Global brands from Mercedes to Amazon and Walmart are cutting out the traditional financial middleman and plugging in software from tech startups to offer customers everything from banking and credit to insurance.
In Nigeria payment startups like Flutterwave, Opay as well as more established names like MTN are increasingly keen to encroach in the traditional banking space, helping to drive innovation in payments and other products.
Today embedded finance – a term for companies integrating software to offer financial services – means Amazon can let customers “buy now pay later” when they check out and Mercedes drivers can get their cars to pay for their fuel.
Banks are still behind most of the transactions but investors and analysts say the risk for traditional lenders is that they will get pushed further away from the front end of the finance chain.
If financial technology firms, or fintechs, can match their success in grabbing a chunk of digital payments from banks – and boosting their valuations in the process – lenders may have to respond, analysts say.
In Nigeria that is already happening with the recent billion-dollar valuation for Opay after SoftBank Vision Fund 2 led a $400 million funding round, valuing the Nigerian mobile-payments platform at $2 billion and marking the investment vehicle’s first bet in Africa.
The $2billion or N824 billion valuation (using the I&E window rate of $1/N412) now means that Opay is bigger than all Nigerian banks, a remarkable feat given that the company is barely 3 years old.
Accenture estimated in 2019 that new entrants to the payments market had amassed 8% of revenues globally – and that share has risen over the past year as the pandemic boosted digital payments and hit traditional payments, Alan McIntyre, senior banking industry director at Accenture, said.
“Big banks and insurers will lose out if they don’t act quickly and work out where to play in this market,” said Simon Torrance, founder of Embedded Finance & Super App Strategies.
Analysts say customers expect services, including financial services, to be directly integrated at the point of consumption, and to be convenient, digital, and immediately accessible.
Major advances into finance by companies from other sectors could however still be limited by regulators. Officials from the Bank for International Settlements, a consortium of central banks and financial regulators, warned watchdogs last month to get to grips with the growing influence of technology firms in finance.
In Nigeria actions by the Central Bank has put a chill in its hitherto thriving market for Bitcoin and other crypto-currencies.
The CBN has also prevented technology firms like MTN from playing directly in the mobile money space if they want to provide loans to customers or accept deposits.
The apex bank has also directed mobile money firms to partner with banks in the country.
Financial regulators were taking the approach that because they don’t know how to regulate tech firms they are insisting there’s a bank behind every transaction – but that did not mean banks would prevent fintechs encroaching, said Matt Harris, a partner at investor Bain Capital Ventures.
“They are right that the banks will always have a role but it’s not a very remunerative role and it involves very little ownership of the customer,” Harris said.