Banks versus e-money issuers: Challenges and opportunities
The banking industry originated in the 15th century, mainly to attend to the needs of the government and big corporations regarding money handling and credit. It was only in the second half of the 20th century, and after the success of the Postal Banks, that the banking sector saw the opportunity that individual accounts offered.
Many National Postal Operators, supported by the “Universal Postal Union”, started encouraging the idea of formal savings to the population offering Postal Saving Accounts. The amount of money handled by most of those National Postal Services Operators was more than the total amount of money held by the banks.
The key factors of the Postal Services were that they had the customer base and the distribution channels needed to succeed. At this point the banking sector started to change its target market from corporate to retail.
In the late 20th century banks started changing the way of serving customers by introducing new channels, different to the traditional branches, such as ATM, POS and more recently bank agents for branchless banking. The latter were introduced to enhance the need for financial inclusion, as society realised that it enabled economic and social development. Entering the 21th century, where the internet spread all over the world and the digital channels such as mobile phones became increasingly important, the banking sector started seeing the need for a business model transformation, which has only been needed in this fourth industrial revolution.
This brief story shows the transformation of the financial sector, although, other actors have been evolving and growing faster than the banks, and have developed innovative solutions that can easily beat the traditional financial services on offer. These actors can also use the digital channels as a medium and take advantage of their strengths in customer experience, flexibility, agility and coverage, to defeat the bureaucracy and processes found in traditional banks.
Anybody working in the financial sector would know that the actors mentioned above are the new emoney issuers (or mobile wallet providers). These actors are developing worldwide financial solutions with more value for the consumers than the banks. According to Mckinsey Panorama, the fintech industry will reduce the banks’ revenue by 40 per cent in the next decade. The main threats to the banks are: Mobile network operators, retailers, agent network managers, transport and utilities, consumer goods companies, money remitters and microfinance institutions. Commonly, they all have huge underbanked and unbanked customer bases and the need to reduce costs.
Governments recognise the important role of the above-mentioned industries to support financial inclusion and the reduction of cash in the economy.
Today we can find 19 countries such as Kenya, Paraguay, El Salvador and Uganda, where e-money issuers, different from banks, have more mobile wallet accounts and handle more money than the accounts and transactions handled by the entire list of commercial banks in the country. There are other countries with highly successful mobile wallets, such as Sweden, USA, India and China, and countries where more than 40 per cent of the adult population are using mobile money actively, such as Tanzania, Zimbabwe, Ghana, Gabon, Namibia.
The Middle East and North African (Mena) region is no stranger to this trend and new e-money regulations have being launched recently to support the development of cashless economies and financial inclusion. These countries are: Jordan, Morocco, Tunisia, the UAE and Egypt.
Why do these actors have such a big impact? What do these actors have that the banks lack? To answer these questions, and get to know in deep the challenges of the formal financial sector nowadays, don’t miss the next article on July 16.