Unmasking regressive banking

In today’s fast-paced world marked by technological advancements and social progress, the banking industry has faced criticism for practices that are seen as regressive, monopolistic, and lacking innovation.

Some argue that traditional banks, driven primarily by profit and control, have hindered financial inclusivity, discouraged collaboration with fintech companies, and stifled innovation. This article aims to shed light on these concerns, highlighting specific issues and proposing potential solutions to foster a more progressive and consumer-centric banking landscape.

One significant issue within the banking industry is the impact of monopolistic pricing decisions on fintech collaboration. Traditional banks, often holding a monopoly on certain financial services, have the power to set prices at their discretion.

This makes it challenging for fintech startups to compete on a level playing field, as they are forced to charge higher prices to generate profits. Additionally, the complex pricing structures within banks create confusion and hinder collaboration with fintech innovators. This leads to wasted time and resources, ultimately discouraging fintechs from engaging with banks.

Another aspect that affects fintech innovation is the reliance on market interest rates as the baseline for pricing new features. Fintech startups often have limited revenue streams and are required to build profit margins on top of the bank’s revenue expectations from day one. This makes it difficult to offer new features at affordable prices, thereby limiting consumer access to innovative financial services.

Digital payments have emerged as a transformative force in the financial services industry, revolutionizing the way transactions are conducted. However, even in this realm, pricing decisions present challenges to fintech collaboration. Banks incur costs related to digital infrastructure, particularly in terms of protecting and recovering from ‘Treasury opportunity loss’ resulting from instant debits and settlements.

While these costs are borne by the banks, the revenue generated from digital payments is often attributed to the digital shop, which may or may not fall under the corporate or retail banking umbrella.

This misalignment of revenue allocation creates a lack of interest among corporate and retail banking divisions in facilitating fintech collaborations unless they result in a significant inflow of deposits. This requirement places an additional burden on fintechs, who must navigate the complex landscape of collaborating with banks while meeting their own financial obligations.

To illustrate these challenges, let’s consider a hypothetical fintech company specializing in innovative digital payment solutions. They have developed a cutting-edge app that enables seamless transactions and offers unique features for businesses. The fintech startup approaches a traditional bank to collaborate and leverage its existing infrastructure to expand their reach.

However, they encounter disinterest from both the corporate and retail banking divisions. The corporate division argues that without a substantial deposit inflow, the collaboration is of limited value. The retail banking division perceives the fintech’s revenue as attributed to the digital shop falling outside their domain, which makes them less inclined to support the collaboration. Both divisions fail to recognize how collaboration can enhance customer loyalty through digital exchange.

Addressing the monopolistic tendencies in banking pricing decisions requires implementing measures that promote collaboration with fintech startups and drive innovation. Adopting transparency in pricing structures would foster a more level playing field, empowering Fintechs to compete effectively.

Providing clarity regarding costs associated with specific financial services would stimulate healthy market competition and benefit consumers.

Additionally, banks should work closely with regulators to establish fair and equitable pricing standards for financial services, ensuring that all consumers, regardless of their financial situation, have access to affordable banking services. Active engagement with regulators can create an environment that fosters fair competition and prioritizes consumer welfare.

There are high expectations from the State Bank of Pakistan (SBP) to bring down payment costs through state-owned payment infrastructure like Raast/RTGS and to control or even subsidize financing pricing for strategic technological interventions.

Banks should adopt a more holistic view of revenue attribution, considering the overall relationship benefits of collaborating with fintechs instead of solely focusing on departmental profitability. Recognizing that revenue generated from fintech collaborations indirectly contributes to the bank’s overall success would help break free from the limited scope of traditional revenue allocation and open the door to meaningful partnerships.

Copyright Business Recorder, 2023