Published On: Mon, Apr 23rd, 2018

Nigerian banks prepare for new digital ecosystem


Why did Dinosaurs go extinct? They failed life’s first law of survival, adaptability. In the quest not to go the way of Tyrannosaurus Rex, Nigerian banks in growing numbers are becoming familiar with the rules of change, they are building a new ecosystem to which they are adapting swiftly. ‘’If you fail to change you get hit on the head with a sledgehammer’’, Ernest Ebi, Chairman, Fidelity Bank Plc, insists.

Ebi noted in a recent interview with Business Hallmark newspaper, ‘’life brooks very little room for a comeback from the blow of lack of vision, speed, and resourcefulness. Those that refuse to change die’’.

This explains why, sometime in 2017, Fidelity’s management booked a retreat where it was decided that the bank would embrace digitization as a sub-blue print for business expansion. ‘’We saw an unfolding ecosystem that required more than plain vanilla banking’’, says Fidelity’s Chairman,’’ we saw a new order in the industry where the customer would be increasingly discerning, discriminatory and impatient; if you dropped the service ball it wouldn’t just be a yellow card foul you get from the customer but it would be a red card sending off the pitch. Customers want precision, timeliness and comfort and that requires cutting edge technology and knife edge competence’’.

Indeed Nigeria’s prickly banking industry is showing signs of evolution. Granted that audited financial statements of banks have appeared dodgy, their approach to market positioning and product development has been sparkling.  Analysts still, however, seem squeamish over corporate cash flows.  Beyond earnings (profit after tax) in 2017, financial bean counters say they are uneasy with lenders cash flow ratios. Most banks current cash to interest coverage ratios have taken a hard knock in the last three years as fiscal and monetary policy take huge bites out of corporate liquidity, especially with the implementation of the Treasury Single Account (TSA) in 2015.

The pulling out of public sector funds from banks left many of them groping for fresh deposits which required slow and patient nurturing. ‘’The removal of public sector funds from banks was like a deep knife wound to the gut; the survival of local lenders was nothing short of a miracle. If any managing director of a bank is currently undergoing treatment for hypertension the genesis of the ailment could be traced to corporate death that seemed inevitable as body bags were already being lined up at the Nigerian Deposit Insurance Company (NDIC) and Asset Management Company (AMCON) who were suited up for the unpleasant task of corporate undertakers’’, says a keen financial observer who declined to be mentioned in print.

Be that as it may, the Nigerian financial system is fast undergoing change. In a recent report by economists at the global consulting firm McKinsey, digitization is becoming a major disruptor of banking business around the world, Nigeria not excluded.

Chairman Nova Merchant Bank and former chief executive officer UBA Plc, Phillips Oduoza notes that, ‘’the market place has become a lot different over the last decade. In today’s market, physical structures are becoming increasingly irrelevant. How big your branch is, is less important than how efficient your digital service channels are and how secure your customer data base is. In the new banking ecosystem the customer expects top notch service delivery on demand and where it is not given migration becomes the instant option. Cost of migration has increasingly declined as banks compete aggressively for fresh accounts,” Oduoza notes.

Given the fact that brick –and-mortar banking services are flat lining as digital channels begin to take over, money centre deposit institutions (DMB’s) are aggressively broadening their technology menus and upgrading their various businesses-to- customer (B2C) platforms to enhance performance. Says Chairman Nova Merchant Bank, Mr. Phillips Oduoza, ‘’digitization is not a modern day fantasy but a full blown service super structure designed to meet the changing requirements of customers; in the new banking ecosystem loyalty is as strong as a rubber band because it depends not on sentiments, but on deliverables’’.

In a recent study on digitization and its impact on the global banking industry, international management consulting firm McKinsey noted that new digital entrants are having an impact on, ‘’bank performance, particularly by threatening customer relationships and margin erosion across retail segments’’.  Indeed technology companies or ‘fintechs’ are fast taking the high ground in providing customers with smooth digital payment solutions that pull the mat from under bank retailers. Even merchant bankers have bought into the concept of digitization of banking services.

According to McKinsey, ‘’in the 2015 global banking annual review, we estimated the impact of the digital threat. Today, we update the estimate to account for a faster pace than anticipated. As interest rates recover and other tailwinds come into play, the banking industry’s ROE could reach 9.3 percent in 2025.

But if retail and corporate customers switch their banking to digital companies at the same rate that people have adopted new technologies in the past, the industry’s ROE, absent any mitigating actions, could fall by roughly 4.0 points, to an unsustainable 5.2 percent by 2025’’.

Analysts note that banks can no longer be slow in realizing the potential of digital technology to the industrialization of their operations. In other words, banks will have to start dipping their toes in digital waters sooner rather than later; banks that are not fully digitized may have to explore new tools and inculcate new skills in digital marketing and analytics that will enable them become digital lords rather than techno slaves. Fidelity’s Ebi notes that, ‘the big issue for banks going forward is how well they integrate technology into an emerging commercial ecosystem; laggards will rue their slowness, while fast adopters and adapters will get bonus benefits from increased margins and larger customer traffic. This is another instance where the patient dog goes hungry’’.

Unfortunately, hungry dogs end up dying. The new digital order will be different from past competition. The critical skills needed in the new order, according to analysts, are predictive technology algorithms, coding, encryption and data mining.

The issue in the new banking ecosystem is not just that of meeting current needs but resolving the yet to be discovered problems and desires of the future. Is this messy? Certainly, and it will get even messier as several non-bank payment and settlement channels begin to provide safe, swift and efficient services to a highly discerning customer base.

‘’Fintechs are going to come in hard and fast over the next few months as a population of slightly under 200million people is too difficult to ignore, besides the Nigerian population is one of the youngest in the world with over 70 per cent below the age of 30 meaning that they are within the age bracket of tech denizens rather than aliens’’ says Bridget Omoluabi, Head corporate strategy at Digital Techniks, a local Fintech firm.

Things might seem a bit fuzzy at the moment but the fellows at McKinsey appear to have caught on to something in recognizing that global banking’s ecosystem is at the cusp of disruption. In Nigeria, banks that refuse to see the shimmer of change on the horizon will like Dinosaurs become extinct, the skeletons of their memory may serve as intriguing oddities to a younger generation , but then maybe not?

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