Branch networks in premier business districts, traditionally believed to measure the stature of financial providers are being replaced with internet banking, payment apps and short-code banking. Technology has enabled non-traditional financial players upend branch networks typically dominated by large financial providers; with newer, nimbler entrants such as Interswitch and Paystack processing more online transactions than Nigeria’s biggest banks. A report by the Nigerian Interbank Settlement System (NIBBS) indicates that Nigeria’s ePaymentservices recorded N38.5 trillion transactions in the first half of 2018, a 38.4 percent increase from N27.8 trillion in the corresponding period of 2017. NIBSS Instant Pay, PoS and Mobile transactions led the pack with the highest growth in value and transaction volume.
With the banking regulator now giving mobile network operators a leg up by granting them payment banking licenses, this will enable them to gain unprecedented advantages with the promise of branchless banking, delivered on smartphones and feature phones. Financial institutions, especially Nigerian banks will then have no choice but to respond better to disruption by reassessing strategies, operating models and risk frameworks.
Non-traditional banking operators enter the industry by leveraging technology to innovate in the banking services sector. Disruptive start-ups are taking a slice from the financial services action and mopping up unbanked, low income earners by providing them financial services. With their lean structures, low cost of operations and lack of branch overhead, fintech players are trumping the traditional operators. In an era of fast online and mobile payments, traditional banks still adopt a three-day wait policy for third-party cheques. eCommerce sites now have wallets for customer’s, which further whittles the hold of banks of customer pockets as technology companies and retailers look to build a presence in the banking sector by tapping into a prodigious appetite for new and innovative banking services.
The industry dynamic has changed with banking now depending more on good infrastructure than how many branches you have. As such, banking operators must stay competitive by re-inventing processes on a lean, asset-light business model. To emerge leaner and more agile, outsourcing specific technology or business process functions has proven effective in reducing both capital and operating costs. This enables banks to transfer significant capital expenditure in technology infrastructure, to lower cost services so they can adapt quickly to fast-paced changes in the marketplace while increasing profits, adding scale, flexibility, and advanced technology capabilities to their businesses.
For too long, financial providers have been held back on their digital transformation journey by legacy technology and processes. In the bid for direct management of their mission-critical IT assets, banks have continued to invest and own data centres to host critical applications. But running a data centre adds minimal value to today’s core banking activities where customers would rather do business online rather than go into bank branches. So, when banking institutions experience failures or system outages that result in downtime, the impact is truly widespread with heavy financial loss and sometimes reputational damage with customers in far flung locations.
How can Nigerian banks improve IT performance and reliability while balancing risk management and cost considerations?
They need to focus on providing robust customer experiences by removing the distractions of physical infrastructure operations. This will enable a refocusing of their technology efforts on optimizing software and applications to deliver better customer experiences, rather than worrying over diesel generators and cooling in server rooms. These banks have the opportunity to embrace outsourcing their primary and secondary data centre environments to established service providers focused on maintaining infrastructure uptime and committing to rigorous SLA requirements. These colocation environments also provide the banks with a multiplicity of connectivity options to enable reach to a wider range of customers which would have been inherently unavailable in their own environments.
There is need for Chief Information Officers, Chief Technology Officers and other C-suite executives to aim to achieve the right balance between the technologies they want to keep in house and the ones that can be outsourced. Outsourced data centres as an example provide banks with the ability to focus on the application layer running in outsourced data centreswhich enable them routinely implement critical applications without the downtime capable of affecting their customers.
A few Nigerian banks have already outsourced their colocation requirements in line with regulatory and requirements from the Central Bank of Nigeria (CBN) which are benchmarked to global standards. Out of the top 25 banks currently operating, 16% have fully outsourced their primary and disaster recovery operations, 44% have outsourced only disaster recovery, 36% currently run primary operations from outsourced facilities. Driven by its commitment to becoming Nigeria’s foremost end-to-end financial services institution, Stanbic IBTC, one of Nigeria’s leading and most innovative banks embraced colocation with MainOne for the deployment of private colocation and workspace for the bank within its data centre, MDXI. After a comprehensive technical and commercial build-versus-buy assessment, the bank outsourced its data centre environment, to MainOne and was able to quickly achieve regulatory compliance, increased efficiencies without the weight of OPEX and CAPEX challenges.
Stanbic IBTC CIO, Gboyega Dada asserts that outsourcing their data centre has drastically reduced the company’s operational and capital expenses as well as enhanced its flexibility and agility. “We have been able to streamline our IT Operations, outsourcing most of what is not core to our business so we can focus on true banking. It has become a lot more cost effective for us because we have saved significantly on capital outlay”, he said.
Business analysts say on-premise hosting is more expensive compared to outsourcing which offers between 20 – 50 percent ownership cost reductions over a three-year period. Thus adopting outsourced data centre services by Nigerian banks could save them between 20 and 50% of their total IT budget while remaining competitive, flexible and deliver better performance.
In 2019 and beyond, data centreuptime will remain key to staying competitive in this industry and even a minute of downtime will not be tolerated by customers when alternate solutions are only a download away. It is expedient for Nigerian banks to resolve downtime issues, which affects reputation and eventually leads to churn and impacts the business bottom-line. Financial providers need to take advantage of world-class colocation service providers so they can focus on providing more efficient and lower financial services to their customers, delivered from always-on infrastructure.
Ejiro leads the Research and Media Strategy Unit of Caritas Communications