In today’s article Katharine Budd, the chief executive and co-founder of Now Money, a Dubai-based fintech start-up, joins me in explaining how fintech works.
To understand this new financial services phenomenon, it is best to start at the very beginning. A very good place to start.
Although you might now be able to operate your bank account from a website or mobile app, the systems that sit behind these online user interfaces have barely changed since they were implemented in the 1970s. The international payment transfer system Swift still runs on the telephone systems. This means that no matter how nice the front-end website your account is on, the transactions displayed are still run off legacy systems, which can lead to legacy issues such as delays in processing transactions and potentially losing the transaction in the system altogether.
So why don’t banks just scrap these legacy systems if they are not able to match modern-day systems? Not that simple. To try and keep up with changes in market demand, these systems have been repeatedly improved upon using incremental upgrades, usually by different IT teams, until they now represent a hodgepodge of sub-systems.
Investing in a system upgrade – which would be expensive, have a material risk of failure and need all other banks to adopt for interoperability purposes – doesn’t look so appealing. This disincentive ensures that customer frustrations continue.
Enter a new breed of start-ups that are innovating where banks are stagnating. The start-ups are cooperating with regulators and cybersecurity experts and developing new technology. These organisations have become know as "fintechs" and their purpose can range from offering customers alternative ways to bank, usually through mobile, to using advanced analytics to provide investment recommendations.
One example of a fintech is Now Money. It started by looking at the problem of 26 million low-income people who, as reported by the World Bank, are excluded from the Arabian Gulf’s traditional banking system. Banks depend on wealthy customers to cover the expensive costs of running a physical branch network and supporting legacy IT systems.
Now Money uses mobile technology to bypass the need for physical branches and provide the unbanked low-income customers with services such as remittances using low-cost, cutting-edge technology.
The poster child for fintech is probably M-Pesa, also a mobile phone money transfer service, which was launched in Kenya in 2007. By 2013, 43 per cent of Kenya’s GDP flowed through M-Pesa, representing more than 200 million person-to-person transactions. By the end of 2016, M-Pesa had 29.5 million clients in countries including Kenya, Egypt, Albania, India and Romania. M-Pesa processed six billion transactions in 2016. Initially launched as a corporate social responsibility initiative, M-Pesa is a clear runaway success. That is the power of fintech.
Traditional financial services depend on a low number of high-margin clients – the upper income and richer middle income. Silicon Valley is attuned to that. But the rest of the world is made up of a large number of low margin clients – the low-income demographic.
We have 46 commercial banks in the UAE, 23 of which are actively operating. Upwards of 80 per cent of the population has a lower income: the blue collar workers – construction workers, domestic staff and so on. They are locked out of the banking market.
Don’t believe us? Take someone – a maid, a driver, anybody with a salary of less than Dh5,000 per month – and watch them try to open a bank account. It is heartbreaking.
This massive unmet demand provides an opportunity, one that has proven extremely lucrative in other markets. Our banks are simply too risk-averse to innovate as they already have good business from the richer segments of society.
Fintech is the answer and the GCC is a starting point, a gateway into the rest of the Middle East and Africa. The beauty is that fintech does not seek to displace banks but to complement them and even enhance their product offering. Perhaps, like M-Pesa, which was driven in large part by the telecommunications company Vodafone, the fintech start-ups will be driven by Etisalat and du. Or perhaps banks will learn from M-Pesa and support the fintech start-ups in search of the solutions that will help them innovate and grow.
Either way, it makes for a compelling financial story with great social impact. A win-win.