David Mouko Elizaphan Omaanya has extensive experience of both the traditional banking and fintech industries. Elizaphan Mouko is a board member of Uzapoint and a visionary business leader driven by a passion for leveraging the latest technology to positively impact lives and create optimal business outcomes. This article will look at fintech, comparing the sector’s advancement into new territories with that of traditional financial institutions.
For any start-up business scaling is a major challenge, and fintech companies are no exception. It is widely accepted that early-stage start-ups typically face fewer barriers to expansion when compared with larger, more established businesses that can struggle to maneuver as quickly. Nevertheless, in the financial services industry, agile young fintech enterprises are presented with a different set of challenges in terms of scaling and expanding their overseas offerings when compared with established financial services companies.
One advantage of fintech companies is that, since they conduct many services entirely online, there are no offices or branches to open when venturing into new locations. This presents some considerable cost savings when expanding into new markets.
As fintechs often rely on machine learning and big data to inform their decisions, scaling up simply increases the amount of data available to feed the decision-making process. This also places fintechs at an advantage compared with banks and other traditional financial service providers, as not all of these businesses are taking maximum advantage of automation and big data analysis.
Another advantage for fintech companies lies in the fact that regulation has yet to catch up with them. While banks and other established financial institutions can be mired by all kinds of legal barriers, including regulations governing what they can do and where they are allowed to do it, fintech is more agile, innovating faster and in many instances leaving regulators scrambling to keep pace.
Of course, this does leave fintech companies vulnerable to sudden legislative updates that could potentially undermine their business model. Take for example Prosper and Lending Club, which was blindsided by a US Securities and Exchanging Commission ruling determining how the company’s money lending activities were classified. This change in policy forced the company to adapt quickly, transforming its business activities. Traditional banks are much less likely to face these kinds of unpleasant surprises, as their business models and products are not innovating to the same extent outside of legislative frameworks.
Fintech companies operating in the money lending arena often encounter difficulties when moving across political borders, as the regulations and rules governing money lending can vary considerably from country to country. Historically, the practice of money lending has attracted suspicion in many parts of the world, necessitating the development of legal frameworks to regulate the industry in many places. Take for example the Middle East, where Sharia law prohibits lenders from charging interest on loans. As a result, many Middle Eastern financial institutions have developed their own range of financial products that comply with Sharia law.
Cross-border anomalies in policy provide established local lenders with a significant advantage in many parts of the world when compared to global fintech companies, as established financial service providers are already familiar with the local customs and rules. A well-funded start-up company may be in a position to tweak its services to make them more appropriate for local conditions where they see a clear market for them. However, an established bank with robust financials is likely to be in a stronger position when it comes to making a sustained effort in a new market, and some markets are easier to venture into than others.
When compared with established banks, fintech companies may be at an advantage when it comes to funding. Today, fintech is attracting a huge buzz among investors, particularly venture capital firms keen to benefit from the explosive growth and surging consumer demand for fintech products. For any start-up, rapid growth is a top priority, with many other operational aspects sacrificed in its favor.
Banks, on the other hand, have a more complex model that is spread across a range of different activities to balance risk. In order to allocate resources to fund overseas expansion, capital must be redirected away from other opportunities. Due to their complexity, traditional financial institutions face more complex decision-making processes when it comes to allocating resources. Such decisions are often taken by a board of directors, each with their own varying appetite for risk, as well as their own ideas about the organization’s strategic direction. Decisions may also require the approval of a compliance team, which could potentially put the brakes on strategy changes.
Establishing a presence in a foreign country is a major challenge for any organization. However, for fintechs and the customers they serve, there are huge advantages for breaking into new territory, boosting financial inclusion, and helping people to access the innovative financial products necessary to drive socioeconomic development.