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Disrupters at the gates

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At the height of the 2008/2009 global financial crises largely caused by the securitization of sub-prime mortgages into asset-backed securities packaged and sold by Wall Street Banks, Jim Cramer, a former hedge fund manager, and host of CNBC’s Mad Money, constantly bemoaned the fact that bankers managed to muck up something (banking) that should be as easy/boring as making money through playing the spread or lending money at rates higher than the cost of the money they lend.

Nigerian banks at the time(2008/2009) also succumbed to a home grown financial crises, not caused by securitisation and inflated asset prices, but by lax risk management.

The banks that survived the subsequent Central Bank intervention, takeovers and move to clean up the sector through AMCON, appear stronger than ever today.

Three banks (Zenith, GTB and StanBic) have released Full Year 2018 results as at Friday March 8th, and they posted combined after tax profits of N452.4 billion.

Look a little bit closer though and Nigerian banks are looking increasingly vulnerable to new disrupters at the gates of their pretty profitable banking empire.

New Fintech credit platforms (RenMoney, KiaKia, Paylater, among others) are popping up and beginning to provide individuals and businesses with the cash flows required to meet urgent obligations.

Paylater, a 2-year old credit company with a mobile app that has been downloaded one million times, disclosed in its newsletter in January that it disbursed 591,560 loans valued at N13 billion in 2018.

Kiakia, another 2 year old company disclosed in December that it disbursed over $1 million in peer-to-peer loans, while RenMoney with 140,000 customers has disbursed N50 billion in loans and attracted N170 billion in fixed deposit inflows.

One major theme running across these platforms is the use of technology and promise of a seamless and simple process, whether it’s for loan applications or savings and investments.

It’s a no brainer in a sense, as traditional banking services often don’t resonate with young people or an increasingly mobile-first younger generation.

Current banking services also seem overly complex and come with often repetitive demands for personal information.

The big kahuna though that would really disrupt the Nigerian financial services landscape and should be giving banks sleepless nights is the promise of mobile money or Payment Service Banks (PSBs), which Telecommunication Companies (TelCos), seem set to drive.

PSBs can be thought of as stripped-down versions of traditional deposit money banks, with a focus on on-boarding more of the excluded and marginalised population.

Unlike deposit money banks (DMBs) and microfinance banks (MFBs), from day one, PSBs will likely have a heavy reliance on technology via digital financial services, complemented with a strong agent banking model, which is meant to reduce overhead costs.

In a world where everyone with a phone is a potential customer, TelCos look poised to take full advantage.

The country’s mobile operators; MTN, Airtel, Globacom and 9mobile recently announced their commitment to deepen financial inclusion to at least 90 million customers in about 2 years, once issued payment service banking (PSB) or mobile money licenses.

The four TelCos combined have some 173.6 million customers, compared to the 21 DMBs with about 30 million bank accounts with unique bank verification numbers or BVNs.

The TelCos also have the resources to deploy in the coming fight.

MTN Nigeria recently released FY 2018 results which showed it has 21.6 million smartphone users on its network, Ebitda margins of 44 percent and revenues eclipsing the N1 trillion mark.

No DMB in the country currently boasts such revenues.

The World Bank Global Findex Database estimates that 118 million Nigerians did not have bank accounts in 2018, leaving financial inclusion rates at 40 percent, one of the lowest in the world.

So how can banks prepare for the coming storm?

Nigerian banks currently follow a traditional model that relies on mobilising cheap deposits, investing most of it in high yielding risk and tax-free Treasury Bills to juice Net Interest Margins (NIMs), and lending mostly to blue chip names.

Loan growth has been muted for the past 2 years, while profits soared.

This means most banks don’t connect to the average person beyond receiving his/her salary in a bank or saving money they can get on demand.

This should be worrying signs for lenders, as while the model has worked in the past, banks should not be betting on it for the future.

While traditional banks are large organizations that have made huge investments in legacy infrastructure like physical branches, the changing financial services landscape is an opportunity to re-evaluate their business models and appeal more to younger people, who often have fundamentally different needs and expectations.

The potential disruption of Nigeria’s financial services industry will ultimately be positive for the consumer and the country as a whole.

Continued innovation in the space (by all) will ensure that Nigerian banks, who might in the near future not have the luxury of a double digit risk free rate, cheap cost of funds and elevated issuance of government paper, will continue to make money and be profitable.

 

PATRICK ATUANYA

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