Why banks’ customer base may shrinks

The doubt hovering over the possibility of the financial technology (FinTech) firms to  displace commercial banks on the payment service banking (PSB) space in the country has been finally laid to rest.

Telecom operators (telcos) and financial technology companies (fintechs) , according to Moody rating agency, will definitely take the shine off banks in the implementation of Payment Service Banks (PSBs) initiative of the Central Bank of Nigeria (CBN).

Since last October when CBN rolled out guidelines for the take-off of the PSBs, the banking arena has been embroiled in arguments on who will supplant who.

For instance, a faculty member of Lagos Business School (LBS) of Pan Atlantic University, Lagos, Dr.(Mrs) Olayinka David-West, said that the FinTechs companies would not displace the banks in their competition for the market share.

Represented by Prof. Olawale Ajai at the last annual workshop of the Finance Correspondents Association of Nigeria (FICAN) in Lagos, Mrs David-West had reasoned:

“In practice, financial technology is not the exclusive domain of the FinTechs as many traditional banks, microfinance institutions and development organisations make use of financial technology. Banks and other financial services providers are important actors in scaling up FinTech solutions. Scale is important, both financially and digitally, to include the vast amount of people and companies at the bottom of the pyramid.”.

She added that the financial services sector has witnessed digital entrepreneurship in the form of FinTech, majorly, because they are highly innovative, imbued with inexpensive startup skillset;they are also entrepreneurial and passionate with no defined guidelines/regulations.

But Moody, in its latest analysis, punctured that argument.The rating agency says:“PSBs will challenge incumbent banks because of their ability to develop their own digital platforms, hold deposits and make transfers without partnering with banks. These new entrants will compete with banks, especially on retail banking products, which will negatively pressure banks’ consumer business unit margins.”

The CBN Governor, Godwin Emefiele, while unveiling his five-year plan had said the apex bank would leverage more on unstructured supplementary services database (USSD), as well as mobile and agency banking, to drive financial inclusion in the country.

Following this announcement of this intent, Moody believes the entrance of new players-telecom operators and fintechs-will reduce efforts by commercial banks to expand their financial inclusion drive through their mobile banking platforms.  The telcos that have already indicated interest in the initiative are MTN, Airtel, 9mobile, Ntel  and Globacom. Based on figures from the Nigerian Communications Commission (NCC), total subscribers for MTN in May was 54 million; Globacom had 43.3 million in November 2018; and Airtel had 43.1 million.

MTN had 43.89 million internet subscribers in December 2018; Airtel had 29.75 million, Globacom had 28.05 million; and 9mobile had 9.91 million. And once the initiative comes into force, these subscribers will be able to deposit and transfer money through their network operators.

CBN , while in the guidelines,  says “the PSBs are to leverage on mobile and digital channels to enhance financial inclusion and stimulate economic activities at the grassroots through the provision of financial services. They are expected to deploy ATMs in some of these areas; deploy Point of Sale (PoS) devices and be at liberty to operate through banking agents.

On the capacity of the fintechs to grab this opportunity, Moody notes that these companies are smaller than the banks and do not have a know-your-customer (KYC) database. They would, therefore, have to go into partnership with banks to enjoy the benefits of the increased market space. The firm also observes that certain banks have already positioned themselves for this competition by buying robotic and tech services from the fintechs.

Hailing the PSBs, Ifie Sekibo, the Managing Director of Heritage Bank Limited, call them an enabler for the financial inclusion to bring as many people as possible into the formal platform.

“It is important that we have such other organisations that help the lower side of our economy. We have people who put money under their bed; leave money in their stores;  fire comes and burn both the store, the money, their investments and they are back to square one. We need to eliminate all that. We need to bring as many people as possible into the formal platform so that 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.”

Allaying the fear of looming rivalry between the operators, he stated:

“They (FinTech/PSBs) are not lending banks. They are essentially going to assist us. For us, it is an enabler for the financial inclusion that we are all talking about. It is not necessarily competition. Yes, it is competition to the extent that we would compete with them in the financial inclusion space. Our agency banking  product would compete with their payment platform. Now, we have a very good payment platform. Most of us, our payment platforms have developed much more than they could be able to even compete with”.

Speaking in the same vein, his counterpart at Ecobank Nigeria, Patrick Akinwuntan, said:

“In the area of financial inclusion, the development of PSBs will actually reduce the overall cost of participation because more capital will be pooled to the sector and the scalability of the sector is still there. We have less than 60 per cent of the population fully banked. If you talk about active financial participation, the percentage would be less than 30 per cent because we have various levels. We have the banked; we have the under-banked and  then we have the unbanked. If you add the under-banked and the unbanked, we would be closer to 70 per cent. So the opportunity is there for more scale participants.”

The apex bank mandates the PSBs 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 apex bank adds that 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.

The National Financial Inclusion Strategy (NFIS), which supports PSBs, seeks to ensure that over 80 per cent of the bankable adults in the country have access to financial services by 2020.

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