Transition Between Old School Financing to New Digital World
The worldwide finance sector has profoundly transformed, especially during and after pandemics. As a result, traditional banks, NBFCs, and especially microfinance companies are now focusing on digital technologies to reshape lending, wealth management and other financial services.
Though the traditional financing companies are still relevant, Fintech operations are accelerating worldwide, especially in the booming market of Africa. Here’s an explanatory revelation on why old-school financing is metamorphosing into new-age digital platforms.
Various Types of Non-Banking Financial Institutions
NBFIs or NBFCs refer to the alternative financing sectors and act as shadow banks. As per regulation, these institutions don’t have banking licences and are not allowed to collect money through demand deposit accounts.
But NBFIs compete with traditional banking institutions in terms of providing financial services such as collective and individual investment, lending, risk pooling, financial consulting etc.
Insurance firms, institutional investors or contractual savings institutions, pawn brokers, microloan organisations, venture capitalists, and currency exchanges are some examples of NBFIs.
Old School Financing vs New Digital Financing
Traditional banks and NBFCs operate on different sets of rules and regulations. Banks solely are dependent on the regulation mandated by the Government, whereas NBFCs are registered under the Company’s Act of each country.
However, keeping an eye on the health and social distancing due to Covid-19, many borrowers started relying on NBFCs and other digital lending companies because the procedure was convenient and hassle-free.
Why Are NBFCs Performing Better Than Conventional Banks?
As people prefer NBFCs, a surge of degrowth in the traditional banking sector is noticeable. People are now more focused on the concept of old-school financing vs new digital financing.
Several reasons are prevailing for the escalated interest in the NBFCs. They are:
Easy Loan Process:
Borrowing a loan from a Fintech company such as NBFC is much easier and time-saving than brick and mortar banks. NBFCs and Fintech companies provide quick loan services even within a day in some cases. NBFCs have comparatively flexible and straightforward policies; even the new-age borrowers can apply for a loan with Fintechs.
AI-Based Credit Evaluation Process:
NBFCs don’t just rely on the traditional credit score and history compared to banks. As the new-to-credit individual has no credit score available, Fintech companies use AI-based technologies and machine learning to understand the consumer’s creditworthiness by analysing their earlier purchases on eCommerce sites, phone details, geo-targeting, etc.
Affordable Interest Rates:
The NBFCs also provide competitive interest rates; in some cases, they can offer lower interest rates than the banks. Some of them even don’t charge lending fees.
For instance, in Kenya, the lending rate is 12.15% in 2022, whereas if one opts for NBFCs, competitive interest rates may be available. An intending individual needs to take quotes from various NBFCs, survey the facilities, and choose the one that suits most.
Simplified Loan Eligibility:
When it comes to a business loan, traditional banks maintain strict rules before sanctioning compared to NBFCs. As a result, people in Nigeria, Kenya and Egypt bypass the conventional loan process and favour high-tech-supportive loan disbursal solutions. NBFCs have simpler and customer-friendly terms and policies, which attract many business individuals to incline towards them.
Digital Transformation in Financial Services
With the advent of new technologies such as robotic processing automation, blockchain, AI and machine learning, the Fintech companies are revolutionising the finance sector. The global Fintech market’s growth trajectory is incredibly increasing and forecasted to grow at a CGAR of 11.9% between 2022 and 2027.
People in Africa previously had limited access to formal loans and credit facilities; now, the tech-powered NBFC companies are eliminating the shortcomings of the traditional banks. The Fintech companies remarkably doubled to around $330.5 million in 2021 compared to last year.
Fintech enabling platforms, like the Vericash Digital Platform, have been using their innovative technologies and helping companies of all sizes transform their operations digitally. Its platform provides all the necessary tools for them to easily customize and design their financial products & services in quick, simple and cost effective manner providing them the agility and scalability to easily evolve and grow their business in the fastest time to market responsiveness.
The success story of Tyme bank inspires more bankers to adopt new technologies. Tyme Bank’s distribution network helped to reduce the cost and passed cost savings to its customers, and it has 30-50% lower transactional costs than other banks. As a result, the bank has successfully signed up 110,000 customers a month.
Significant Difference Between Traditional banks and Fintechs’ Lending Models
African traditional banks provide various types of loans, such as personal, vehicle, and business, but to be eligible, one needs to meet specific criteria. They have to ensure that no loan has been taken from the bank previously, a recent proof of income that reflects your last 3 salary deposits, and more. However, Fintech companies are gaining more popularity these days due to their various lending facilities such as Microloans, Nano loans, BNPL, Short term low-risk loans, and others with easy eligibility criteria removing manual process. For example, Nigeria-based startup Fintech company Aella Credit provides micro-loans to African SMEs. Other Fintechs like OppLoans offer online personal loans, bad credit loans, and even loans without credit checks on rates and terms. New-age digital banks are less judgemental than their traditional counterparts and more flexible with their eligibility criteria. By using AI technology and various data sources, the risk assessment and the probability of bad loans are much reduced in these Fintech platforms.
How is Digital Transformation Changing the World?
With rapid digital transition, business individuals are witnessing positive impacts such as competitiveness, faster and cost-saving operations, better customer and employee experience etc.
The impressive benefits have convinced many corporate owners to take up digital transformation and assess old school financing vs new digital financing as their business strategy. Around 91% of global finance leaders have introduced digital intervention in their businesses.
Fintech companies are the major part of this global digital transformation and are in high demand for their lower barriers of entry, customer-oriented, data and risk management. Furthermore, the market is expected to surpass $300 billion in 2030 as further improvements are made in banking, payments, lending, financial planning, and insurance.
The more Fintech companies flourish, with the help of new technologies like AI and a reduction in the cost. Because of its ability to cope with unstructured data and machine learning algorithms, AI redefines how financial services operate, satisfies customer-centric needs, and increases cybersecurity.
For example, Jumo built a scalable and automated platform for creating predictive data products and models. This will further help the financial service providers in Africa.
Moreover, we will see more regTech or regulatory technologies to prevent fraudulent activities, lessening the risk of data breaches in the financial sector. Hence, access to the funding will be more transparent, improved underwriting algorithms, and many more.
Challenges Faced by Financial Institutions during and after Pandemic
Traditional banking models received the hardest hit during and post-pandemic. The issues such as revenue pressure, low profitability, inaccessibility for many individuals, and many more contributed to huge losses in banking sectors.
Contraction in the economy compelled the banking sector to reduce the interest rates as well, thus falling behind the stipulated annual outcome. Moreover, lack of employment caused loan defaults from the borrowers, made even more difficult for the financial institutions to run their businesses properly.
Strategy to Transform from Old School to New Digital Financing
Significant financial instability and volatility made many NBFCs come forward and reach a maximum number of people who are in desperate need of loans. Unlike traditional financing, fintech companies focus more on digital mediums for various financial services.
With Fintechs, the requirement to use papers as documents has become zero. There is no need to wait in the queue to borrow money. These platforms use the web and mobile apps to connect with consumers for lending loans.
On the other hand, traditional banks take weeks to approve loans, and Fintech companies like Lydia take only one day to disburse the amount in the borrower’s account. FairMoney also sanctions loans up to 1 million Niara and free transfer within a very short time.
To conclude, the global financial sector is in constant transition. Instances of old school financing vs new digital financing show rapid adaptation of technologies in the financial domain.
Whether organisation or individual, getting faster loans and expedited documentation is everybody’s first choice now. As a result, NBFCs and microfinancing companies are rapidly moving from the traditional space to a digital platform.
About CIT Vericash
CIT VERICASH is a division of CIT GLOBAL, an international leading provider of innovative eCommerce and mCommerce software solutions and services with solid expertise spanning 25 years, since its establishment in Toronto, Canada in 1993. By applying CIT Global’s dedicated centers of excellence and its specialized leading products, in cooperation with its strategic partners, the company has delivered innovative and award-winning solutions to its clients in more than 48 countries, serving leading brands from North America, Europe, Asia Pacific, the Middle East, and Africa.