Banks vs Fintech - How Fintech is affecting forex in Africa

Oct 18, 2017

Driven by efficiency, Fintechs utilize software resulting in instant, paperless transactions.

Naturally, any service - be it for business or leisure - that seeks to fulfil basic but core needs will draw demand. One of those services is intermediation. Intermediation can happen in many spheres but since money primes the world, there is an immense demand for intermediaries or exchanges to deliver and live up to consumers' expectations. With international business, we have Foreign Exchange, often denoted as Forex or simply FX, that draws and keep things running.

What is Forex?

Forex is simply a marketplace for trading currencies. It is a free, decentralised market which is extremely liquid and heavily capitalized. Currencies, in this case, are fiat coins or notes that are acceptable as money by order of the issuing government often applicable within a given jurisdiction.

Because international trade must go on irrespective of currency differences, Forex enables conversion of fiat currencies from one jurisdiction to another as goods or services change hand. It is because of this that Forex market capitalization is in multiples of even the largest stock exchanges in the world. In fact, recent data from Bank of International Settlements gives a ball-park figure of about $5.1T per day. To put it in perspective, that is about 40 times the average trade volume on the NYSE.

As impressive as it may be, Forex is nothing without a network of international banks spread across the world. Located in different time zones and with all transactions done electronically, currencies can be changed 24/7 either through the spot or the futures market. An FX Spot market offers a quote or a real-time price where one currency can be settled for another on the spot. It has also taken precedence over futures or forwards market which is built over it mainly because of automation.

 

The disruptive effects of 21st century financial companies…

Why Forex though? First off, Forex is not a substitute for banking. It is a channel of free market for institutional and individual trader around the world - and in fact, Forex daily volumes particularly in Africa, continue to balloon. Thanks to an economy stepping gas on the development pedal, the accelerating economies and the unexplored market, more international brands within Africa and the rest of the world are eyeing a pie of this African dream.  Empirical data from the IMF suggests that Africa will be the next frontier in propelling the currently stagnant global growth forward.

However, despite the hysteria, things are not so rosy after all. International and regional banks around Africa are beginning to feel the heat as Fintechs take root. Fintechs are disruptive financial companies that leverage on the internet to provide multiple solutions at a go.

The motivation behind Fintechs….

Driven by efficiency, Fintechs utilize software resulting in instant, paperless transactions. They also rely on a mix of other technologies such as artificial intelligence and big data to innovate and consequently revolutionize business models.

In fact data from Disrupt Africa indicates that there are more than 301 Fintech startups across Africa who have cumulatively secured more than $90M of funds since 2015. Most of them seek to provide low-cost channels of payment or fund transfer which was and still is a gapping concern in Africa.

A possible solution to this impasse…

Therefore, as technology becomes readily available and internet penetration increase, Fintechs will likely shake the very core of status quo unless an inevitable collaboration happens between banks, service providers and these "disruptive" companies. Ultimately, their main objective is to provide reliable, convenient and attractive services to end users desirous of reducing transaction costs. 

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