… CBN vows to open up space for innovative banking

By OBINNA EZUGWU

Palpable anxiety has crept into the Nigerian banking space on account of the entry of telcos and fintechs into the formal lending vaults of the nation’s financial space which had traditionally been an exclusive field of sorts for Nigeria’s Deposit Money Banks, DMBs.
Indeed, things came to a head when word filtered into the public domain that the Central Bank of Nigeria had granted the nation’s largest telecommunications services provider, MTN Nigeria Communications PLC, a license permitting it to commence mobile money operations in Nigeria.

While there had already been a number of fintechs playing in the field before MTN’s entry, their limited size and market reach, as well as their continuing reliance on the DMBs to even reach their customers did not at that point pitch them as a major threat.

Not so with MTN as the fact of the company’s size and apparent capacity for massive disruption was too much of a game-changer to be ignored.
And as if that was not tough enough to handle, the other players in the burgeoning telecoms space also began to signal their intention to similarly commence their own foray into the financial services arena.

Putting intention into practice, at the close of August 2019, MTN officially launched its mobile money, MoMo, operations in Nigeria with an opening event in Abuja, the Federal Capital Territory. The Rubicon had been crossed.

With the forays made in the mobile money field in countries like Kenya and Ghana, expectations are high that overall, the telcos invasion will help do what the DMBs, Community Banks and Microfinance Banks have been unable to do over the years; namely the acceleration of the pace of financial inclusion across many more segments of the population. But then this may very well be at the expense of the DMBs to some extent.

Sources say that it is based on this realization that the DMBs began to intensify efforts to ensure that they do not lose grips of the unfolding process.
A related source of worry for the DMBs may be the prospect of their losing a very active cash cow of sorts when the telcos eventually get into the full field of cash mobilization on terms that do not require their inter-mediation services. At the moment, many telcos finance their operations, with among others, huge tranches of cash that they source from DMBs, and of course with fees attached.

Should such high net-worth clients find alternative sources of raising funds for their operations, then the banks which are already struggling with the burden of meeting the apex bank’s real sector lending ceiling, will be further hard pressed to find subscribers for the funds in their kitty.

For example, in mid-September, MTN had itself confirmed that it was exploring raising N100billion via commercial papers as an additional financing window for its operations. Significantly, though it noted that the move was not a done deal yet and that progress on it would be communicated via the Nigerian Stock Exchange, NSE, market watchers believe that the success of this proposed transaction, the fact of the firm now trading on the floor of the NSE, and the likely expansion in its financial services window would make it less dependent on bank loans that had been a critical part of its operational financing over the years.

Beyond the veneer

Calls put through to spokespersons of several of the leading DMBs in the country were met with off-record responses that the situation was under control and that the new entrants into the financial space were not really a threat.
While talking calm on the surface of things, the banks are fighting back. And there is evidence. According to Sam Akaranta, a customer with one of the leading DMBs in the country, the threat indeed is real.

‘The entrance of the telecoms networks as well as other platforms like Carbon (Paylater), Renmoney, Branch and so many others is already disrupting traditional banking. It’s a response to the openness allowed by the authorities in banking the unbanked. The CBN is helping the banks to contain this. If you notice now, banks are now offering loans to small and medium scale enterprises. In fact, they now have a mandate to give out 60% of their profits as loans. My bank has given me such a loan, 212k payable in 6 months with 1.7% interest.’

Evidence of the fact that the DMBs are not taking things lying low can be gleaned from the responses of their leadership during their more analytical moments. For example, in an interview with World Finance, Guaranty Trust Bank, GMD/CEO Segun Agbaje had admitted that they were well aware of the challenge and taking steps to contain same.

‘We have decided to disrupt ourselves and not live in denial. At one time, when we did competitor analysis, we only used to look at other banks. Today, we look at fintech businesses, telecommunications firms, and even betting companies – essentially, anyone who offers any form of payment service. And one thing that we have learned is that although people will always need banking services, they may not always need banks.’

For Femi Awoyemi, Chairman and Group CEO, Proshare Consulting, the threat is still largely manageable.

‘The entry of telcos and fintechs into the payment system adds a further dimension to financial retail market distribution capacity but this does not pose an immediate challenge to the banks. Payment agents increase payment penetration by leveraging the depository roles of deposit-taking institutions. DMBs will not be threatened in this financial segment.’

Going further however, Awoyemi says that the DMBs should however not just let things be as there could also be other challenges.

‘The main threat will come from retail lending. If say, Jumia allows people purchase goods on credit based on an online purchase algorithm, this means retail lending activities will bypass banks and result in a reduction in both top and bottomline earnings of DMBs. However, banks will still be caretakers of the cash balances of depositors. Now, if cryptocurrency such as Bitcoin and Ethereum catches on as a medium of exchange and a store of value, then the transferable value of citizens efforts or activities become a matter of binary codes. Banking may be essential but banks, as known today, will become dinosaurs and disappear or at best be severely limited in their roles as financial intermediaries. In the medium term banks may be more relevant in corporate finance and advisory services but even these areas over a longer period could be flattened like pancakes.’

But Awoyemi is also conscious of the point made by Agbaje that there is a lot of room for technological upgrade, if not outright collaborations across the fields.

‘Banks are increasingly sensitive to the threat of Telcos and Fintechs and are tying up partnerships or heading into the technological era by setting up foundries and sandboxes of their own or they have become open to simply buying the competition. A lot needs to happen before Fintechs hurt banks in a major way and with banks already aware of the threat, we may more likely see convergence that creates complementarity and reduction in service delivery cost across telecommunications, consumer retailing and financial services.’

On the spectacular success story of M-Pesa in East Africa, Awoyemi says that though it is in itself a most audacious statement, its example may not fully catch on in Nigeria at this time.

‘M-pesa is an error that turned out right. It represents an example of positive unintended consequences, the model may not be replicable in respect of measurable results. But technology, banking and consumer retail purchase will achieve some form of integration in Nigeria; the exact character of the mutation is indeterminate.’

Corroborating this point, Sunday Kargbo, a banker, opines that heads, tails, the banks surely do have their work cut out for themselves:

‘The world is evolving rapidly. Technology is changing the game and setting up new rules. With the crazy disruptions that automation, Artificial Intelligence and other fourth generation technologies are bringing in, businesses are crossing borders. Uber has started the ferry business. Facebook is creating a global currency. The rules have changed. Any business that wants to stay afloat much be very innovative. Our banks will need to move with the trend if they want to continue to exist.’

But how early would the challenge be felt? The analyst, James Edu remarks:
‘You are correct that the entry of telcos and fintechs into the payment system adds a further layer of financial distribution capacity to the ecosystem but this does not pose an immediate challenge to the banks. Payment agents increase payment penetration leveraging depository roles of deposit-taking institutions. The banks will not be threatened in this financial segment.’

On the matter of what traditional banks can do to respond to the financial disruption capabilities of Fintechs and Telcos, he notes that ‘the immediate answer appears to be to buy up the competition or build Fintech solutions of their own. A number of banks now have Fintech foundries and sandboxes to jump ahead of the evolving disruption.’