks are loss-making, but with time and scale fintech companies will be able to offer cheaper capital, and they can offer loans with an interest rate that are comparable to the banks. Not only in The U.S., but this will also follow for countries in Africa as well. In the end, the main question is whether fintech companies will get government approval. 

As of now, most fintech companies are partnering up with traditional banks to provide service due to government regulations. So, overall it is possible for banks and fintech companies to Co-exist in the future. Both the banks and fintech companies should learn from each other and co-exist.     

Frequently Asked Questions (FAQs)

Q1. What is the future of payment in Africa?

According to a report published by McKinsey & Company, it shows that the e-payment market is only going to increase in the coming years. The market is going to increase by 20% in 2025. The overall market value would reach $40 billion dollars. With technological advancement and fintech companies partnering with traditional banks, the future payment of Africa is going to get digital.       

Q2. How is African Bank performing?

According to reports, financial inclusion has increased in the last 5 years. Around 30% of people had access to mobile banking, and that number increased to 60% in the year 2020. So, the banks are increasing their user base day by day. The banks are growing consistently and the growth is seen to be sustainable.   

Q4. What are the challenges faced by African banks?

The banks were supposed to lessen the economic depression caused by the pandemic. It was hoped that they would maintain the financial services needed to for recovering the economy but they were faced with some challenges:

• The income-to-cost ratio was uneven, averaging 59.05% in 2017. Maintaining a physical bank institution was loss-making.
• The increased cost of maintaining Security was also a challenge. With the increase in cyber crimes, security had to be maintained.
• With the increase of digital banking, banks were facing a threat. To address the consumer’s needs, the banks had to partner up with a fintech company or make their own department, which would cost a lot.

Bottom line

After going through this article, we hope that you will get clarity on the benefits offered by both traditional banks and online banks. Fintech companies are popular now for the features that it offers. Fintech companies have their own share of issues which include security breaches, etc. Then comes traditional banks that are there for a long time and it has a huge user base, but it has a lot of inconveniences. There is a fee for everything starting from withdrawing and maintaining your account.

In the future, with rapid technological advancement fintech companies will be successful, however, banks will survive because of their business model, customer interactions, and overall trustworthiness.