#20 Future of Finance

How major trends in tech could affect financial services particularly in Africa

Hi all - This is the 20th edition of Frontier Fintech. A big thanks to my regular readers and subscribers. To those who are yet to subscribe, hit the subscribe button below and share with your colleagues and friends. 🚀

This stack (internet, cloud, mobile) has enabled us to do old school financial services in a digital way. While the first generation of fintech companies created billions of dollars of value, because of new enablers like Plaid, Cross River Bank, Finix and Wisetack, we’re now moving past that phase to one where fintech moves from being a business model unto itself, to being the fourth layer in the stack or the “fourth platform,” wherein financial functions like payments, lending and insurance join connectivity, intelligence and ubiquity as layers of the stack upon which new companies can be built.

John Street Capital

This week I attempt to imagine where financial services will be in 10 years time, particularly from an African perspective. The continual impact of technology on finance continues to grow rapidly and this growth is expected to accelerate. Often when predicting the future in an internet driven world, we tend to be conservative largely because our world has grown on a linear scale for long periods of time.

My interest in this topic stems from the fact that like all things, narratives are critical for understanding the world and thus making decisions for the future. Fintech as the intersection of finance and technology also has pervasive narratives that if you’re not careful can drive entrepreneurs and investors to make the wrong decisions. What I mean by this is that for instance, globally the narrative around tech has revolved around some ideas such as;

1. Creating beautiful and seamless user experiences;

2. Enabling embedded finance and open banking;

3. Decentralised finance and crypto;

Upon further reflection, particularly since I started this newsletter, the obvious realisation is that Africa and a lot of the developing world needs a different conversation around Fintech. Do African clients need seamless user experiences or suitable financial products that allow them to grow their income? What’s the role of open banking in a mobile money world or worse, a world in which less than 50% of adults have bank accounts? Are we ready for De-Fi whose main innovation is a more robust and transparent accounting system? Or are we better off creating value with the resources we have and growing intra-African trade?

With this in mind, I take a look at some of the mega trends that will impact industry and finance and then analyse how Africans can ride on these trends to solve core problems such as lack of access to credit, financial exclusion, economic opportunity and economic growth.

Mega Trends that will Impact Finance and Banking Significantly

5G and IoT

5G is critical technology and a foundational element of industry 4.0. 5G is expected to usher in a new paradigm of integration between humans, things and cyber systems. To understand 5G it’s important to understand some core elements. 

1. 4G utilises mid-radio frequencies whereas 2G and 3G use low radio frequencies. High radio frequencies are used largely in satellite communication as well as car sensors. 5G enables all three frequencies to be utilised at once thus having the benefits of higher capacity as well as scenario specific utilisation. For instance, a smart watch may need low level frequencies due to battery usage whereas an automated robot will require the low latency available with high radio frequencies;

2. 5G has 100x the capacity of 4G increasing download speeds to 10,000 Mbps from 100Mbps. What’s important to note about the increased capacity is the fact that it will enable a 100x increase in data uploads. Currently, mobile networks are used more for downloads than uploads;

3. 5G has significant processing power thus making it function more than just a network, but as a distributed data centre. This enables computing power to shift from the cloud to the “edge”. Anticipated innovations like AR glasses then become economical because 5G will handle the heavy computing work thus obviating the need for significant battery usage. The same will apply amongst a multitude of devices

4. 5G enables network slicing meaning that specific services can get their own slice of the network. For instance, ambulances can get a specific slice that corresponds to their precise needs in terms of latency, speed and reliability. A different slice can be availed for streaming movies and another one for smart factories.

The natural outcome of 5G will be the maturing of IoT as an element of modern societal design that encompasses lifestyle, finance and production. Things in this case can refer to normal devices such as fridges, cars, factory machines as well as sensors and trucks. The result will be smarter cities and companies driven by increased data and information. 

Source: Thales

AI and Machine Learning

Plenty of ink has been spilled discussing the impact of Artificial Intelligence and Machine Learning on banking and finance. AI and ML will definitely improve elements such as personalisation, credit decisioning as well as operations. From the front end to the bank-end of banking and finance. Nonetheless, finance practitioners also need to be cognisant of the impact AI and ML will have on other industries which are ultimately bank customers. 

Driving the growth in AI and ML are factors such as 5G and the subsequent growth in data volumes as well as increases in the core technologies that enable AI and ML at scale. 

Source: Softbank

The slides above from the FY2020 Softbank investor presentation show that Graphics Processing Unit capabilities, Autonomous Vehicle Processors and the training time for large data sets (defined in this case as a 1 trillion parameter model) are all improving at non-linear speeds. The result is that AI and ML will impact every imaginable industry. Farmers will be able to better predict crop yields using computer imaging techniques. These same techniques will enable retailers to better manage their inventory levels. Logistics systems will be able to better predict routes and schedules whilst factories will significantly improve their efficiency and operating models.

Incumbents in non-bank industries will be significantly disrupted. AI and ML as a service will overtime be perfected enabling small companies to benefit from enterprise grade AI. 

The above is an interesting video on how AI is impacting farming.

Big Data

Data should be seen as the fourth factor of production, the 4 in industry 4.0. Data coupled with smartphones, AI and its subsequent impact on personalisation will have the following consequences;