As financial technology (fintech) segments continue to explode with innovative products, companies across financial services are beginning to witness an intense pressure on their profit margin.
A new survey released by the World Economic Forum (WEF) to BusinessDay, found that following mounting pressure, payment profitability is likely to decline in the future.
The survey titled ‘Beyond Fintech: A Pragmatic Assessment of Disruptive Potential in Financial Services’’ noted that one of the drivers of lower profitability is the development of national-level faster payment schemes. Examples in Nigeria may include NIBSS powered mCash, Paga, PaywithCapture, Remita etc.
These innovations will lead to a decrease in revenues from other payment sources (wire transfers, cheques, etc) as customers move to new platforms. In the same vein, the existence of national-level faster payment schemes, means that fees to the end consumer are non-existent, conditioning customers to expect low-fee payments in all transactions.
The survey also revealed that technologically advanced fintechs are moving into the retail and business-to-business (B2B) areas, lowering revenues that financial institutions can earn or foreign exchange (FX). Several banks have decided to partner with a fintech solution to offer FX services instead of operating their own, forgoing that income entirely.
San-Francisco-based Nigerian fintech startup, Flutterwave, founded by Iyinioluwa Aboyeji and which recently closed over $10 million in seed funding, is working with some of the top commercial banks in Nigeria to provide ease of payment.
The survey observed the distinction in the adoption of mobile payment technology for countries like Nigeria without modern payment systems and those that have.
“Countries without modern payment systems benefitted greatly from mobile payment technology, whereas the benefits are more marginal in countries with modern payments systems. As a result, adoption has differed considerably by region, depending on the degree of unmet needs,” WEF stated in the survey.
It also noted that the level of penetration of new payment technology affects adoption of payment solutions. For instance, adoption has been very high in a country like Nigeria where merchants have supported new technologies compared to the United States where merchants have resisted adoption.
One major reason mobile payment solutions are not as ubiquitous in the US and countries in Europe as in countries in Africa like Nigeria are due to the overwhelming dominance of card-based solutions.
“Customers are reluctant to try a new method of payment (mobile) without a clear, demonstrated improvement. Ingrained behaviours mean that the less significant of an improvement a new solution represents, the less patience customers will have with it,” WEF noted.
If customers in US and Europe are reluctant to adopt mobile payment system, the majority of the world express uncertainty in switching to non-traditional payment schemes without significant benefits. The non-traditional payment schemes include all cryptocurrencies. The survey suggests that they may be willing to switch if they see significant benefits.
However, if low adoption were to persist, financial services market leaders could be forced to look for new strategies while the smaller players go for partnerships. When that happens, the ultimate beneficiaries are the customers and the merchants at the expense of intermediaries.
The survey nevertheless sees a situation where the fields of payment fragments instead of converging as merchants, intermediaries and schemes all seek to differentiate. In this scenario, customers are likely to enjoy individually tailored experiences but may lose track of spending while banks gain power as they track a customer’s entire payment profile.
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