As markets adapt to a new digital age, and regulations start forcing banks to open up their data and APIs, incumbent financial houses are at risk of becoming “dumb pipes” .
“Dumb pipes” is a term usually affiliated with mobile networks, and refer to a large network provider being unable to compete with over-the-top players who offer services over their networks, undermining the network provider’s differentiating products.
This was seen with the rise of WhatsApp and various messaging apps in 2014, which undercut operators like MTN and Vodacom’s SMS functionality. Another example is Skype, which undercut voice revenue.
Speaking at the BusinessTech Digital Banking Conference on Wednesday, senior investment executive at Rand Merchant Investments, Dominique Collett, says that financial institutions are now starting to face the same pressures.
Internationally, European banks are being forced through regulation – specifically the second Payment Services Directive (PSDII) to open up their data to third parties to allow customers to better manage their finances.
Through the PSDII, banks are obligated to provide these third-party providers access to their customers’ accounts through open APIs (application program interface).
This in turn enables third-parties to build financial services on top of banks’ data and infrastructure.
According Collett, as a result, while this introduces competition into the market, and works in the favour of startups and digital fintech companies (who now get to leverage established data and systems), this risks making the incumbent banks
“As non-banks take over the customer interaction, banks may find it increasingly difficult to differentiate themselves in the market,” Collett said.
In a South African sense, while nothing like PSDII yet exists to force banks into this scenario, the European market is an indicator of where the world is headed.
Because of this, South Africa’s banks, like global banks, are ripe for disruption.
Disruption not from where you expect
According to Collett, while the first reaction is to think of digital banks as the big disruptors to the big established banks – however she believes that the true disrupters will come from outside the banking space.
“The big disrupters will come from outside the banking space – from other financial groups that have established client bases.”
In South Africa’s case, an example of this is Discovery Bank, which is launching with an established client base from its health insurance business.
Incumbent banks in South Africa will ultimately be forced to interact with fintech disrupters rather than try to compete against them. This could be accomplished in several ways, Collett said.
Either through vendor/partnership agreements; equity stakes; accelerator programmes; or forming consortiums.
Collaboration presents the best opportunity for both groups (incumbents and fintechs) to balance their strengths and weaknesses, she said.