Banking services are no longer just for banks says Elmar Grobbelaar
Elmar Grobbelaar says businesses need to embrace innovation and become a fintech player.
Banking services are no longer just for banks. A major trend is spreading across the world of business: any and every kind of business or brand can now become a fintech player in its own right. Businesses that embrace financial innovation will keep their ever more discerning customers happy and loyal in the years to come.
So, what does this mean for businesses of all kinds and the CFOs that take care of their financial health?
Business leaders need to realise that the Covid-19 era brought about big changes in the world of business and retail that are not likely to go away, including a global shift towards digitisation and cashless, contactless ways of transacting and interacting. Grocery and clothing retailers, content producers, insurers, telcos, transport businesses and many more, are experiencing the fintech innovation boom right now, for this reason.
It’s happening because customers want seamless, easy brand experiences that include things like being able to pay off items they bought, or to pay with the utmost ease without having to jump through hoops like card payments that require OTPs.
CFOs from all kinds of industries need to be aware that fintech innovation is a massive trend across the business spectrum that will become a normal part of their work in the next few years. It’s a trend that will affect the balance sheet decisions CFOs have to make in order to allow their companies to innovate to keep customers happy, without breaking the bank.
Innovation alert: embedded finance
Fintech is accelerating at an unprecedented pace globally, in part due to the pandemic, but also thanks to what is considered to be the defining fintech trend of the 2020s: embedded finance.
Embedded finance is predicted to amount to over $7 trillion in revenues by 2030 and entails the use of Banking-as-a-Service and API-driven banking and payments services that integrate into many other environments and ecosystems. That means banking or financial services are spilling over to hundreds of other industries, because everyone needs to innovate to remain relevant, successful and profitable.
Financial innovation in a changing world
With the rise of embedded finance, brands are starting to embrace financial services in various shapes and forms: to move money, to offer bank accounts or virtual wallets or even provide loans or buy-now-pay-later (BNPL) solutions to their clients and customers. These can either be off-the-shelf solutions or uniquely tailored financial products. Brands like Uber, Apple/Apple Pay, Walmart, many fashion retailers, and others have already embraced the embedded finance model.
When embarking on this course, brands can take one of two routes: the old school in-house way of building everything with their own resources, in line with traditional methodologies and tech-owner principles, or the outsourced way through embedded finance partners for greater speed, robustness, tech agility and cost-effectiveness.
When non-financial companies need to start behaving like banks
Many brands are realising that they need to start incorporating banking capabilities into their mix. To do that, businesses can embrace what is called Banking-as-a-Service (BaaS). With this model, brands that want to launch banking offerings can work with specialist partners who provide them with a banking framework, sponsored banking licence, bespoke and tailored software solutions, hardware and infrastructure support, IT and cyber security, compliance support, human resource management and any other elements required to launch fintech services without the initial enormous capital outlay and ongoing maintenance responsibilities of going solo. It’s a very efficient, cost-effective, and scalable way to achieve something that would otherwise take years and bottomless budgets to realise.
Lessons from the South African banks
In South Africa many companies are pivoting their business models as they explore a future where fintech capabilities are a natural extension of their offering. Just think of Discovery Bank, Checkers, Shoprite, USave and various clothing retailers.
These brands can look to the traditional banking sector for hard lessons learnt. For a time, South Africa was gripped by a sort of bank-building fever – mostly via the old-fashioned DIY approach. We had so many costly banks popping up – many of which were years in the making and never made it out of the starting blocks – to the extent that the regulator eventually capped the number of banks in the local ecosystem.
Many learnt the hard way that creating and launching a bank from scratch is extremely capital intensive. In fact, many new South African banks incurred costs in the multiple billions to build and launch over a course of five or more years, while spending hundreds of millions just on consultancy fees to big advisory firms. The outsourced route might have cost them under R100 million for the same products, thanks to economies of scale. Upgrading and maintaining banking systems is a prohibitively expensive exercise, which is why some South African banks still run on very old mainframes and legacy tech infrastructure.
Leveraging changes in reporting standards
While contemplating the various embedded finance opportunities available to them to enhance their customer value proposition, large South African businesses should not be oblivious to the opportunities afforded to them with the recent changes in international accounting standards.
These changes allow for alternatives once the traditional capital budget vs operational cost discussions take place (think IFRS 6 operating leases, for example), keeping in mind expected shareholder returns and the ever-present financial covenant requirements.
Given the significant operational costs linked to any proprietary banking system and associated compliance obligations, coupled with the potential impact of onerous financial covenants, players in the banking game can quickly amass an enormous stack of expensive assets that most could barely afford to, or want to maintain, let alone innovate on top of.
In this context, outsourced banking services make sense for brands that want to spread their wings. They don't need to own and disclose extremely expensive fintech assets, high infrastructure development costs and maintenance, nor invest heavily in security, compliance and human fintech resources, to embrace financial innovation.
Every asset needed to build their financial customer service toolkit belongs to the BaaS or embedded finance provider, who can offer those products and services at a fraction of the cost because they spread it across multiple clients to achieve economies of scale. Outsourcing is an extremely powerful tool for cost saving and innovation.
This is how slow innovation and intense balance sheet pressure become things of the past and improved fintech-driven customer service becomes the way of the future.