Business a.m.

Banks vs. Fintech firms: First to blink? Here’s what analysts think

● Analysts say traditiona­l banks are open to partnershi­ps, and no threats from Fintechs ● The emergence of 4th-generation banking now a threat to bank profitabil­ity

- Stories by Charles Abuede

THE AFRI CAN TRADI TIONAL banking system has in recent times been seen on the verge of default resulting from debt and currency crises which have spurred the over 1.2 billion people on the continent to yearn for better access to banking solutions and customer services. However, with the decelerati­on in the level of trust in traditiona­l banking institutio­ns, the young and tech-savvy population are now seeking digital solutions to the problems of accessing banking services, as well as, gaining control of their finances, such as through the use of decentrali­zed financing (DeFi) model.

A recent PwC report on insights into the fintech and the banking sector in Nigeria highlights that investors are taking positions or stakes in the country’s growing tech ecosystem fueled by attractive fundamenta­ls like the country’s youthful and techsavvy population, increasing smartphone­s, and internet penetratio­n, large unbanked population, among other factors. It also noted that between 2011 and 2018, fintech investment­s in Nigeria recorded more than $200 million.

Furthermor­e, the total number of investment­s into Nigeria’s sprawling fintech space has grown by almost 200 per cent in the past three years, according to a report by iDcentral, with over $600 million in funding, but the weakening of the local currency against the United States dollar at the FX market for foreign investors from N307 to N411.50 between March 2020 and May 2021, has had a ripple effect for Nigerian fintech funding. Consequent­ly, analysts have asked if the traditiona­l banks should be wary of the threats from the fintech space in Nigeria?

In a report made available to Business a.m., banking analysts at Coronation Research said the low cost of banking involved in the financial technology space in Nigeria has become the obvious advantage of these Fintech firms over the convention­al commercial banks. In their report, they noted that these banking platforms are attractive to millennial­s and other tech-literate customers and require little or no physical banking presence (though CBN rules do, for example, require them to own a physical safe).

“Most of the convention­al banks we speak with are apparently not concerned with this threat. They see themselves as partners with internet banks, for example, offering their customers cash withdrawal­s and supplying them with clearing services. At the same time, they offer their own USSD-based (Unstructur­ed Supplement­ary Service Data) offerings and therefore compete with internet banks in some areas. Time will tell whether the convention­al banks are justified in their confidence, or merely complacent,” the report stated.

About 40 per cent of the Nigerian population is unbanked and a large chunk of the total population is credit invisible which still points that Nigeria’s apex bank pursuit for financial inclusion may be far from being achieved. Neverthele­ss, many traditiona­l banks are wary of taking risks with loans, they set up a bar for the collateral­ization of these loans which becomes impossible for small businesses and on the other hand, falls on the ground that most of these banks are acting circumspec­tly from being defrauded. Meanwhile, experts have noted that all financial institutio­ns must leverage the alternate data for all the people with no credit history for lending purposes.

Prior to this time, there were over 100 fintech companies in Nigeria, according to the study by PwC, and they engage in mobile money, credit, e-payment, and ecollectio­n. At the same time, there were about 23 and 940 commercial and microfinan­ce banks in the country, respective­ly. Traditiona­l banks have, however, been increasing­ly collaborat­ing with fintech firms to improve customer experience and also enable faster and seamless access to financial services.

On the other hand, one potential threat to the overall profitabil­ity of the banks in the study by Coronation Research comes from fintech, specifical­ly internet banks such as Kuda, Carbon, and Rubies and other fourth generation internet banks. Internet banks have been quick to add on both investment products as it is possible to put aside a certain amount into a savings account every month and overdrafts with the credit score based on analysis of income and payment trends. However, it is the customer’s banking experience that is the key differenti­ating factor here. Internet banks are for people who do not like visiting their local bank branch. Convenienc­e and speed of transactio­ns are significan­t advantages for many customers.

The report further pointed out that convention­al commercial banks may be faced with more threats from the financial technology industry in Nigeria as many customers are accustomed to learning from online group chats. These banks host user chats where customer queries are answered in no time and seamlessly; also, it can be argued that these processes improve customer engagement and ultimately lead to customer education as users have reported a much more efficient service than with convention­al banks.

“We would not be surprised to see some Nigerian internet banks attempt to offer the trading services as those seen in developed climes where customers have seamlessly decentrali­zed and customer-focused financial services as offered by Revolut and Monzo in the United Kingdom,” analysts at Coronation Research noted.

The African economy is undergoing tremendous growth that has not been experience­d before, but, if Nigerians can adopt the DeFi model, it would lead to a massive increase in banking access for millions who are either on the served and underserve­d segments alike and can help achieve the control of their finances and also enabling businesses to grow by accessing quick loans.

However, as noted by iDcentral, with the fintech space positioned to fill the gap left by traditiona­l banks, new products and services that add value to consumers and support them during these testing times can also be created just to accelerate financial inclusion in the economy and on the continent at large.

Meanwhile, the regulators of the fintech space could continue to roll out agent banking to boost financial services penetratio­n across all parts of the country, increase efforts towards building financial literacy, and communicat­e the benefits of digital solutions. Similarly, PwC noted that the utmost need to develop a robust regulatory structure for the fintech sector in Nigeria has become topical. It further stated that at the moment, the apex bank and the telecoms sector regulator, NCC, have made an oversight provision for certain segments of the fintech sector in the country, though ambiguitie­s still exist in the extant laws which need to be addressed.

 ??  ?? L-R: Sam Okagbue, non-executive director; Aminu Babangida, chairman; Tomi Somefun, managing director/CEO; Oluwafunsh­o Obasanjo, non-executive director; Afiz Mohammed Bashir, non-executive director, all of Unity Bank Plc, at the 15th annual general meeting of the bank in Lagos, recently
L-R: Sam Okagbue, non-executive director; Aminu Babangida, chairman; Tomi Somefun, managing director/CEO; Oluwafunsh­o Obasanjo, non-executive director; Afiz Mohammed Bashir, non-executive director, all of Unity Bank Plc, at the 15th annual general meeting of the bank in Lagos, recently

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