IMPACT OF FINTECH ON THE GROWTH OF SMES IN NIGERIA (A CASE STUDY OF PAYSTACK)
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
Review of literature covers; theoretical review and empirical review including summary for the literature review. The study reviews available literature from journals, books, reports, and newsletters from both developing and developed nations.
2.2 Theoretical Literature Review
This study will be based on Fintech Business Models theory, Merton’s Market Efficiency theory of innovation, non bank led theory on innovation and Schumpeterian theory of innovation as discussed below.
2.2.1 Fintech Business Models Theory
Wambari and Mwaura (2009) asserts that any model of mobile/branchless banking aimed at attracting low income people will depend on banking agent ie outlets that conduct financial transactions on behave of the financial institutions. They argue that agent banking is a key part of Fintech business model which tent to creat the link between the banks and their clients. The new Fintech business models tend to give new market structures for offering existing products of financial services (savings, credits, transactions). The banking business models theory classifies branchless banking into three models; Bank focused model, Bank –led model, non- bank led model.
(i) Bank –Focused Model
Physical bank use low-cost delivery channels different from the traditional channels to offer banking services to its customers. Examples are Automatic Teller Machines (ATMs), Internet
Banking, Mobile phone banking, all aimed to offer specific banking services to bank clients.
(ii) Bank –Led Model
According to this model, financial services are offered using retail agents or mobile devices rather than using physical banks. The model offers the opportunity to increase financial services inclusion by offering cheaper various delivery channel, different trade partners (chain stores, telecom) who have capacity and uniquemarket distinct from traditional banks.
(iii) Non- Bank Led Model
Here, the bank acts only as a custody of the excess money and the other service providers (eg telecom) does all the transactions. Kumar, et al (2006) argued that here customers do not operate with a bank but transact using mobile devices or prepaid cards and agents. Clients covert their funds into mobile money stored in a virtual electronic money account not linked to an individual bank. This model is risky because the regulatory environment of the non bank operators might not give much importance to know your customer or customer identification. This may provide leeway for Money Laundering and Terrorism Financing (ML/FT).
Mobile baking business models theory is important to this study by helping in the understanding the alternative low cost and more convenient branchless bank delivery channels and the inherent risks likely when financial institutions allow its customers to operate Fintech in their financial transactions.
2.2.2 Technology Acceptance Model (TAM)
This theory shows how and why users adopt a technology. Presented with new technology, users are faced with several perceptions that affect their decision to use it. These are perceived usefulness (level of accepting that certain technology will improve productivity) and perceived easiness of use (level of accepting that using certain technology will be effortless) (Davis,1989). The two factors though determine the adoption and usage of new technology, they are affected by other factors like security, cost, accessibility, trust (Lu,Yu, Liu and Yao ,2003). Perceived effortless of use influences users perception on the usefulness which both determines perceived use and the real use of the technology (Viehland and Leong, 2007). This model has been commonly used to determine the level of acceptance and use of a technology depending on the users perception on usefulness and easiness of use (Richardson and Ndubisi, 2002). This study used TAM as the study model and considered factors like accessibility, low cost and security. This theory is important to the study by explaining how small business owners have adopted new technology in conducting their businesses. This is particulary the case where small business make use of M-banking in their money transaction which has led to fast, secure and more accessible money transactions.
2.2.3 Demand and Supply side Twin Theory
This model explains financial inclusion and financial literacy (Chakrabarty, 2011). Financial inclusion provides financial markets and services demanded by people while financial literacy stimulates the demand side. Growth in financial inclusion is being driven by demand and supply factors (Mehrotra et al., 2009). Banks are supposed to mitigate the supply side processes that hinter poor people from accessing the financial markets. On the demand side, factors like low income or asset holding prevent financial inclusion. Lack of financial inclusion has resorted to many SMEs rely on personal savings or internal sources to finance their businesses. The banks supply side interventions are key to unlocking this financial exclusivity and enabling SMEs access financial services. Most banks offer financial products and services not customized to informal sector, provide rigid and complex documented processes which deter technology availability an acceptance (Simiyu, 2015).With the introduction of the mobile phones, most most of the current financial inclusion channels focuses on hand held devices. This theory is applicable in this study because financial institutions have innovated Fintech that has opened up the financial market and created efficiency in financial transaction where money transaction between SMEs and customers is done in a more speedily manner and at cost effective ways therefore enhancing growth of businesses from voluminous sales that they are making.
2.3 Empirical Literature Review
This chapter covers studies carried out on Fintech services factors of accessibility, costs and security which have contributed to the growth of SMEs.
2.3.1 Accessibility
Accessibility, which means the ability to reach the intended services is a key advantage of mobile payment services ( Pagani , 2004). SMEs have greatly benefited from using mobile money transfers with agents spread throughout the country. Due to ease of accessibility, SME owners rarely visit the bank meaning they have more time in their businesses. With Fintech ,SME owners can easly receive or send money to their banks anywhere (Omwonsa, 2009). Most of the SME owners know how to use mobile payment services which demand no training before use and are easy to use .
Schierz, Schilke and Wirtz (2010) revealed that mobile technology usage has become part of users’ daily life. Despite this, mobile payment is amazingly one of the rarely mobile services being used, because mobile payment services have not been fully accepted by the clients. The study by Schierz, Schilke and Wirtz focused on variables affecting users’ acceptance of mobile payment services. The study results indicated significant effects of compatibility.subjective norm.and individual mobility. The study recommended more effort in marketing of mobile payment services to attract clients’ perceptions to the technology.
Omwansa (2009) while studying M-Pesa progress in Nigeria found that the respondents were aware of the service. Mobile transfer services were found to be used by micro business owners because they spend less time visiting the bank and therefore create extra time in rmanaging their businesses. The study also revealed that mobile services on money transfer were easy to use as they need no training and were very convenient when used.
2.3.2 Transaction Costs
Omwansa (2009) revealed that subscribers to mobile money transfers have adopted the technology because it’s lesser cheaper to services at the banking hall. He asserts that sending money through mobile phone is much cheaper than using banks and other money transfer channels like securical firms. The lower transaction costs benefit is passed on to consumers (Mallat, 2007).Most SMEs owners have mobile hand sets easy to operate and with all functionalities required in Fintech making the transaction costs affordable and being below what banks charge.
Mallat (2007) while studying consumer usage of mobile payments used six focused groups’ sessions, examined client acceptance of a new mobile payment service. . The study indicated that mobile payments complimented small value cash payments and were more compatible with digital devices and service purchases. The study, however, suggested that certain situational limitations like absence of other payment means or urgency of the service affected the benefits accruing from mobile payments. In this study, time, place, independence, availability, remote purchases, and lack of queue were suggested as the benefits accruing on use of mobile payments. The study indicated a number of barriers to the acceptance of mobile payments .These include; high payment costs, complex payment procedures, limited widespread merchant acceptance, and perceived risks.
Jack and Suri (2014) in their study on Transactions Costs and risk Sharing on SMEs in Nigeria revealed a great reduction in transaction costs and entrepreneurs can now conduct financial transactions over the phone without having to travel to banks. Njenga (2009), while studying Mobile phone banking on usage experiences in Nigeria found that there was a large business potential to be exploited in the Nigerian Fintech sector. The study found that most customers accepted the role played by the Fintech services in their daily activities. Njenga (2009) asserts that the mode of usage is mostly influenced by missions and marketing strategies of M-Banking service providers. M-Banking users tend to use the service in many ways depending on the nature of activities and urgency, however, the “hype factor” is a unique dimension of use. Here, the usage of Fintech ic caused by excitement and imagination originating from the M-banking utilization environment. Banks might be better off by ofering the service at lower costs to entice more customers and not focuse on high charges which scare off potential customers.This way banks can increase their revenue sources through increased transactions volume.
2.3.3 Security
In Fintech, users perception on the security and trust to the payment service providers is necessary (Siau et al., 2004: Mallat, 2007).The mobile transactions safety involves; lack of delay of transactions, completeness of the transactions, customer identification and confidentiality of the customer information. Users of Fintech transactions are more concerned on security and safety which revolves in the use of PIN and security code (Nam, Yi, Lee and Lim, 2005). Shon and Swatman, (1998), assert that the key requirement for any electronic financial transaction is confidentiality, authedication, data integrity and non-reputation. Other security features include users’ anonymity and privacy (Jawyawardhena and Foley, 1998: Shon and Swatman, 1998: Mallat, 2007). Njenga (2009) argues that the demand of high M-banking usage depend on wide network coverage and quality network connections. This ensures easy, speedy and cheap access mobile transactions affordable to all prospective partakers. With wide network coverage and good connections new SMEs can be opened in deep remote areas and or existing SMEs owner can expand their businesses in areas which could have been unreachable without the network operation.
Omwansa (2009) found that losing a mobile phone does not mean lose of one’s money because one’s mobile money account cannot be accessed without a correct personal identification number (PIN). Fintech proves to be both convenient and safe service that users carry around their E- money and can withdraw cash any time at a minimal fee without inconveniences. To use mobile payment system, one should strongly believe in the safety and trust in the providers of the payment system. Users of any payment system are primarily concerned with the Security and safety of mobile payment transactions. Safety means lack of delay or incompleteness of a transaction and non disclosure of private information payment transactions. These security and privacy issues are ensured through the use of the secret code for personal identification for every
single M- banking transaction. Omwansa recommended that customer information
confidentiality, transaction authentication, data integrity and security were the sole requirements for any financial transaction in Fintech environment.
Merritt (2011) revealed that mobile money transfer has inherent risks, just like all other retail payments systems of ; privacy and security, money laundering, user protection, fraud, credit and liquidity. The study found that mobile money services were minimizing the inherent risks in cash-based payment services, thereby increasing openness in cash flows and enabling risk management through the regulation of the payment systems. The study recommended consideration of numerous issues in order to minimize the risks that may be posed by mobile phone payments. Other non bank key players involved in mobile payments, like telecom firms’, their agents and technology vendors may pose more risks. The study noted existence of unique risks to telecom firms which may not be detected or monitored by thefinancial institutions and their regulators due to experience limitations. The multiple regulations exercised on banking and telecommunications sectors are to blame because they operate autonomously and have limitations of joint cooperation so as to provide effective oversight onr mobile money transfers. There is need to merging the two distinct sectors to form an effective joint regulatory environment across all sectors involved in mobile money transactions.
Mbogo (2010) applied theory of Technology Acceptance Model (TAM) on his studyon the impact of mobile payments on the success and growth of micro-business in Nigeria .The TAM model was extended to include other factors capable ofpredicting success and growth in microbusinesses. The study revealed that acceptance of the mobile money transfer technology and its influencing factors like accessibility, cost, convenience and security were related to perceived use and actual usage by the SMEs to improve their success and hence growth.
2.4 Summary
The effect of mobile technological innovation like Fintech services depend primarily on accessibility, costs and security on the services being offered. The studies have shown that the mobile money transfer has resulted in secure and faster accessibility of funds to remote areas enabling entrepreneurs to run businesses in those areas which were financially excluded before the Fintech innovations. The study also revealed that transaction costs have come down as a result of M-banking since only a small fee is involved in money transaction. This has made it easier for SMEs to access or deposit funds frequently to the financial institutions and also save funds which are re invested to grow the businesses. Entrepreneurs can now access credit or repay loans instantly at cheap transaction costs compared to when they had to visit the physical bank Offices.
The adoption of M-banking in SMEs has also led to more security in conducting daily businesses. The use of cashless system of doing businesses has avoided unnecessary losses when carrying out transactions in businesses. This means SMEs owners in unsecure areas can transact large amounts of money in receipts or payments without fear giving them opportunity to expand their stocks of goods and offer more services all over the region, hence more growth.