“The target customer segment, the base of the pyramid segment, of the Agent Banking and USSD Banking offerings is largely the same as the Payment Service Banks’ target customers. As such, most banks will accelerate the rollout of their Agent Banking and USSD Banking offerings, and position to gain competitive advantage over the telcos.”
In late October, the Central Bank of Nigeria (CBN) released guidelines for the licensing and regulation of payment service banks (PSBs). According to the apex bank, “the essence of the regulation is to leverage on technology to promote financial inclusion and enhance access to financial services to the rural poor, low income earners and financially excluded of the society.”
This was the central bank’s response to the increasing possibility that its goal of ensuring over 80 per cent of bankable adults have access to financial services by 2020 may not be achieved. It did not mince words: “Despite several initiatives including the introduction of microfinance banking, agent banking, tiered know-your-customer requirements and mobile money operation in pursuit of this objective, the inclusion rate remains below expectation.”
According to the central bank’s guidelines, PSBs would be able to accept deposits from individuals and small businesses, carry out payments and remittances, sell foreign currencies, issue debit and pre-paid cards, operate electronic wallets, render financial advisory services, and invest in government securities.
PSBs would, however, not be able to grant loans, advances and guarantees. They would also not be able to accept foreign currency deposits. The underwriting of insurance would not be permissible either. Furthermore, PSBs would not be allowed to accept any closed scheme electronic value like airtime as a form of deposit or payment. These restrictions, the CBN likely hopes, would ensure that banks and insurance firms are able to keep their businesses relatively unperturbed.
Since PSBs are primarily “expected to leverage on mobile and digital channels”, mobile telecommunication companies are probably best suited for the task. And they are eager to perform it. In November, chief executive Rob Shuter of South Africa’s MTN, which is probably the telecoms firm most Nigerian banks are worried about, announced his firm would be applying for a mobile money license. And if all goes according to plan, MTN would launch the service no later than the second quarter of 2019. With more than 50 million subscribers to its mobile phone service already, MTN could easily become a dominant player in the Nigerian banking sector.
What Nigeria is now doing is not novel, in any case. More than 70 per cent of Kenyans already use their mobile phones to access financial services, for instance. And Kenyan banks and telecom firms involved in the sector have managed to get along just fine. So how would banks react in the Nigerian case?
…banks have instead chosen to diversify their offerings into traditionally non-banking but increasingly valuable ancilliary services. That way, they are more valuable to their customers and thus make it difficult for them to switch to other financial services providers.
But first, how are global banks responding to digital and technological disruptions to their industry? In November, the Financial Times asked bankers, consultants and other relevant stakeholders. Their responses could be grouped into five; namely: Attack, Acquire, Partner, Diversify or Change.
Some banks have simply “launched their own digital banks”, an “attack” strategy. Others have taken the acquisition route by taking over fintech firms. Partnerships are also an increasingly attractive option for banks. But they tend to be between big players in the respective sectors.
Other banks have instead chosen to diversify their offerings into traditionally non-banking but increasingly valuable ancilliary services. That way, they are more valuable to their customers and thus make it difficult for them to switch to other financial services providers.
More radically, some banks have simply decided to change their business models all together to become more digitally relevant.
Which of these options is likely to be the response of Nigerian banks?
Compete
Adesola Adeduntan, chief executive of First Bank, one of Nigeria’s leading banks, envisages two likely responses. For the first one, Adeduntan says banks could chose to compete. How so?
“Recall that prior to the release of the guidelines for the licensing and regulation of Payment Service Banks, most Nigerian Banks had already embarked on the rollout of the Agent Banking and Unstructured Supplementary Service Data (USSD) Banking service offerings.”
“The target customer segment, the base of the pyramid segment, of the Agent Banking and USSD Banking offerings is largely the same as the Payment Service Banks’ target customers. As such, most banks will accelerate the rollout of their Agent Banking and USSD Banking offerings, and position to gain competitive advantage over the telcos.”
…“more intensive competition will be good news for consumers, as they have more choice of payment options at lower prices. For financial institutions, the implication is they will have to focus more on innovating to create new credit products and new investment and savings products, as revenue streams from payments will become smaller and smaller.”
“The banking industry incumbents will position to gain competitive advantage by becoming more innovative and proactive in creating solutions that will ensure they can profitably serve the base of the pyramid customer segment. In addition, they will create innovative products and services to ensure they improve overall customer experience while creating “stickiness” with their existing and potential customers.”
Collaborate
First Bank’s Adeduntan also sees room for collaboration. “Incumbent banks may also respond by establishing strategic partnerships with the telcos who may want to play in the banking industry. Incumbent banks have the industry know-how and cash management logistics capabilities; while telcos have superior technology/digital infrastructure and product innovation capabilities. The partnership will seek to harness the existing strengths of both the telcos and the incumbent banks to create a mutually beneficial relationship.”
Customer Wins
Andrew S. Nevin, advisory partner & chief economist at global consultancy PriceWaterHouse Coopers (PwC) in Lagos, whose firm consults for both banks and telecom firms says, “more intensive competition will be good news for consumers, as they have more choice of payment options at lower prices. For financial institutions, the implication is they will have to focus more on innovating to create new credit products and new investment and savings products, as revenue streams from payments will become smaller and smaller.”
Expect More Innovation
PwC’s Nevin goes further to explain the big picture. “We have already seen big data and analytics make a big difference to granting credit in Nigeria. There are now numerous services that can provide short term loans using automatic credit scoring. These services did not exist three years ago.”
“The…making [of] automated credit decisions through data will only grow, and will be extended through[out] the economy. In addition, innovations like Blockchain are really going to help credit granting as they increase trust and the accuracy of information.”
“We have seen in the last month announcements from both Interswitch and Sterling [Bank] regarding blockchain solutions for granting working capital credit efficiently at much lower cost. All of these innovations are gathering momentum – analytics, blockchain, AI [artificial intelligence], geospatial data – and will have a major positive impact not only on financial services, but on agriculture, FMCG (fast moving consumer goods), logistics and many other industries.”
Rafiq Raji, a writer and researcher, is based in Lagos, Nigeria. Twitter: @DrRafiqRaji
An edited version was published in the first quarter 2019 issue of African Banker magazine.
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