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Open Banking Sparking a Wave of Innovation in Financial Services by EOS Intelligence
by EOS Intelligence EOS Intelligence No Comments

Open Banking Sparking a Wave of Innovation in Financial Services

The adoption of open banking is leading to innovation across financial solutions such as account-to-account payments (A2A), personal finance management (PFM) apps, embedded finance, and banking-as-a-service (BaaS) by enabling real-time data-driven insights and personalized financial services. It is paving the way for a more dynamic financial landscape. Open banking has evolved rapidly since the revised Payment Services Directive (PSD2) came into force in Europe. While challenges exist, adopting open banking solutions, aided by introducing regulatory and security measures, holds the potential to revolutionize the financial services sector.

The introduction of APIs transformed banking services

Open banking has emerged as a transformative force, changing how financial data is shared, and services are offered to consumers. It securely provides third-party financial service providers access to consumer’s financial information with their consent through an application programming interface (API). It aims to foster innovation in financial services, encourage healthy competition, and give consumers more control over their banking information. Several banks across countries, including Citi, Barclays, and Deutsche Bank, have started providing access to their APIs.

Regulatory initiatives and consumer demand lead to open banking growth

While open banking has existed for a long time, it gained traction when the PSD2, a European regulation focused on creating a more open, competitive, and secure payment landscape across Europe, came into effect in 2018.

Since then, several countries have introduced open banking regulations to support its adoption. For instance, in the UK, the open banking initiative, led by the Competition and Markets Authority (CMA, the UK’s principal authority responsible for strengthening business competition and preventing anti-competitive activities), became effective in 2018. In addition to the European countries, Australia, New Zealand, Brazil, and South Africa, among others, have introduced regulatory measures to drive the adoption of open banking.

Countries across the globe are adopting various approaches to open banking, including regulatory-led, market-led, and hybrid approaches. While Europe has taken a regulatory-led approach, adopting open banking in the USA, Canada, and China is driven by consumer demand and technological innovations. Consumers prefer to have control and transparency over their financial data. While there are currently no regulatory frameworks for open banking in the USA, the Consumer Financial Protection Bureau (CFPB) has proposed rules to protect consumer data rights, which will aid in facilitating the adoption of open banking.

Several countries, such as India, South Korea, Japan, Hong Kong, Russia, and Singapore, have adopted a hybrid model, including both regulatory and market-led initiatives. These countries do not have mandatory open banking regimes, but policymakers are looking to introduce initiatives to accelerate open banking adoption. For instance, in Singapore, the Monetary Authority of Singapore (MAS) and the Association of Banks have published an API playbook. This publication aims to support data exchange between banks and fintech players.

The growing emphasis on introducing regulatory measures to ensure data security will likely drive the adoption of open banking.

Open Banking Sparking a Wave of Innovation in Financial Services by EOS Intelligence

Open Banking Sparking a Wave of Innovation in Financial Services by EOS Intelligence

Open banking is driving innovation in financial solutions

The adoption of open banking is transforming financial solutions, including A2A payments, variable recurring payments (VRP), PFM apps, BaaS, and embedded finance, by enabling faster, more convenient, secure, and personalized financial services.

A2A payments and VRP

Open banking allows secure access to real-time bank data to third-party providers, enabling process automation, speeding up A2A payment transfers, and providing a better user experience. Increasing adoption of open banking globally is expected to make international A2A payments more viable and secure.

Digital wallet platforms such as Apple Pay, Google Pay, and Stripe are looking to integrate open banking on their platforms to provide enhanced user experience. In September 2023, Apple soft-launched a new iPhone wallet app in the UK integrated with an open banking framework to replace traditional banking apps as the preferred platform for accessing information related to their account balance, spending history, etc.

Open banking also encourages the widespread adoption of variable recurring payments by giving consumers more transaction control and transparency. The use of variable recurring payments is expected to increase across various commercial payment services, such as utility bills, subscriptions, and insurance premiums, in the coming years.

PFM apps

Access to financial data enables PFM apps to share more effective and personalized financial advice with consumers. A real-time snapshot of the overall financial health of the consumers helps them make long-term financial decisions.

BaaS

Banking-as-a-service platforms are likely to develop due to the adoption of open banking, allowing non-banking entities to provide financial services without becoming certified banks. This offers consumers a variety of payment and credit options, as well as more personalized finance solutions, expanding the industry offering.

Integrating BaaS in retail is being explored to improve customer loyalty programs and provide seamless payments. Also, the scope of services is likely to expand rapidly, from offering banking services to individual consumers to small and medium-sized enterprises (SMEs) and large corporations in the near future.

Embedded finance

Open banking has become the driving force behind the rise of embedded finance, enabling businesses and corporate clients to enhance operational efficiency and user experience. While retail and e-commerce platforms are some of the first to adopt embedded finance, the adoption is likely to increase in less digitalized spaces such as real estate as well.

Synergy with AI and blockchain offers scope for advanced innovation and security

Open banking provides a data-rich environment by aggregating data from various financial institutions for AI algorithms to analyze and utilize for decision-making. It is expected to benefit AI algorithms further by incorporating new features such as data categorization and anomaly detection in the coming years.

On the other hand, AI is likely to increase the effectiveness of open banking by analyzing individual consumer data and enabling the offering of personalized services. AI and open banking will likely help financial institutions develop innovative products.

While both AI and open banking complement their financial services, they can lead to data misuse or unauthorized access concerns, highlighting the need for strong regulatory measures to keep up with the evolution of open banking and AI.

Blockchain technology will likely become more common in open banking as it will enhance the security and transparency of financial transactions. It will likely reduce the risk of data breaches and unauthorized access to consumers’ finances. Additionally, it will likely make it easier for consumers to share their data by simplifying the authentication and consent processes.

Open banking services have expanded from basic payment initiation to open finance

The open banking framework has evolved from basic account information and payment initiation services to open finance, including access to data from various accounts, including savings, investments, pensions, insurance, and mortgages.

Countries such as India, South Korea, Australia, and Brazil have moved from open banking to open finance to develop a more connected financial ecosystem. In February 2024, South Korea also introduced two initiatives focused on including business data and providing offline open banking services.

In Europe, the European Commission is also pushing towards open finance by introducing the Financial Data Access (FiDA) regulation, a framework to enable secured sharing and access of financial data.

Open banking will diversify consumer options, with non-financial companies such as telecom providers, e-commerce platforms, and utility companies offering innovative financial products. They will likely enter into partnerships with banks to provide integrated services to consumers, enhancing their offerings and creating an interconnected financial ecosystem.

Lack of standardized APIs affects the open banking adoption

While open banking is gaining traction, specific challenges, such as lack of standardized APIs, integration with legacy systems, privacy compliance, and data security, are affecting its adoption.

The lack of standardization of APIs across financial institutions is the key challenge in adopting open banking. Third-party providers are usually unable to adapt to different APIs and provide seamless data sharing between systems.

Various financial institutions also face difficulty integrating open banking into their legacy systems, making the integration process complex and expensive. Banks must first update their systems by investing in technology upgrades and partnering with fintech solutions providers to overcome integration challenges.

As the adoption of open banking increases, the chances of data breaches might also increase, highlighting the need to protect customer data and compliance with privacy regulations. Banks are looking to adopt measures such as encryption, clear usage policies, and regular audits to protect customer data. The European Union has also put regulations such as the General Data Protection Regulation (GDPR) and the Digital Operational Resilience Act (DORA) in place to protect customer data and improve the digital security of financial institutions. Advanced security measures solutions, including tokenization and dedicated API gateways, can also help safeguard customer data.

Lack of awareness among consumers is another key challenge. Users are often unaware of open banking and are reluctant to share their financial data due to privacy concerns. Initiatives aimed at educating the users about security and regulatory norms related to open banking by banks can help overcome this challenge and drive adoption.

EOS Perspective

The shift to an open banking model can transform the future of digital banking. The key driving factors for the users are the ease and clarity of the interface, which are likely to replace the traditional banking infrastructure and ownership of consumer data.

The expected introduction of PSR1 in 2026 will likely improve competition and consumer protection in the payments market, which will likely drive the adoption of open banking. PSR1 will help enhance fraud prevention, improve consumer rights and protection, standardize payment regulations, and enhance open banking functions.

The introduction of regulatory and security measures and growing awareness about open banking and its benefits are also likely to aid this growth. A phased implementation of open banking will help with greater adoption of open banking by gradually introducing the concept to the consumers and helping them adapt.

Open banking will benefit banks by providing better customer insights, encouraging innovation, and creating an additional revenue stream through API monetization. However, increasing competition from fintech and non-financial institutions entering the market will likely pressure banks to transition to open banking. The shift to open finance will further increase the competition in the industry. We will likely witness banks entering partnerships with fintech players to develop and offer innovative financial services for their consumers.

The financial sector is embracing open banking as a means to offer creative and innovative financial solutions to enrich the user experience. Open banking will likely evolve into a broad ecosystem of connected services, streamlining the consumers’ products, services, and applications into one, providing a seamless experience.

What’s Fueling Asia’s Drive to Develop Wholesale CBDCs by EOS Intelligence
by EOS Intelligence EOS Intelligence No Comments

What’s Fueling Asia’s Drive to Develop Wholesale CBDCs?

The emergence of Central Bank Digital Currencies (CBDCs) has become a central focus in the global financial space, as it offers the potential for revolutionary shifts in how the world conducts and manages monetary transactions. While much of the spotlight has been on retail CBDCs, wholesale CBDCs are gaining momentum globally. Asia is leading the pack in developing wholesale CBDCs that offer opportunities that may significantly impact the global financial landscape.

Asia is outpacing developed countries in the drive toward wholesale CBDCs

Wholesale CBDCs are digital forms of a country’s fiat currency. Unlike retail CBDCs, only a limited number of entities can access wholesale CBDCs, which are designed for undertaking interbank transactions and settlements. The concept of wholesale CBDCs is similar to currently available digital assets used for the settlement of interbank transactions, with the key differentiation being the use of technologies such as distributed ledger technology (DLT) and tokenization.

Wholesale CBDCs have garnered global interest with central banks. Facebook’s (albeit failed) attempt to launch its Libra cryptocurrency in 2019 was a breaking point for blockchain technology’s use in global finance, eventually spurring the development of wholesale CBDCs. Initially launched as a measure to counter private cryptocurrencies, wholesale CBDCs are fast emerging as a potential disruptor in the fintech space.

Currently, more than 30 countries are researching the use of wholesale CBDCs. Interestingly, about half of these countries are from Asia. The development of wholesale CBDCs in Asian countries has outpaced the efforts of financially strong economies such as the USA and the UK, as these CBDCs offer more tangible benefits to developing economies in Asia than their more developed counterparts.

Several Asian countries have engaged in pilot programs, and proof-of-concept runs to explore the use of wholesale CBDCs to improve the efficiency of domestic large-value transactions and cross-border transfers.

China has been at the forefront of the development and widespread testing of wholesale CBDCs. Several Southeast Asia and the Middle East countries, including India, the UAE, Thailand, and Singapore, have launched pilot programs to explore the viability of wholesale CBDCs and test interoperability for cross-border transactions.

Achieving faster and cheaper cross-border transactions is key to Asian central banks

Growth in global trade has resulted in exponential growth in cross-border transaction volumes. However, these cross-border transactions are faced with challenges. There may be involvement of potential intermediaries, varying time zones, and regulatory frictions that may cause slower settlement. Financial systems such as SWIFT have a stranglehold on the cross-border transaction ecosystem, with many of these transactions using SWIFT messaging to settle payments.

Potential intermediary fees and forex-related charges also lead to increased transaction costs. According to World Bank’s estimates, transaction costs for cross-border transactions may range up to 6% of the transfer value, a significant surcharge.

Removing friction associated with cross-border transactions is a key goal behind Asian countries’ push toward exploring wholesale CBDCs.

A growing interest in wholesale CBDCs is attracting investments in building large-value payment infrastructures in Asia, allowing for faster and more efficient cross-border transfers. Wholesale CBDCs enable central banks to transact directly with each other, removing the involvement of multiple intermediaries and resulting in quicker transaction settlement. This also results in the elimination of intermediary fees to help lower transaction costs.

Technology also adds elements of security and traceability to these digital transactions. It also offers the potential to program them by automating or restricting payments if certain conditions are met.

Challenging US dollar dominance in cross-border settlements offers additional motivation

Several Asian countries are also looking to reduce their reliance on financial settlement systems that involve US dollar reserves. Currently, most cross-border transactions involve the use of the US dollar. Countries with limited forex reserves also face the challenge of outgoing reserves, resulting in potential currency inflation and adding to the already high transaction costs.

Wholesale CBDCs offer several Asian countries, particularly those with limited US dollar reserves, an opportunity to directly transfer the amount in their local digital currencies and eliminate the need for US dollars in bilateral transactions.

Developing Asian economies, such as China and India, with significant cross-border transactions, are looking to promote their CBDCs as a potential reserve currency in the Asian region that would allow cross-border settlement directly in the digital currency. It is also in the interests of countries such as China to develop its CBDC (e-CNY) as a potential alternative to the US Dollar in cross-border trade to mitigate any potential currency-related challenges posed by economic sanctions from the USA and EU.

What’s Fueling Asia’s Drive to Develop Wholesale CBDCs by EOS Intelligence

What’s Fueling Asia’s Drive to Develop Wholesale CBDCs by EOS Intelligence

Tandem development and collaborations offer tailwinds to CBDC projects in Asia

Central banks of several Asian countries are undertaking information sharing and tandem development of CBDC infrastructures to mitigate some challenges associated with CBDC.

Recent pilot projects such as mBridge, launched by central banks of China, the UAE, Thailand, and Hong Kong, have been testing the use of a common ledger platform for real-time peer-to-peer transactions. The launch of several other projects, such as Project Mandala (involving Singapore, South Korea, and Malaysia) and Project Aber (involving Saudi Arabia and the UAE), is laying the groundwork for the widespread implementation of wholesale CBDCs.

Another potential avenue for collaboration includes forming partnerships with central banks to maintain reserves of digital cash to facilitate direct settlement. China, in particular, plans to develop e-CNY as a potential reserve currency alternative to the US dollar.

Interoperability and ownership are key challenges to CBDC implementation

While the use of wholesale CBDCs certainly comes forward as a boon, there are challenges in using these technology-driven digital currencies. CBDCs may have varying protocols, and interoperability between different CBDC frameworks remains a key challenge for implementing wholesale CBDCs for cross-border transactions.

Establishing common technical and operational standards is essential to ensure CBDC interoperability. Currently, most pilot programs involve CBDCs with common or similar technological frameworks and rules, which limit the application of wholesale CBDCs to a certain number of compatible entities.

Recent research projects are laying the groundwork for CBDCs’ compatibility with various ledgers and technical frameworks. However, significant testing will be required before compatibility can be established across the Asian region.

Ownership, governance, and regulatory oversight of wholesale CBDC technologies are other key concerns. Doubts exist over who will oversee the transactions and ledger entries, especially for any multi-party cross-border transaction.

Systems must also to adhere to anti-money laundering and counter-terrorism financing regulations. Varying financial laws may also hamper the seamless implementation of these anti-money laundering and counter-threat funding regulations across the region.

Lastly, like any digital asset, CBDCs are also susceptible to cyberattacks.

EOS Perspective

Wholesale CBDCs can potentially change the nature of cross-border transactions across Asia and globally.

We are likely to witness significant growth in test runs and pilot programs by several Asian countries to provide proof of concept for the applicability of wholesale CBDCs in countering the challenges associated with cross-border transactions. We can expect a spurt in CBDC alliances and treaties among countries with significant bilateral and intra-regional trade. Simultaneously, it may result in slightly reduced transaction volumes going through existing cross-border financial systems such as SWIFT.

The next stage of CBDC evolution is likely to coincide with the emergence of pilot programs involving multiple CBDCs with different technological frameworks, creating possibilities for easier and seamless cross-border transactions among banks or countries without any existing bilateral or regional partnerships.

These developments are likely to be aided by the development of enabling technologies such as RegTech (regulatory technologies) and SupTech (supervisory technologies), which could provide the sandbox environment for widespread testing of the CBDC systems, as well as lay the groundwork for potential regulatory systems to manage these infrastructures.

With the bulk of cross-border transactions still being conducted in the US dollar, wholesale CBDCs do not pose any imminent threat to its dominance. The US dollar’s future prospects in this role will depend on whether digital currencies such as e-CNY take off as a reserve currency, which is unlikely, at least in the short- to medium-term.

The overall success of wholesale CBDCs will depend on the level of cooperation that countries across Asia can develop over the next few years.

Charting the RegTech Journey – Navigating Consolidation as the Next Vital Phase by EOS Intelligence
by EOS Intelligence EOS Intelligence No Comments

Charting the RegTech Journey: Navigating Consolidation

RegTech, short for regulatory technology and often categorized as a subset of fintech, emerged in 2015. The RegTech industry was fragmented, with numerous small players targeting specific niches within the regulatory compliance landscape. However, the recent trend towards consolidation is reshaping the sector. Larger RegTech firms are increasingly acquiring smaller players to expand their offerings and solidify their market positions.

RegTech comprises powerful tools that leverage advanced technologies such as artificial intelligence (AI), automated machine learning (AML), and big data analytics. These technologies streamline regulatory compliance processes, addressing challenges from technology-driven economies, largely through automation. Automation plays a significant role in reassuring regulatory compliance professionals about the effectiveness and efficiency of RegTech solutions.

According to a 2023 report by Corlytics, a Dublin-based regulatory risk intelligence firm, regulatory penalties associated with legal and regulatory enforcement in the financial sector exceeded US$10.5 billion globally. This underscores the escalating pressure on financial institutions to comply with regulations, prompting them to turn to innovative technological solutions. RegTech has emerged as a promising avenue for organizations within the fintech ecosystem to efficiently navigate complex regulatory landscapes while reducing cost and time and improving compliance effectiveness.

Market landscape transformation through investments and strategic acquisitions

Investors increasingly recognize RegTech’s potential, and it remains a bright spot within the fintech ecosystem. Data from UK-based financial market platform Dealogic shows 116 global RegTech deals in 2023 with a total value of more than US$13.5 billion, demonstrating significant investment activity in the sector. Last year witnessed notable acquisitions across various markets, with larger financial services corporations and RegTech vendors acquiring smaller players to strengthen their market position through consolidation.

Key transactions, such as the acquisition of Adenza by Nasdaq for US$10.5 billion in 2023 and Finellix by Stellex Capital for US$176 million in 2022, underline the strategic importance of RegTech solutions for both financial and technology companies.

These developments reflect a broad strategic move to address the escalating compliance costs faced by banks and brokerages in the wake of regulatory reforms such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (simply known as the Dodd-Frank Act). The Dodd-Frank Act, introduced in the USA in 2010 following the 2007–2008 financial crisis, has had a profound impact on the global financial sector. The Act has prompted financial institutions globally to significantly improve their regulatory reporting systems and processes, leading to more extensive adoption of technology solutions. Dodd-Frank and other stringent regulatory measures have significantly increased compliance costs for financial institutions and companies operating in various sectors.

Larger financial services firms and RegTech companies are consolidating to integrate complementary financial solutions and expand their operations. In one such development, US-based automated RegTech player CUBE acquired UK-based counterpart The Hub Technology in 2023 to further boost their automated regulatory intelligence (ARI) abilities to reduce compliance risk and cost.

Consolidation within the RegTech sector aims to empower larger entities to effectively tackle challenges related to anti-financial crime measures, cross-selling opportunities, and regulatory compliance services, primarily among banking and brokerage clients. This strategy aims to diversify revenue streams, broaden market reach, and increase the serviceable market.

Simultaneously, M&A offers small and mid-size RegTech companies a strategic avenue to enhance capabilities, achieve accelerated growth, better competitive market positioning, and maximize value. While acquisitions often lead to integration within the larger corporate structure, there is still room for acquired smaller RegTech companies to maintain a level of independence.

In 2023, Corlytics acquired the UK-based RegTech firm Clausematch to integrate its capabilities into a comprehensive platform for managing the regulatory risk value chain for tier-1 clients. Despite the acquisition, Clausematch maintains its independence and is a strategic partner to Corlytics. It continues to serve existing clients while also extending its services to Corlytics tier-1 clients, including 14 of the top 50 global banks. This autonomy can be instrumental in fostering partnerships that are essential for scaling up and achieving sustainable growth in the ever-changing fintech regulatory ecosystem that demands agility and continuous innovation.

The appeal of RegTech’s one-stop-shop model

The concept of a one-stop shop model in the RegTech industry, facilitated by consolidation, appeals to businesses seeking streamlined and comprehensive compliance solutions. In the evolving financial market landscape, clients are increasingly preferring to consolidate their RegTech solutions under a single provider rather than engaging with multiple vendors. This demand stems from the desire for streamlined processes, reduced administrative burden, cost savings, and seamless integration of services.

RegTech companies can meet this demand and improve the overall customer experience by offering comprehensive end-to-end solutions and value-added services. In 2023, Muinmos, a Denmark-based RegTech company, saw substantial revenue growth as more clients flocked to the firm. This surge was attributed to Muinmos’ comprehensive platform, which manages the entire onboarding process, spanning from KYC/AML procedures to risk assessments and regulatory classification.

Through strategic acquisitions of smaller RegTech firms with specialized solutions, RegTech solution providers can further enhance their offerings, capitalizing on the trend for integrated solutions and establishing a competitive edge in the market.

Partnerships with smaller firms provide larger companies in the RegTech sector with advantages such as accelerated time-to-market and the opportunity to serve as a testing ground, paving the way for potential future acquisitions.

RegTech startups joining forces

Many RegTech startups are partnering to provide a broader range of regulatory solutions to their clients by enhancing their platforms and adding compatible services from other partners. This forms a robust entity with expanded capabilities to compete with established players.

In November 2023, Flagright, a German-based startup specializing in AML compliance and fraud prevention, formed a strategic alliance with Regtank Technology, a Singapore-based RegTech services provider. This partnership underscores their joint commitment to developing an advanced transaction monitoring solution for fintech companies using AI/ML algorithms. Additionally, these partnerships are likely to help startups reach more customers across various geographies, solving risk and compliance challenges for more businesses.

The double-edged sword of consolidation

For existing and emerging RegTech companies, consolidation presents a double-edged sword. As larger players consolidate and dominate the market, there may be fewer opportunities for investment in smaller, emerging RegTech startups. Investors may perceive greater risk in backing smaller players when larger, more established firms offer similar or more comprehensive solutions. This could lead to a concentration of investment in a few key players, potentially stifling innovation and diversity in the market.

Consolidation impact on the RegTech investment landscape

With fewer startups and a more prominent role for established players, the overall number of investment opportunities in RegTech may slow down in the short term. This could lead to a shift in focus from rapid innovation to the successful integration of acquired technologies as larger players seek to leverage their expanded capabilities and market presence.

Challenges faced by small firms and emerging startups

Consolidation within the RegTech sector could heighten entry barriers for new and smaller firms. Small companies are likely to face resource constraints compared to their larger counterparts. They may struggle to match the scale of investment, R&D capabilities, and market reach of consolidated firms, potentially limiting their ability to innovate and expand their market reach.

Opportunity for small vendors due to consolidation

Consolidation could create gaps in the market for specialized RegTech solutions catering to unaddressed regulatory needs within the RegTech industry. Consolidation efforts in the RegTech sector mainly target large tier-1 clients, including large banks and other financial institutions. However, there are potential gaps and opportunities in smaller businesses across non-financial verticals that require tailored regulatory solutions. This would likely prompt smaller companies to carve out niche areas of specialization within the evolving RegTech landscape.

Specializing in particular regulatory domains, industries, or technological niches allows smaller firms to distinguish themselves as providers of specialized solutions. This makes them appealing targets for acquisition or partnerships by larger players, driven by the ongoing consolidation trends in the RegTech sector.

EOS Perspective

Traditionally, many RegTech companies evolved as single-point solutions for specific regulations. The market is witnessing a shift away from multi-point solutions that address specific issues and moving towards modular solutions that offer flexibility and can be reconfigured to address diverse problems and industry verticals. This shift is likely to drive further consolidation as regulated entities seek mature, cost-effective solutions tailored to their needs.

Conventionally, RegTech solutions have primarily targeted large enterprises with significant budgets. However, we are witnessing a notable shift, as small RegTech companies are now offering affordable compliance solutions tailored to small and medium-sized enterprises (SMEs) as well. This shift is driven by the recognition of unique regulatory challenges faced by different sectors, such as healthcare, insurance, and energy. This recognition prompts small RegTech players to tap into opportunities arising from the growing demand for industry-specific RegTech solutions. This trend reflects a broader movement within the RegTech industry towards democratizing access to compliance tools and addressing the specific needs of diverse business sectors.

With venture funding slowing down due to the economic downturn, a rise in M&A activities is anticipated in the coming years. Due to the time-consuming nature of decision-making around procuring RegTech solutions by regulated entities, major RegTech players are expected to focus on developing and offering sticky RegTech solutions to ensure stable and recurring revenue growth. Consequently, this trend is likely to drive further consolidation within the large RegTech sector, as evidenced by Corolytics’ acquisition of ING SparQ RegTech and Clausematch in 2023, followed by a substantial investment from Verdane, an investment firm, in April 2024. This investment is poised to accelerate Corlytics’ M&A activity, signaling a shift towards the emergence of technology partners that provide unified platforms by integrating solutions from multiple firms through consolidation.

P2P Lending Needs More than Just an Appetite for Investment by EOS Intelligence
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P2P Lending Needs More than Just an Appetite for Investment to Sustain Its Growth

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Peer-to-peer (P2P) lending has emerged as a global financial phenomenon. It has revolutionized the way individuals access loans. The innovation of P2P lending has experienced varying degrees of success and turbulence in different regions, notably India, China, and the USA. Understanding the reasons behind the rise and fall of P2P lending across these major markets provides critical insights into the global dynamics of this industry.

P2P lending – good old loans with a modern take

Peer-to-peer (P2P) lending is giving loans through an online platform that connects lenders and borrowers to exchange goods, services, or money directly by eliminating traditional intermediaries such as banks. Financial technology facilitates P2P lending, directly connecting individuals or businesses with investors.

Lenders and borrowers need to register with a P2P platform before conducting any transactions. The registration entails an AI-based evaluation of the borrowers to assess their credit score, employment details, income, and credit history. It also monitors their social media activities, including usage patterns and interactions. Using these assessments, the borrowers’ creditworthiness is determined, categorizing them into various risk tiers and informing the interest rates offered.

Subsequently, lenders can make informed decisions about lending money based on borrowers’ assessed scores. This empowers them to select suitable borrowers and enables borrowers to choose appropriate lenders. The P2P platform charges fees from both parties for its services instead of deriving profit from monthly installments.

To mitigate fraudulent activities, certain regulatory bodies oversee these platforms to ensure compliance with regulations and maintain transparency. For example, P2P lending in the USA is regulated at the federal and state levels. The US Securities and Exchange Commission (SEC) oversees the investors of the P2P lending platforms, while the Federal Trade Commission and the Consumer Protection Financial Bureau oversee the borrowers. In India, all P2P lending platforms must register as Non-Banking Financial Companies (NBFC)-P2P Lenders with the Reserve Bank of India (RBI).

The global P2P lending market is expected to reach US$705.81 billion by 2030 up from US$83.79 billion in 2021, at a 26.7% CAGR during 2022-2030, according to Precedence Research.

In addition to the increasing demand for financial services, factors such as lower operating fees compared to traditional financial services, quicker loan approvals, and the adoption of digitization in the banking sector drive the growth of the P2P lending market.

P2P Lending Needs More than Just Appetite for Investment by EOS Intelligence

P2P Lending Needs More than Just Appetite for Investment by EOS Intelligence

China’s P2P lending – started strong but faced a downturn

China’s P2P lending industry witnessed speedy development since 2007. There were 3,383 P2P lending platforms running in China with around RMB 130 billion (~US$18.2 billion) in combined monthly transactions in January 2016, as per the Home of Online Lending, an organization that collects and assembles P2P data from various sources in China. Founded in August 2007, PPDai or Paipaidai, currently known as FinVolution Group, was the first online P2P lending platform in China. PPDai was listed on the New York Stock Exchange in November 2017.

However, this burgeoning growth of the P2P lending industry in China was unsustainable and short-lived. This was evident from the fact that out of 6,607 P2P lending platforms, 6,277 were closed and problematic, leaving only 330 P2P lending platforms in business in China as of August 2020, as per the Home of Online Lending. As of August 2020, the lenders of the collapsed P2P lending industry of China owed depositors US$115 billion.

There were several Ponzi schemes related to untrustworthy P2P lending platforms enticing potential investors with attractive bonuses for referring family and friends, as reported by the Chinese media by the end of 2015. For example, in early 2015, Ezubao, with 900,000 investors, went bust when it turned out to be a Ponzi scheme with US$9 billion. Some P2P platforms were found creating fictional information about the borrowers in order to create groups of assets, and these platforms utilized funds to fulfill their own business requirements.

Although until early 2016, no regulatory authorities were overseeing P2P platforms in the country, it was believed that the Chinese government was observing the industry closely. Three bodies (The China Banking Regulatory Commission regulating P2P lending business, the Central Ministry of Industry and Information Technology supervising the telecom business of P2P lending, and the Cyber Administration of China developing rules, managing administrative licenses, and control over internet regulation and censorship in China) together announced the Interim Measures on Administration of the Business Activities of Peer-to-Peer Lending Information Intermediaries (“Interim Measures”) in August 2016.

Interim Measures became China’s first regulatory framework for the P2P lending industry. According to the Measures, a P2P lending platform’s scope of business in China is limited to acting as lending information intermediaries. As per the new rules, P2P lending platforms were mandated to establish custodian accounts with registered financial institutions for investor and borrower funds previously held by them. This was done to decrease the risks associated with situations when P2P lending platform owners flee with the investors’ money.

Interim Measures also mandated that P2P lending platforms register with the local financial regulatory body. The Measures provided P2P lending platform owners with a twelve-month timeline for implementing all the mandates. However, there was a delay in the implementation, as the registration and rectification processes were scheduled to be completed by June 2018, but they were not complete as of August 2018.

The exponential growth of P2P lending platforms in China resulted in several crashes due to cash shortfalls, defaults, frauds, and closures, causing massive financial losses for lenders. Such market scandals made it difficult for investors and borrowers in China to survive. They presented difficulties in acquiring financial resources, and the platforms faced a situation where investors started withdrawing their investments, thus bringing about the ultimate crash of the P2P lending industry in China.

Indian P2P lending – bright future fueled by regulators

P2P lending started in early 2014 in India. However, it began gaining significance in September 2017 when the Reserve Bank of India (RBI) decided to regulate P2P lending in the country.

People in India started using online platforms to borrow and lend funds to various untapped markets characterized by less developed infrastructure and lower investment activity. The method of borrowing changed over time. Borrowers who found it difficult to access credit from financial institutions were borrowing money from relatives, friends, acquaintances, lenders, colleagues, and business partners. The revolution took place via the intervention of digital ways of funding the credit ecosystem.

In September 2017, RBI introduced regulatory guidelines that ensured P2P lending through non-banking financial companies (NBFCs). In October 2017, RBI published a different framework for the P2P lending platforms. RBI categorized these rules as NBFC-P2P. The regulatory norms have enabled P2P lending platforms to create adaptable lending and borrowing models, including the development of flexible loan tenures, interest rate structures, and more.

Later, in 2018, RBI published a list comprising names of the first five companies registered with NBFC-P2P lending. The registration list helped ensure a secure, regulated sector and protect the interests of lenders and borrowers. RBI, in one of its regulations, mentioned a cap of Rs.5,000,000 (~US$60,000), which means if lenders invest money above Rs.1,000,000 (~US$12,000) across P2P platforms, they are required to submit a certificate from a practicing Chartered Accountant certifying a minimum net worth of Rs.5,000,000. This also means that the borrower must certify the difference between their assets and liabilities to show their financial strength. The introduction of the cap discouraged many lenders from giving out big loans.

According to RBI, fund transfers between participants on the P2P lending platform should be made through the escrow account mechanism. This means that all transactions will be processed via bank accounts, and cash transactions are strictly prohibited.

RBI mandated that P2P lending platforms be members of the Credit Information Companies, entities that maintain credit-related information about businesses and individuals. This regulation by RBI was welcomed by P2P platforms but separated less powerful players from the P2P market. The inclusion of rules has brought higher transparency, credibility, and stability to P2P lending. However, they have also increased the operation cost for P2P lending platforms and decreased the activities of lenders and borrowers.

All these changes have helped borrowers obtain loans more easily and protected lenders from fraudulent activities. According to IndustryARC, India’s P2P lending market is predicted to reach US$10.5 billion with a CAGR of 21.6% between 2021 and 2026. Market transparency in P2P lending, facilitated by technologies such as blockchain and smart contracts, has contributed to the growth of the P2P lending market.

Government promotion of cashless technology in P2P lending has reshaped the financial sector, gaining significant momentum over the past years. The introduction of AI and machine learning, along with RBI norms, has created a more secure marketplace for investors and borrowers. Innovations and new players in the P2P market are expected to impact the growth of P2P lending in the future.

P2P lending in the USA – star performer driven by technologies

The P2P lending market shows significant growth in the North American market with a larger size, higher revenue, and rapid growth. Several platforms, such as Lending Club (founded in 2006) and Prosper (founded in 2005), supported the growth of the P2P lending market in the USA by making P2P lending easy and secure. These platforms helped in attracting a large number of borrowers and investors. In the USA, the adoption of mobile and digital technologies such as Venmo, which was acquired by PayPal in 2013, and Squash Cash increased customer interest in digital transfer capabilities.

The USA has achieved remarkable success in P2P lending compared to other countries, partially due to the implementation of various payment technologies, including the EMV (Europay, Mastercard, and Visa) smart payment card protocol used as an electronic payment method. This success can be attributed to the presence of adequate legal frameworks and well-defined strategies for generating revenue.

One contributing factor to the rise of P2P lending in the USA has been the emergence and growth of small and medium-sized enterprises (SMEs actively involved in P2P lending activities). These platforms helped reduce the cost of office setups, maintenance, staffing, etc., and thus helped boost the growth of P2P lending.

One of the reasons behind the increase in the P2P lending market was the COVID-19 pandemic in 2020. At a time when major businesses and organizations were facing difficulties regarding finance and operations, P2P lending platforms helped them to raise funds for their operations through online lending platforms such as i2iFunding, Faircent, Lendbox, etc., allowing a direct lending process without the involvement of third-party participants, such as banks.

Technological advancements, such as blockchain, are another reason behind the increase in the P2P lending market in the USA. They eliminated the need for physical branches and reduced operational costs. They reached global audiences such as individuals and businesses in underserved or remote areas. They also helped in reducing the risk of fraud and improve financial transactions. Undoubtedly, the P2P lending market is growing largely thanks to the adoption of new technologies.

EOS Perspective

Peer-to-peer (P2P) lending has shown distinct trends in India, China, and the USA. India and China witnessed a decline in their P2P lending markets due to regulatory hurdles aimed at addressing issues such as fraud and investor protection. Conversely, the USA experienced a surge in P2P lending activities. This uptick can be attributed to a well-established regulatory framework and a sustained appetite for alternative lending solutions. P2P lending platforms in the USA have been able to offer borrowers access to credit while providing appealing investment opportunities to lenders, all while adhering to regulatory standards.

Many new developments in P2P lending are helping the platforms become successful. One such development is the integration of decentralized finance (DeFi), a financial technology that works on a secure distributed ledger. The DeFi technology, born in 2018, aims to create a transparent, open, and permissionless financial system operating on blockchain networks such as Bitcoin or Ethereum.

DeFi in the USA empowers individuals with P2P digital exchange by challenging the centralized financial system by eliminating banks’ fees and other charges. DeFi allows a P2P lending platform to access a global pool of liquidity (which means a collection of digital assets to enable trading on DeFi), reduces costs and risks, and offers more flexible and customized products.

Artificial Intelligence and Machine Learning will continue to be the solutions that transform P2P lending with better data analysis, credit scoring, risk assessments, and fraud detection capabilities. AI will also allow for efficient and more personalized services to both lenders and borrowers.

Regulatory authorities, with their frameworks, have saved several platforms from data breaches, tax compliance issues, consumer protection concerns, and cyberattacks. These authorities, together with industrial associations, will continue to create innovative and adaptive solutions such as sandbox programs (a time-bound, controlled, and live testing environment involving parameters within which the firm must operate).

Looking at the history of some of the key P2P lending markets, it is evident that creating a more robust, secure, and dependable P2P lending ecosystem necessitates technological innovations and establishing a practical regulatory framework to ensure the safety of financial activities.

eNaira Is It Here to Stay or Are Nigerians Going to Say ‘Nay’ by EOS Intelligence
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eNaira: Is It Here to Stay or Are Nigerians Going to Say ‘Nay’?

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Although Nigeria boasts about its digital currency launch, there are contradictory opinions about eNaira’s subsequent adoption. The eNaira has the potential to impact Nigeria’s economy positively, however, it is not possible without its widespread acceptance.

CBDC – A global picture

Central Bank Digital Currency (CBDC) is virtual currency or money issued and controlled by a country’s central bank. According to the Atlantic Council, a leading US-based think tank, 130 countries were considering a CBDC as of September 2023, while only 35 countries were exploring a CBDC as of May 2020. This steep rise in the number of countries considering CBDC in a span of just over three years shows an increasing interest in CBDC across the globe. Even more so, some 64 countries are already in an advanced phase of exploration of the currency (development, pilot, or launch phase).

Among the G20 countries, 19 are in the advanced stage of developing CBDC, and 9 out of these 19 G20 countries are in the pilot phase. There are some 11 countries that have launched a CBDC. China’s CBDC is in the pilot stage and is presently reaching 260 million people taking part in this pilot while being tested in more than 200 scenarios, including e-commerce, public transit, and stimulus payments. In Europe, the European Central Bank is currently on course to start its pilot for CBDC, the digital euro.

More than 20 other countries are stepping towards piloting their digital currency in 2023. Countries such as Australia, Thailand, and Russia plan on continuing pilot testing. Brazil and India intend to launch their CBDC in 2024.

eNaira – A choice or compulsion?

eNaira is Nigeria’s digital currency, issued and regulated by the Central Bank of Nigeria (CBN) for retail use. It is a liability of the CBN, similar to coins and cash.

Cryptocurrencies such as Bitcoin and Ethereum are similar to eNaira in terms of the underlying Bitcoin technology. Apart from this, both cryptocurrencies and eNaira are stored in digital wallets and can be used for payments and digital transfers across the globe to anyone with an eNaira account at no cost.

However, what makes eNaira different from Bitcoin or Ethereum is that the CBN has access rights controls over the Nigerian digital currency. Secondly, the eNaira is not a financial asset but rather a digital form of the physical naira, to which it is pegged at parity.

With the release of eNaira in October 2021, Nigeria became the first country in the African continent and second in the world after the Bahamas to launch a CBDC. Major motivations behind launching CBDC in Nigeria included encouraging financial inclusion, improving cross-border transactions, complementing the current payment systems, and enabling diaspora remittances. However, the adoption of eNaira has been low, with only 0.5% of the Nigerian population using CBDC within a year of its launch.

In a rather desperate move to compel its people to adopt eNaira, the government caused cash shortages in the country. This resulted in protests, riots, and unrest among Nigerians. As a result of the currency shortages in early 2022, Nigeria witnessed a 12-fold increase in the number of e-Naira wallets to 13 million since October 2021.

As of July 2023, the value of transactions had also seen a 63% rise to N22 billion (US$48 million) since its launch in October 2021. According to the International Monetary Fund (IMF), 98.5% of the eNaira wallets were inactive one year after the launch of the CBDC, meaning 98.5% of eNaira wallets have not been used even once during any given week. These low levels of activity mirror the low public adoption of eNaira.

eNaira Is It Here to Stay or Are Nigerians Going to Say ‘Nay’ by EOS Intelligence

eNaira Is It Here to Stay or Are Nigerians Going to Say ‘Nay’ by EOS Intelligence

Motivations to launch eNaira: Strong enough to sustain adoption?

CBN conceived multiple advantages of adopting eNaira, such as fostering financial inclusion, facilitating remittances, and minimizing informality in the economy. These serve as motivations for launching eNaira and are expected to take shape with the eNaira becoming more widespread along with strong support of the regulatory system.

Fostering financial inclusion

Currently, eNaira can be used by people with bank accounts, but the idea is to expand the coverage to anyone with a mobile phone, even if they do not have a bank account. Around 38% of the adult population in Nigeria do not have bank accounts. If this section of the adult population could be provided with access to eNaira through mobile phones, Nigeria could potentially achieve 90% financial inclusion.

Facilitating remittances

Nigeria is one of the Sub-Saharan African countries that receives considerable remittances. In 2019, Nigeria received US$24 billion in remittances, which are usually made through international money transfer operators. These operators charge around 1-5% of the value of the transaction as their fee. One of the motivations for launching eNaira is to reduce the costs associated with remittance transfers.

Minimizing informality in the economy

With more than half of the economy being informal, it becomes imperative for the Nigerian government to introduce a digital currency across the country to reduce the informality in the economy and increase the country’s tax revenues. Therefore, eNaira was launched in Nigeria to strengthen the tax base along with obtaining higher transparency in informal payments.

Can Nigeria overcome implementation challenges to spur eNaira adoption?

It comes as no surprise that Nigeria is facing a range of adoption barriers on its journey to eNaira’s widespread implementation. Apart from perceptual barriers such as considering eNaira wallets as deposits at the central bank, which might decrease the demand for deposits in commercial banks, there are cybersecurity risks and operational barriers linked to eNaira. These adoption barriers to Nigeria’s CBDC include a combination of factors such as lack of required tech infrastructure, lack of training of bank personnel managing the process, trust issues, and electricity and internet issues.

Lack of tech infrastructure

The CBN is looking to revamp the technological platform used for eNaira and was in talks for that with a company called R3 in early 2023. CBN is contemplating having complete control over the platform, while eNaira was initially developed in collaboration with a fintech multinational called Bitt. The change of technology platform vendor in less than two years might suggest a lack of vision of CBN regarding the technological infrastructure necessary for the seamless adoption of eNaira.

Lack of training

The CBN is expected to oversee the ledger and manage the system, while other financial institutions, such as banks, are to provide users with access to CBDC wallets. The bank staff is required to onboard users to the eNaira platform. However, it is observed that the bank staff is not sufficiently trained to be able to seamlessly bring users on board. This, in turn, negatively impacts the adoption of CBDC.

Trust issues

Nigeria has been considered a country with high money laundering and terrorist organizations funding risk (ML/TF). In February 2023, the Financial Action Task Force (FATF), a global money laundering and terrorism funding inspection organization, put Nigeria on its grey list owing to Nigeria not having adequate measures to curb such activities. Similarly, Basel Institute of Governance, a non-profit organization focused on improving governance and preventing corruption and other financial crimes, in its 2022 global ranking on ML/TF risks, placed Nigeria 17th out of 128 countries, a high spot indicating a significant risk of ML/TF.

In the current design of CBDC in Nigeria, the CBN is equipped to monitor all users’ transactions using eNaira, potentially allowing it to detect and curb ML/TF activities and improve Nigeria’s standing in the risk rankings. However, this has turned out to be a double-edged sword in implementing eNaira. The high level of supervision of all transactions has brought apprehension amongst potential users in Nigeria, most of whom believe that eNaira was developed by the government to monitor the monetary transactions, breaching their right to privacy and potentially giving the government a tool to control them. This lack of trust significantly hampers the adoption of the CBDC in Nigeria.

Electricity and internet issues

With around 92 million people not having access to power in a population of 200 million, Nigeria has one of the lowest electricity access rates globally, as per the Energy Progress Report 2022 published by Tracking SDG 7. At the same time, the internet penetration in Nigeria stands at 55.4% in 2023. Seamless internet connectivity and power access are some of the critical prerequisites for the smooth implementation of the eNaira in Nigeria.

What would give eNaira adoption a much-needed push?

As the challenges to widespread adoption of the eNaira are multipronged, finding solutions to overcome the implementation challenges is not easy or quick.

One of the main infrastructural challenges, inadequate power and internet access, should be among the first to be addressed. One way to approach it is to create offline access to the eNaira platform. To achieve this, the CBN launched the Unstructured Supplementary Service Data (USSD) code for eNaira, meaning that Nigerians without internet-enabled phones can perform transactions with eNaira.

To facilitate rapid and seamless adoption of the eNaira, the CBN must make the CBDC available to everyone with a mobile phone. More and more people should be encouraged to use eNaira by incentivizing them through rebates while paying income tax. Another incentive example dates back to October 2022 when CBN offered discounts if people used eNaira to pay for cabs.

EOS Perspective

The eNaira has the potential to have a significant impact on the Nigerian economy. As transactions using eNaira are fully traceable, more widespread adoption of eNaira is expected to expand the country’s tax base by bringing higher transparency in payments, especially in informal markets. It will undoubtedly result in higher tax revenue, a development welcomed by the government.

With US$24 billion in remittance receipts in 2019, Nigeria is considered one of the key remittance destinations in Sub-Saharan Africa. As remittances are currently burdened with a 1-5% charge of the transaction value, removing these costs through the adoption of eNaira would bring more remittance income to the population and, indirectly, more capital to the Nigerian economy.

With the expanded tax base, cheaper and higher inflows of remittances, facilitated retail payments, welfare transfers, etc., the impact of the eNaira on the Nigerian economy is likely to be quite considerable. Indeed, at the time of launch, the CBN estimated that the eNaira should increase Nigeria’s GDP by US$29 billion over the first 10 years, contributing to the country’s economic growth and development. With the implementation challenges encountered so far, it is clear that these estimations were overly optimistic. Still, how well the CBN can do its homework and undertake well-directed steps to navigate the challenges remains to be seen.

Africa’s Fintech Market
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Africa’s Fintech Market Striding into New Product Segments

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Fintech is certainly not a new concept in the African region. More than that: Africa has been a global leader in mobile money transfer services for some time. The market continues to evolve and the regional fintech players are now moving beyond just basic payment services to offer extended services, such as credit scoring, agricultural finance, etc. With Africa being significantly unbanked and still lacking financial infrastructure, fintech industry is at a unique position to bridge the gap between consumer needs and available financial solutions.

The African subcontinent is much behind many economies when it comes to financial inclusion and banking infrastructure owing to low levels of investment, under-developed infrastructure, and low financial literacy ratio. As per World Bank estimates, only about 20% of the population in the sub-Saharan African region have a bank account as compared with 92% of the population in advanced economies and 38% in low-middle income economies.

Related reading: Fintech Paving the Way for Financial Inclusion in Indonesia

This gap in the formal banking footprint has been largely plugged by the fintech sector in Africa, especially with regards to mobile payments. While in the developed economies, the fintech sector focuses on disrupting the incumbent banking system by offering better services and lower costs, in Africa it has the advantage of building and developing financial infrastructure. This is clear in the uptake of mobile fintech by the African population, making Africa a global leader in mobile payments and money transfers.

While in the developed economies, the fintech sector focuses on disrupting the incumbent banking system by offering better services and lower costs, in Africa it has the advantage of building and developing financial infrastructure.

However, mobile payments have simply been the first phase in the development of digital finance in Africa. The penetration and mass acceptance of mobile wallets have opened doors for the next phase of digital financial services in Africa. These include lending and insurance, agricultural finance, and wealth management.

Moreover, owing to the success achieved by mobile wallets, global investors are keenly investing in fintech start-ups that are innovating in the sector. For instance, Venture capital firm, Village Capital, partnered with Paypal to set up a program named Fintech Africa 2018. The program aims to support start-ups across Kenya, Nigeria, South Africa, Ghana, Uganda, Rwanda, and Tanzania, which provide financial services beyond mobile payments (especially in the field of insurtech, alternative credit scoring, and fintech solutions for agriculture, energy, education, and health).

Africa’s Fintech Market Striding into New Product Segments

Agricultural finance

Agriculture is the livelihood of more than half of Africa’s workforce, however, due to limited access to finance and technologies, most farmers operate much below their potential capabilities. Due to this, Africa homes about 60% of the world’s non-cultivated tillable land.

However, in recent years, several established fintech players as well as start-ups have built solutions to provide financial support to the region’s agricultural sector.

In late 2018, Africa’s leading mobile wallet company, Cellulant, launched Agrikore, a blockchain-based digital-payment, contracting, and marketplace system that connects small farmers with large commercial customers. The company started its operations from Nigeria and is expected to commence business in Kenya in the second half of 2019.

Under their business model, when a large commercial order is placed on the platform, it is automatically broken into smaller quantities and shared with farmers on the platform (based on their capacity and proximity). Once the farmer accepts the order for the set quantity offered to him, the platform connects the farmer with registered transporters, quality inspectors, etc., who all log their activities on the blockchain and are paid through Cellulant’s digital wallets. All this is done on a blockchain to ensure transparency.

Related reading: Connecting Africa – Global Tech Players Gaining a Foothold in the Market

Another Nigeria-based company, Farmcrowdy, has been revolutionizing financing in Nigeria’s local agriculture sector by connecting small-scale farmers with farm sponsors (from Nigeria as well as other regions), who invest in farm cycles. Farmers benefit by receiving advice and training on best agriculture practices in addition to the financial support. Sponsors and farmers receive a pre-set percentage of the profits on the harvest in that cycle. In December 2017, the company received US$1 million seed investment from a group of venture capitalists including Cox Enterprises, Techstars Ventures, Social Capital, Hallett Capital, and Right-Side Capital, as well as five angel investors.

In addition to these, there are several other players, such as Kenya-based Twiga Foods (that connects rural farmers to urban retailers in an informal market), Kenya-based Tulaa (that provides famers with access to inputs such as seeds and fertilizers, as well as to finance, and markets through an m-commerce marketplace), Kenya-based, FarmDrive (that helps small farmers access credit from local banks through the use of data analytics), etc.

While most ventures in this space are currently based in Nigeria and Kenya, the sector is expected to grow significantly in the near future and is likely to expand into other parts of Africa as well.

In terms of expected trends in services development, with growing number of solutions and in turn apps, it is likely that consumers will tilt towards all-inclusive offerings, i.e. apps that provide solutions across the entire agricultural value chain.

Alternative credit scoring and lending

Large number of Africans have limited access to finance and formal lending options. Since there is a limited number of bank accounts in use, most people do not have a formal credit history and the cost of credit risk assessment remains high. Due to this, large portion of the population resorts to peer-to-peer lending or loans from Savings and Credit Cooperative Organizations (SACCOs), usually at rates higher than the market rate.

Fintech sector has been working towards reducing the cost of credit risk assessment through the use of big data and machine learning. It uses information about a person’s mobile phone usage, payment data, and several other such parameters, which are available in abundance, to calculate credit score for the individual.

Several companies, such as Branch International, have been following a similar model, wherein, through their app, they analyze the information on customer’s phone to assess their credit worthiness. On similar lines, Tala (which currently operates in Kenya), collates about 10,000 data points on a customer’s mobile phone to determine the user’s credit score.

Fintech sector has been working towards reducing the cost of credit risk assessment through the use of big data and machine learning. It uses information about a person’s mobile phone usage, payment data, and several other such parameters, which are available in abundance, to calculate credit score for the individual.

Other business models include a crowdfunding platform, on which individuals from across the world can offer small loans to local African entrepreneurs. Kiva, a global crowd lending platform, has been partnering with several companies across Africa over the past decade (such as Zoona for Zambia and Malawi in 2012) for providing financial support to entrepreneurs. Kiva vets the entrepreneurs eligible for the loan and the loan is repaid over a period of time. Post that lenders can either withdraw the amount or retain it with the company to support another entrepreneur.

Currently, about 20% of all fintech start-ups in Africa are focusing on lending solutions, with investors backing them with significant amount of funding. This is primarily due to a growing demand for financing in Africa. Moreover, limited barriers with regards to regulations for digital lending start-ups also make it easy for companies to enter this space and test the market before investing large sums of money or entering into a partnership with a bank.

This may change in the long run, however, with regulators increasingly monitoring this growing sector. For instance, in March 2018, the Kenyan government published a draft bill under which digital lenders will be licensed by a new Financial Markets Conduct Authority and lenders will be bound by interest rate caps that are set by the authority.

Insurance and wealth management

Apart from agriculture financing and credit scoring and lending, there are several digital start-ups in the space of insurance and wealth management. There are limited traditional solutions for insurance and wealth management in Africa, a fact that presents significant potential for growth in these categories.

South Africa’s Pineapple Insurance is a leading player in the insurtech space. The company operates as a decentralized peer-to-peer insurance company wherein members take a picture of the product they want to insure and the company uses artificial intelligence to calculate an appropriate premium. The premium is stored in the member’s Pineapple wallet and when a claim is paid out, a proportionate amount is withdrawn from the wallets of all the members in that category. Moreover, members can withdraw unused premium deposits at the end of every year making the process completely transparent.

In addition to Pineapple Insurance, there are several other companies that are making waves in the insurtech sector. These include, South-Africa based Naked Insurance (which uses artificial intelligence to offer low cost car insurance), Kenya-based GrassRoots Bim (which leverages mobile technology to develop insurance solutions for the mass market), and Tanzania-based Jamii Africa (which offers mobile micro-health insurance for the informal sector). Companies such as Piggybank.ng in Nigeria and Uplus in Rwanda, also provide digital solutions for savings and wealth management.

Apart from these fintech solutions, a lot of innovations are also taking place in the payments space. Several companies are working towards extending the reach of Africa’s mobile payment solutions. For example, a leading Kenyan mobile payment company, DPO Group, partnered with MasterCard to launch a virtual card that can be topped with mobile money by the end of 2019. The card has a 16-digit number, an expiry date, and a security code similar to a debit card, thereby facilitating transactions beyond Kenya, with rest of the word as well.

EOS Perspective

There is an immense opportunity in the fintech space in Africa at the moment. Most start-ups are currently operating in Kenya, South Africa, and Nigeria, and are expected to move to other parts of the continent once they have achieved certain scalability and outside investment. Having said that, foreign investors are also keenly observing movement in this space and are on the lookout for fresh concepts that have the capability to build new offerings as well disrupt existing financial solutions.

At the same time, with the industry being relatively new, many of its aspects remain unknown, a fact that increases risk of investing in the sector. Currently, a lot of these solutions depend heavily on data (especially through mobile usage). However, there are increasing regulations regarding data privacy across the globe and over the course of time, this trend is also expected to reach Africa.

Moreover, direct regulations regarding the fintech sector may also impact the business of several new players. Currently the companies are evolving fast and the regulators are playing catch-up, however, once the industry becomes seasoned, clear regulations are expected to ensure safety of the money involved. Fintech companies are also vulnerable to risks arising from online fraud, hacking, data breaches, etc., and regulations are extremely important to keep these in check as well.

While the sector enjoys limited scrutiny at the moment, entry and operations may not be as simplistic in the long run as they seem now. Despite this, the sector is expected to prosper and witness further innovation that will drive it into new territories to satisfy the currently unmet financial needs of the African population.

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Connecting Africa – Global Tech Players Gaining Foothold in the Market

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While in the past, most global tech companies have focused their attention on emerging Asian markets, such as India, Indonesia, Vietnam, etc., they have now understood the potential also offered by African markets. Africa currently stands at the brink of technical renaissance, with tech giants from the USA and China competing to establish here a strong foothold. That being said, Africa’s technological landscape is extremely complex owing to major connectivity and logistical issues, along with a limited Internet user base. Companies that wish to enter the African markets by replicating their entry and operating models from other regions cannot be assured of success. In addition to global tech firms building their ground in Africa, a host of African start-ups are increasingly finding funding from local as well as global VC and tech players.

Great potential challenged by insufficient connectivity

Boasting of a population exceeding 1.2 billion (spread across 50 countries) and being home to six of the world’s ten fastest-growing economies, Africa is increasingly seen as the final frontier by large global technology firms.

However, the African landscape presents its own set of challenges, which makes increasing tech penetration extremely complex in the market. To begin with, only about 35% of the continent’s population has access to the Internet, as compared with the global rate of 54%. Thus, Africa’s future in the technology space greatly depends on its ability to improve digital connectivity. This also stands in the way of large tech-based players that wish to gain foothold in the market.

Large players try to lay the necessary foundations

Due to this fundamental challenge, companies such as Google, Facebook, and IBM have initiated long-pronged strategies focusing on connectivity and building infrastructure across Africa. Facebook’s Free Basics program (which provides access to a few websites, including Facebook and Whatsapp, without the need to pay for mobile data) has been greatly focused on Africa, and is available in 27 African countries. With Facebook’s partnership with Airtel Africa, the company has started to strengthen its position in the continent.

Similarly, Google has launched Project Link, under which it rolled out a metro fiber network in Kampala, Uganda, with Ghana being in the pipeline. Through such efforts and investments, Google is aimed at bringing about faster and more reliable internet to the Africans.

Microsoft, which has been one of the first players to enter the African turf, is also undertaking projects to improve connectivity in Africa. The company has invested in white spaces technology, which uses unused radio spectrum to provide Wi-Fi connectivity at comparatively lower costs.

However, managing to get people online is only the first step in the long journey to develop a growing market. Companies need to understand the specific dynamics of the local markets and develop new business models that will fit well in the African market.

For instance, globally, the revenue model for several leading tech companies, such as Google and Facebook, largely depend on online advertising. However, the same model may not thrive in most African markets due to a limited digital footprint of the consumers as well as the fact that the business community in the continent continues to draw most transactions offline, using cash.

Connecting Africa – Global Technology Firms Gaining a Foothold in the Market

Players employ a range of strategies to penetrate the market

These tech giants must work closely with local businesses and achieve an in-depth understanding of the unique challenges and opportunities that the African continent presents. Therefore, these companies are increasingly focusing on looking for collaborations that will help in the development of successful and sustainable businesses in the continent.

Leading players, such as Google and Microsoft have been investing heavily in training local enterprises in digital skills to encourage businesses to go online, so that they will become potential customers for them in the future.

While this strategy has been used somewhat extensively by US-based and European companies, a few Chinese players have recently joined the bandwagon. For instance, Alibaba’s founder, Jack Ma announced a US$10 million African Young Entrepreneurs Fund on his first visit to Africa in July 2017. The scheme will help 200 budding entrepreneurs learn and develop their tech business with support from Alibaba.

The company has also been focusing on partnerships and collaborations to strengthen its position in the African market. Understanding the logistical challenges in the African continent, Alibaba has signed a wide-ranging agreement with French conglomerate, Bollore Group, which covers cloud services, digital transformation, clean energy, mobility, and logistics. The logistics part of the agreement will help Alibaba leverage on Bollore’s strong logistics network in Africa’s French-speaking nations.

Considering the importance of mobile wallets and m-payments in Africa, Alibaba has expanded its payment system, Alipay, to South Africa (through a partnership with Zapper, a South Africa-based mobile payment system) as well as Kenya (through a partnership with Equitel, a Kenya-based mobile virtual network operator). In many ways, it is applying its lessons learnt in the Chinese market with regards to payments and logistics, to better serve the African continent.

While Chinese players (such as Alibaba and Baidu) have been comparatively late in entering the African turf, they are expected to pose a tough competition to their Western counterparts as they have the advantage of coming from an emerging market themselves, with a somewhat better understanding of the challenges and complexities of a digitally backward market.

For instance, messaging app WeChat brought in by Tencent, China-based telecom player, has provided stiff competition to Whatsapp, which is owned by Facebook and is a leading player in this space. WeChat has used its experience in the Chinese market (where mobile banking is also popular just as it is across Africa) and has collaborated with Standard Chartered Bank to launch WeChat wallet. In addition, WeChat has collaborated with South Africa’s largest media company, Naspers, which has provided several value added services to its consumers (such as voting services to viewers of reality shows, which are very popular in Africa). Thus, by aligning the app to the needs and preferences of the African consumers, it has made the app into something more than just a messaging service.

While collaboration has been the go-to strategy for a majority of tech companies, a few players have preferred to enter the market by themselves. Uber, a leading peer-to-peer ridesharing company entered Africa without collaborations and is currently present in 16 countries.

While entering without forging partnerships with local entities helps a company maintain full control over its operations in the market, in some cases it may result in slower adoption of its services by the local population (as they may not be completely aligned with their preferences and needs). This can be seen in the case of Netflix, a leading player in the video streaming service, which extended its services to all 54 countries in Africa in January 2016 (the company has, however, largely focused on South Africa). Despite being a global leader, Netflix has witnessed conservative growth in the continent and expects only 500,000 subscribers across the continent by 2020.

On the other hand, Africa’s local players ShowMax and iROKO TV have gained more traction, due to better pricing, being more mobile friendly (downloading option) and having more relatable and local content, which made their offer more attractive to local populations.

Netflix, slowly understanding the complexities of the market, has now started developing local content for the South African market and working on offering Netflix in local currency. The company has also decided to collaborate with a few local and Middle-Eastern players to find a stronger foothold in the market. In November 2018, the company signed a partnership with Telkom, a South African telecommunication company, wherein Netflix will be available on Telkom’s LIT TV Box. Similarly, it partnered with Dubai-based pay-TV player, OSN, wherein OSN subscribers in North Africa and Middle East will gain access to Netflix’s content available across the region. However, while Netflix may manage to develop a broader subscriber base in South Africa and a few other more developed countries, there is a long road ahead for the company to capture the African continent as a whole, especially since its focus has been on TV-based partnerships rather than mobile (which is a more popular medium for the Internet in Africa).

On the other hand, Chinese pay-TV player, StarTimes has had a decade-long run in Africa and has more than 20 million subscribers across 30 African countries. While operating by itself, the company has strongly focused on local content and sports. It also deploys a significant marketing budget in the African market. For instance, it signed a 10-year broadcast and sponsorship deal with Uganda’s Football Association for US$7 million. To further its reach, the company also announced a project to provide 10,000 African villages with access to television.

US-based e-commerce leader, Amazon, is following a different strategy to penetrate the African markets. Following an inorganic approach, in 2017, Amazon acquired a Dubai-based e-retailer, Souq.com, which has presence in North Africa. However, the e-commerce giant is moving very slowly on the African front and is expected to invest heavily in building subsidiaries for providing logistics and warehousing as it has done in other markets, such as India. This approach to enter and operate in the African market is not widely popular, as it will require huge investment and a long gestation period.

Local tech start-ups are on the rise

While leading tech giants across the globe are spearheading the technology boom in Africa, developments are also fueled by local start-ups. As per the Disrupt Africa Tech Startups Funding Report 2017, 159 African tech start-ups received investments of about US$195 million in 2017, marking a more than 50% increase when compared to the investments received in 2016.

While South Africa, Nigeria, and Kenya remained the top three investment destinations, there is an increasing investor interest in less developed markets, such as Ghana, Egypt, and Uganda. Start-ups in the fintech space received maximum interest and investments. Moreover, international VC such as Amadeus and EchoVC as well as local African funds appear keen to invest in African start-ups. The African governments are also supporting start-up players in the tech space – a prime example being the Egyptian government launching its own fund dedicated to this objective.

African fintech start-ups, Branch and Cellulant, have been two of the most successful players in the field, raising US$70 million and US$47.5 million, respectively, in 2018. While Branch is an online micro-lending start-up, Cellulant is a digital payments solution provider. Both companies have significant presence across Africa.

EOS Perspective

Although US-based players were largely the first to enter and develop Africa’s technology market, Chinese players have also increasingly taken a deeper interest in the continent and have the advantage of coming from an emerging market themselves, therefore putting themselves in a better position to understand the challenges faced by tech players in the continent.

Most leading tech players are looking to build their presence in the African markets. Their success depends on how well they can mold their business models to tackle the local market complexities in addition to aligning their product/service offerings with the diverse needs of the local population. While partnering with a local player may enable companies to gain a better understanding of the market potential and limitations, it is equally imperative to identify and partner with the right player, who is in line with the company’s vision and has the required expertise in the field – a task challenging at times in the African markets.

While global tech companies are stirring up the African markets with the technologies and solutions they bring along, a lot is also happening in the local African tech-based start-ups scene, which is receiving an increasing amount of investment from VCs across the world. In the future, these start-ups may become potential acquisition targets for large global players or pose stiff competition to them, either across the continent or in smaller, regional markets.

It is clear that the technological wave has hit Africa, changing the continent’s face. Most African countries, being emerging economies in their formative period, offer a great potential of embracing the new technologies without the struggle of resisting to adopt the new solutions or the problem of fit with legacy systems. It is too early to announce Africa the upcoming leader in emerging technologies, considering the groundwork and investments the continent requires for that to happen, however, Africa has emerged as the next frontier for tech companies, which are causing a digital revolution in the continent as we speak.

by EOS Intelligence EOS Intelligence No Comments

Fintech Paving the Way for Financial Inclusion in Indonesia

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Over the past two decades, financial sector in Indonesia has witnessed a massive transformation with the introduction of fintech solutions, fuelled by growing digital market and increasing investments in the fintech market. The sector’s growth offers tremendous opportunities and has led to the emergence of various start-ups offering online financial services. Fintech promises technological solutions to various challenges within the financial sector and offers value-added services such as transaction analysis and customer engagement initiatives. However, challenges such as poor financial literacy among Indonesians and cumbersome regulatory processes continue to pose a threat to the market growth.

Fintech is increasingly gaining traction in Indonesia and changing the way financial companies do business. Gone are the days when banks were the only source of financial transactions in the country. Fintech has revolutionized the financial sector with the emergence of various technological start-ups in areas of mobile payment, loans, money transfers, asset management, etc.

Fintech sector’s growth in Indonesia is largely driven by the rapidly increasing internet penetration and rising smartphone usage, as well as solid and continuous investments – over 2013-2018, investments in the fintech industry are forecast to reach US$ 8 billion, growing at a CAGR of 21.7%. Despite these growth drivers, the sector faces several hurdles such as inexperienced financial personnel, lengthy regulatory processes, and poor financial knowledge among the Indonesian population.

Fintech Paving Way for Financial Inclusion in Indonesia

Nevertheless, the country has been taking measures to tackle the challenges to create banks of the future. In November 2016, Bank Indonesia, central bank of the country, set up a fintech office in Jakarta to boost development of the industry. The office is aimed to optimize technological advancements across the fintech sector, assist players in understanding the regulations, and increase industry’s competitiveness by sharing its developments with international institutions. In addition, Indonesia’s Financial Services Authority is in the process of developing regulations to govern the industry, a significant step to enable both the fintech players as well as the regulators to function cohesively. Further, the industry is also receiving support from conventional financial institutions, which have started adopting digital innovations by initiating collaborations with fintech companies.

Indonesia’s high dependency on cash-based transactions along with low financial penetration rate serve as untapped opportunity areas for fintech players to explore. As of 2014, only 36% of the adult Indonesian population had bank accounts. Additionally, 89.7% of all transactions are still conducted in cash. Fintech players have gradually started leveraging these opportunity areas by expanding services with introduction of various start-ups offering a range of online financial products. As of 2016, the country hosted around 140 independent start-ups, an improvement from just a handful a few years ago, representing a steady growth of the industry. Some of the prominent players of the industry include HaloMoney, Cekaja, and Kartuku, among others.

EOS Perspective

Fintech is the answer to the need for a more secure, fast, and practical financial processing system. It has the potential to transform Indonesia’s financial industry by creating a paradigm shift in the way financial services sector operates. However, certain measures need to be taken to realize its full potential. In order to cultivate skilled personnel, the government should collaborate with universities across the country and promote fintech courses to develop the required skill set among people. Additionally, the government should encourage the association between conventional financial institutions and fintech companies to promote collaborative training and communication, which could help to improve financial education among players in the market. The association would also help both parties to improve their own areas of expertise.

Fintech industry has slowly started changing the way financial services are being accessed in Indonesia. Gradual yet steady on-going efforts to overcome hurdles are likely to result in a larger population enjoying benefits of digital financial services.

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