Payments in Africa, FinServ's tectonic shift, Banks on the Metaverse, Fintech still strong,
Free book with a big question! "Can BRICS De-Dollarize the Global Financial System?"
1. The Future of Payments in Africa
2. Financial Service’s Tectonic Shift
3. Banks and the Metaverse
4. The Pulse of Fintech H1 2022 is strong
5. Free Book! Can BRICS De-Dollarize the Global Financial System
Kiki in Mechanical Ballet, by Fernand Léger, Man Ray 1924. The Oscar Niemeyer Museum, Brazil. “The American artist Man Ray (1890-1976) was the one who changed the status of photography from a simple record of reality to - also - an art form.”
I confess that tonight no single image captured the spirit of any of the stories I am publishing so I went with this striking image by Man Ray! Isn’t fintech nothing more than “mechanical ballet?”
1. The Future of Payments in Africa
E-payments are "the future of payments in Africa" with the market expected to grow 152% from 2020-25!
McKinsey is back with another fantastic report on Africa this time covering payments. A follow-up to their report last week on African Fintech:(here)
Download Mckinsey report: here
“Africa’s domestic e-payments market is expected to see revenues grow by approximately 20% per year, reaching around $40 billion by 2025. This compares with global payment revenue growth of 7%.”
Percentage growth paints a rosy picture. The grim reality is that Africa desperately needs e-payments for greater financial inclusion. Currently, only 5 to 7% of all payment transactions in Africa were made via digital! Put another way, “cash is king.”
Now what I think is the most interesting is the interplay between telecoms, fintech and banks for market share, but we’ll get into this in a second.
First, read the four forces driving the demand for e-payments are:
1️⃣ Young city dwellers and strong economic fundamentals:
Young, urbanized consumers combined with Africa having the fastest population growth rate in the world, averaging 2.7 percent per year.
2️⃣ Proliferation of alternative payment methods:
Consumers continue to benefit from alternative payment methods offered by local and international fintech players and telecom companies.
3️⃣ Payments infrastructure is reducing friction and boosting integration
Africa is experiencing an increase in real-time payments infrastructure enabling instant account-to-account transactions.
4️⃣ Disruptive innovations: [🔥CBDC!🔥]
Currently, more than ten African countries are in the process of launching CBDCs!
CBDCs will give telecoms the edge
Here’s why Africa is going to be fascinating to watch. First credit cards are going to become also-rans, a position that the card companies dread. McKinsey agrees: “the expectation is that revenue intensity for cards will gradually decline."
This leaves a battle between banks, telecoms, and fintech in a new CBDC world. What advantage will fintech have over the established bank and telecom networks when CBDCs level payments fees?
Fintechs are going to work hard to come up with unique services, or platforms, to battle telecoms with extensive physical networks.
McKinsey’s survey supports this with 42% of respondents saying telecom e-wallets will win the payments battle. I think that with the launch of a CBDC this will be even more likely.
This leaves banks, who can't possibly catch up! They have limited physical locations and as most people are unbanked have no preexisting relationships.
Takeaway
CBDCs will put banks, fintechs and telecoms on equal footing as the cost of payment is the same for all.
CBDCs will depower banks and fintechs swinging the balance of power strongly to the telecoms' advantage.
Watch as CBDCs in Africa show how they will be a game changer.
2. Financial Service’s Tectonic Shift
Financial service’s tectonic shift: 10 years ago incumbents comprised 90% of industry value; now they are down to 65% with FIT companies growing to 35%.
OW recognizes three categories with the “FIT” category somewhat hard to define. Still the loss of market value for incumbents is significant and shows a transition that I believe will be hard to stop.
Download the report: here
OliverWyman (OW) says incumbents need to “pivot now” to capture new growing sources of value or continue to lose value to big tech and FIT companies. A change that incumbents, despite massive spending on digital, are unable to make decisively.
OW recognizes three players in financial services: incumbents, big tech, and "financial infrastructure and technology" or "FIT" companies. With incumbents surrendering value growth to big tech and “FIT” companies: (see exhibit 8 pg. 13)
The growth numbers over the past decade show the trend with incumbent banks insurers and asset managers, growing 70% compared to big tech and merchants growing 405%.
“FIT” companies, which include data providers, market infrastructure and payment tech like Visa, MC, PayPal and Square, grew 480%! Now the problem with FIT growth, particularly in payments is that it represents lost opportunities for incumbents who are “aghast at the scale and speed of loss of value share.”
Can incumbents staunch the bleeding?
What are incumbents to do to stem the losses? OW claims that incumbents’ response to FIT and big tech has “not been decisive enough” (no kidding) and recommends a pivot while taking advantage of rising rates.
1️⃣ Pivot the focus of the organization more decisively toward the big future sources of value growth:
• Note: OW concedes that there is “nothing new” in these suggestions!
• Organize around the notion of customer first, where customer type and need define the services provided, partners worked with, and infrastructure needed — and those responsible for solving customer needs are not incentivized by sitting on balance sheets.
• Create distinct service platforms that expand the service breadth of the group and put greater internal and external focus on growth and investment.
2️⃣ Use the rising rate environment to go on offense
• Note: Can you see a bank doing any of these?
• Fighting back before it’s too late on core assets such as payments;
• Getting on the crest of the wave with some of the biggest new opportunities coming such as digital assets and climate financials;
• Positioning at the center of a powerful set of partnerships to build the compelling services to which customers will want connected data services, and to avoid disintermediation by big tech wallets.
Takeaways
Are the above rather generic recommendations enough? Not likely. The reality is that incumbents will not be able to fight back against “digitally native” FIT and big tech.
Incumbents that act quickly can at best staunch the bleeding, but the financial services market has forever changed.
Incumbents' halcyon days are in the past.
3. Banks and the Metaverse
Banks on the Metaverse, whether they are on the leading edge or bleeding edge is anyone’s guess!
Kudos to “BabySwapBox.com” for this excellent read on which banks are on the metaverse! You can draw your own conclusions but my take is that the efforts are so minimal no one is bleeding nor leading! Download report: here
So are banks with a presence on the metaverse learning and positioning themselves to be leaders or are they wasting time because the metaverse is still so ill-defined that it’s nothing more than theater?
Leading or bleeding?
I think that the jury is out! That said, a number of banks have taken the plunge. While none are transacting just yet you can go to Santander, HSBC, JPMorgan and BNP Paribas to check out their "presence." In the case of JP you can check out their "lounge."
“With 47% of bankers believing that their customers will be making transactions via augmented reality or virtual reality by the year 2030, it’s no surprise to see early industry leaders venturing into these uncharted territories.”
That’s very true, AR and VR will undoubtedly be used in banking, but it’s hard to come up with a compelling use case right now other than customer service, and potentially pushing clients products that they’ll have to sign up for through traditional channels.
The key word in that prior sentence was “push.” If clients don’t want to be "pushed" products in the real world why on earth would they go to the metaverse for more of the same?
Personalization key to metaverse interactions
Successful metaverse banking interactions will be built through personalization, and so far none of these offerings can do much better than Mark Zuckerberg’s cringeworthy metaverse avatar.
Zuck spent $10B on the metaverse and all he got was this stupid selfie!
While few would argue that the technology doesn’t have potential, the personalized metaverse experiences that will make it stick are still years away.
Here’s where I disagree with the author whose second sentence says:
“The primary draw of this method is that it offers a way to hold money securely without having to go through traditional banking settings.”
Frankly, none of these banks transacts on the metaverse, so none are holding money “more securely” on the metaverse. It’s also not at all clear that when these banks do offer transactional capability whether they will use standard web services or blockchain services touted by metaverse fans.
Korean KB Bank’s -planned- account opening seems the most ambitious and how it will accept personal info on the metaverse is unknown.
Takeaways
For now, I don’t see banks with a metaverse presence building an insurmountable lead on the competition.
Banks have vaguely defined metaverse offerings. Can you tell me what a lounge is? I don’t think any have invested so much that they are “bleeding.”
No doubt they’ll learn a few tricks on how best to tailor customer inquiries but if the avatar on the other end is a standard customer service person or worse a chatbot it’s hard to see what the bank or the user is gaining.
There is certainly potential but for now, metaverse hype exceeds the reality.
4. The Pulse of Fintech H1 2022 is strong
Good news! Fintech’s pulse is strong and while deal volume is down the industry is doing well everything considered.
KPMG’s Pulse of Fintech report shows that fintech’s glory days may be behind it but it is still going strong despite rising inflation and interest rates taking their toll on public and private companies alike. Download: here
So here’s a quick rundown, headlines are mine, commentary from KPMG:
🔹 It could be a lot worse:
“Global investment in fintech fell from $111.2 billion across 3,372 deals in H2’22 to $107.8 billion across 2,980 deals in H1’21, mirroring the decline in investment experienced in the broader technology sector."
🔹 APAC just keeps going:
Total fintech investment and deals volume declined in both the Americas and EMEA regions, while the Asia- Pacific region attracted a new annual high of fintech investment amidst a decline in the number of deals.
🔹 Valuations tank and IPOs halt but what do you expect, look at the stock market:
The turbulence in the public markets globally had a major impact on the valuations of many public tech companies in H1’22, including fintechs. This, combined with other challenging market factors, brought IPO activity almost to a halt — a trend expected to continue through H2’22. With the IPO door closed, H2’22 could see downrounds.
🔹 Watch M&A as low valuations make for bargain shopping:
“Given the downward pressure on valuations, M&A activity will likely increase as investors see the opportunity to make acquisitions at better prices than have been seen in recent years. Startups could also look to sell as an alternative to holding a down round.”
🔹 No surprise, revenues matter:
“Fintech is expected to remain a strong focus for investors in H2’22 and into 2023. Fintech investors, however, are expected to become more discerning with their investments — focusing more on profitability and cash flow when evaluating opportunities.”
🔹 Payment space is still on fire:
“Investors in all key jurisdictions continued to flock to the payments space in H1’22, investing $43.6 billion in payments-focused companies.” [The resilience of payments never ceases to amaze but see the next bullet for why…...]
🔹 APAC is getting a tech upgrade:
“In many parts of the APAC region, particularly jurisdictions outside of China, the infrastructure underpinning existing financial markets is viewed as quite aged — from the technologies used directly by exchanges to different payments rails. This is driving a significant amount of investment.”
Takeaways
Good news! Those who predicted a fintech disaster will be sorely disappointed, it's not that bad.
Those dinosaurs, like me, that said revenue still matters may yet have the last laugh.
We’re still in a rising interest rate environment so expect the tech sell-off to continue with further impact on fintechs. We’re not out of the woods just yet!
5. Free Book! Can BRICS De-Dollarize the Global Financial System
“Can BRICS De-Dollarize the Global Financial System" looks at the most pressing question in the financial world during a time of war and sanctions.
Download the free “open access” publication: here
Will dollar hegemony hold? As Russia demands energy payments in rubles, India buys coal in yuan, the US dollar soars, and sanctions cut into global trade authors Zongyuan Zoe Liu, PhD, CFA and Mihaela Papa tackle this critical question.
The answer they deliver may surprise you. With new technologies like CBDCs and BRICs commanding 20+% of global GDP, the answer is not as clear as it once was.
Here are some highlights from this important "open access" publication:
🔹 Coalition De-dollarization:
“We found growing support for de-dollarization and efforts to innovate in the de-dollarization space among all coalition members. We found that BRICS members do not have to prioritize de-dollarization for strategic reasons (e.g., avoiding sanctions) to use multiple de-dollarization pathways.”
🔹 But BRICS don’t get along:
“Our systematic examination of BRICS’ coalitional de-dollarization initiatives speaks to the growing convergence among BRICS and the deepening of BRICS’ economic cooperation despite the recent military conflict between India and China." The dynamic within BRICS demonstrates that de-dollarization is advocated by pivotal states – explicitly counter-hegemonic Russia and diversification-focused China that attempt to mobilize followers in order to create a broader nondollar-based sphere of influence.”
🔹 Not a litmus test for friend or foe:
“The challenge to the US dollar does not only come from US strategic adversaries or competitors but also from US allies and partners among BRICS who have economic incentives to reduce the dollar’s dominance and hedge against exchange risk.“
🔹 The role of CBDC:
“Our analysis suggests that the use of new financial technologies (e.g., block-chain, digital currencies, and cloud-based financial infrastructure) can propel the formation of a revisionist de-dollarization coalition and strengthen the credibility of collective mobilization.“
“Such a coalition could lead to the creation of new market instruments and infrastructure that exclude the incumbent power, serve as global public goods with a broader buy-in, and divert global financial traffic away from the incumbent system.”
Takeaways
The authors are not calling for a rapid de-dollarization, instead, as I stated in “Cashless” think of this as slow erosion.
Lost on many is that these competing currencies don't need to topple the dollar to be successful. It will be enough simply to provide an alternative!
The thought of any change to dollar hegemony is unthinkable to many.
I think de-dollarization is already underway. Watch as China and Russia now buy oil in yuan and ruble!
Thank you for reading!
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Rich Turrin is the international best-selling author of "Cashless - China's Digital Currency Revolution" and "Innovation Lab Excellence." He is an Onalytica Top 100 Fintech Influencer and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Living in Shanghai for the last decade, Rich experienced China going cashless first-hand. Rich is an independent consultant whose views on China's astounding fintech developments are widely sought by international media and private clients.
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