Banks’ Fresh Headache

The changing banking landscape occasioned by increasing activities of financial technology companies and the planned introduction of Payment Service Bank may change commercial banks’ operating models, writes Obinna Chima

There has been a surge in financial technology (fintech) companies in the country. These firms which have continued to encroach in commercial banks’ businesses, clearly threatens the profitability of financial institutions, especially at a time when Nigerian banks are facing significant earnings-constraining regulations compared to their peers in the continent.

For instance, a recent report had shown that some fintech firms have started targeting the deposit and loans segments of traditional banks, with a view to taking part of the market share of the financial institutions.

The report by Lagos-based Financial Derivatives Company Limited (FDC), cited an example of PiggyBank, which uses recurring card payments to allow its customers create and fund a savings account on their mobile phone. This, according to the report, has proven popular among working class Nigerian youths as it offers an alternative to a traditional fixed deposit account which requires a number of visits to a physical branch to set up.

Indeed, as technologies evolve, customer taste and lifestyles also change, prompting the development of technology solutions that would meet customers’ needs and lifestyles, as they relate to financial transactions.

The emergence of fintechs changed the whole narrative in the banking sector as they continue to come up with disruptive technology solutions that have changed the face of banking globally.

In fact, fintechs offer customers a superior service, at a lower cost, through the efficiencies of technology.

On the other hand, commercial banks are financial intermediaries: they take money from people looking to save (deposits) and give to people looking to borrow (loans). They generate interest on loans, and they collect fees and commissions on numerous value added services to the depositors, for example: money transfers, foreign exchange transactions, and bill payments.

Clearly, the incursion by the fintechs is causing banks headache as they strive daily to maintain their market share.

And the planned introduction of Payment Service Bank is expected to further heighten competition in the industry.

Role of PSBs

The Central Bank of Nigeria (CBN) had in the last quarter of 2018, unveiled the operational guidelines for the PSBs. The move was in furtherance of the CBN’s mandate of promoting a sound financial system and enhancing access to financial services for low income earners and unbanked segments of the society.

The PSBs are to operate mostly in the rural areas and unbanked locations, targeting financially excluded persons, with not less than 25 per cent financial service touch points in such rural areas as defined by the CBN from time to time, the guidelines said.

According to the CBN, the key objective of setting up PSBs is to enhance financial inclusion by increasing access to deposit products and payment/remittance services to small businesses, low-income households and other financially excluded entities through high-volume low-value transactions in a secured technology-driven environment.

The new banks are to also enter into direct partnership with card scheme operators but such cards shall not be eligible for foreign currency transactions.

They are to deploy ATMs in some of these areas; deploy Point of Sale devices and be at liberty to operate through banking agents (in line with the CBN’s Guidelines for the Regulation of Agent Banking and Agent Banking Relationships in Nigeria).

Accordingly, PSBs are envisioned to facilitate high-volume low-value transactions in remittance services, micro-savings and withdrawal services in a secured technology-driven environment to further deepen financial inclusion and help in attaining the policy objective of 20 per cent exclusion rate by 2020.

Already, MTN Nigeria and Airtel Nigeria have announced plan to set up a PSBs in Nigeria.

Airtel had said the PSBs would help promote financial inclusion as well as enhance access to financial services to the rural poor, low income earners and financially excluded of the society.

The Chief Executive Officer and Managing Director of Airtel Nigeria, Mr. Segun Ogunsanya, had said, “We have commenced the process of applying for a license as we believe that we are at a vantage position to empower and connect more Nigerians as well as deliver mobile banking services to the door steps of the financially excluded.”

On his part, the Chief Executive Officer of MTN, Mr. Rob Shuter, had said after securing the licence, it would be followed by a concerted financial-services roll out in 2019 to its more than 60 million Nigerian subscribers.

Owing to this, the Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, argued that the level of rivalry in the banking sector was expected to deepen this year.

According to him, because the industry was consolidating, the level of rivalry between competitors would intensify and when they compete, they reduce price and they give consumers more choice.

“The banks are being cannibalised from the outside by the telecom companies (telecoms) because the telecoms are going to have mobile payment systems and they (the telecoms) have very deep pockets, so they invest significantly.

“Telecoms are the ones that invest in capital expenditure. They invest on average between $1 billion and $2 billion annually on capital expenditure, which the banks can never afford to spend.

“So, because of this, the banking industry is going to go through a major shake out. The banks are already under pressure, but the pressure would intensify in the coming years,” he added.

Repositioning for Competition

However, some chief executive officers (CEOs) of commercial banks in the country have allayed concerns about the planned introduction of the PSBs.

They insisted that the proposed service banks would not eat deep into their market share in the retail banking space.

The CEOs indicated that even though the development would bring about increased competition, they would also not relent in introducing measures to ensure that the commercial banks remain dominant in the sector.

The Managing Director, Ecobank Nigeria, Mr. Patrick Akinwuntan, noted that while the PSBs could bring about increased competition, “competition in itself is not negative.”

He added: “If you actually talk of active financial participation, the percentage will be less than 30 per cent because you have various levels.

“You have the banked, the underbanked and the unbanked. If you add the underbanked and the unbanked, we will be closer to 70 per cent.

“And so the opportunity is there for more participants. We have demonstrated that in various countries like Ghana, Cote d’ivoire, Republic of Benin, Togo, Liberia, Kenya, Rwanda, Uganda, Cameroon, that we operate, that we have the ability to collaborate well with telcos that have participated in this space.

“At the end of the day participants need a strong bank as the final repository. We look forward to collaborating with participants in this space. “We will embrace collaboration in the evolving market space that we are looking forward to in Nigeria. I think it is a bold step by the central bank, it is a commitment to bring financial services to every household.”

To the chief executive officer of Heritage Bank, Mr. Ifie Sekibo, the PSBs are essentially to assist banks in driving financial inclusion.

“For us it is an enabler for the financial inclusion, it is not necessarily a competition. Yes, it is competition to the extent that we will compete with them in the financial inclusion space, our agency banking products will compete with their payment platform, but we all have very good payment platforms.

“For most of us, our payment platforms have developed much more than they could even be able to compete with.

“But for us, it is important that we have such organisations that helps the lower side of our economy where people put money under their beds or leave money in their stores and when fire comes it destroys both the money and their investment and it is back to square one.

“We need to eliminate that; we need to bring in as much people under the formal platform so we can measure them. Today we don’t have good measurement for how much money is in circulation in Nigeria because we don’t even know.

“But if we can get these new institutions join us to expand the financial inclusion space we believe it is better for everybody and it is better for the economy.”

On the other hand, Guaranty Trust Bank Plc in its recently released 2019 economic outlook pointed out that the development would be net negative for the industry.

It, however, stated that the PSBs would be positive for customers, “as it has the capacity to improve customer service, increase product and service offerings, enhance financial inclusion and drive the adoption of a digitisation of banking services.”

GTBank noted that the banking industry continues to face increasing competition from fintech companies and other non-bank companies offering a wide range of financial services to the retail and MSME segments leveraging technology.

According to the financial institution, fintechs have been able to achieve a fair disruption of the retail banking landscape through the deployment of simplified banking services which has revolutionised the service offerings of commercial banks. “It is however believed that their capacity to effectively gain significant market share is limited without collaboration. “The relative ease with which fintechs approached and gained market share in the retail lending space, a hitherto unserved market, has prompted commercial banks to give this more focus. “We expect to see an increase in competition amongst banks to capture market share in the retail and micro/small business space over the course of 2019,” it added.

The CEO of the bank, Mr. Segun Agbaje, had stressed the need for banks to embrace digital transformation in other to create an entirely new banking experience that meet the demands and expectations of today’s millennials. He urged banks to be innovative so as not to lose their market share to competitors in the digital banking space.

In addition, he advised commercial banks to build business models and create platforms to meet the needs of their customers always.

Therefore, there is need for commercial banks to deepen their customer relationships and enhance customer service delivery. In fact, there is need for banks to rebuild their organisations around the customer, simplify and structurally reduce cost and be innovative.