On the 6th of April, 2016 while addressing a church congregation at This Present House (TPH) Lekki, Lagos, the CEO of Guaranty Trust Bank, Segun Agbaje made a confident and interesting statement about disruptions in the banking space, he said “I confront disruptive technology for survival, I will never sit down and let other people take what I believe is my own business and my own market share, so if you think you’re Paypal or Apple Pay and I’m going to seat back, no, I will do *737, simple banking for every Nigerian and for every dollar or Naira you spend, I will spend as well, but I will not give up my market space.” He went on to talk about how they would beat all the e-commerce players in the marketplace game because he is ready and can afford a free marketplace. I think it was a very interesting and optimistic talk and if you have some spare time, it might be worth watching the full video here.
This is not about the bank CEO’s comments but I observe the same level of confidence in his voice when I speak with some other bank executives. Despite the numerous global reports that banks are at the risk of losing up to 25% of their revenue to FinTech companies within the next few years and comments like Bill Gates’ assertion 24 years ago that “banking is necessary but banks are not,” I do not think Nigerian banks are losing much sleep over FinTechs. I also doubt if any bank has collapsed globally owing to the fact that FinTechs stole their market and I doubt that will be happening soon.
Don’t get it twisted though.
Publicly, banks make it look like they are concerned about FinTech disruption and they should be, but behind closed doors, I do not think that their worry is much about the FinTech companies springing up in Nigeria.
If you notice from my earlier assertion that the GTBank boss made reference to two global tech companies (Apple Pay and Paypal that aren’t even very active in the market yet) and not one Nigerian FinTech company. The reason for this is because the banks know that they have some strong inherent advantages that startups that are seeking to disrupt them will struggle to overturn. However, there are companies that have similar advantages and might pose a threat but they are not necessarily the FinTech startups. With my experience in the FinTech space in Nigeria so far, I know that as long as banks dominate on deposits, lending, payments and investing, they will be around for a while. The struggle for FinTechs remains the ability to achieve enough scale independently to the point of actually displacing the banks. But before we go too far, what are these inherent advantages that are making the banks overbearing?
Trust (Established Relationship)
Trust is a very valuable currency in the world today, more-so in the financial world. Even though a lot of customers think their banks are sloppy, they still trust that the banks will be around for a long time and they will have their money whenever they need it. This trust has been built over the years due to established customer relationships and the guarantee of the government through regulation (CBN, NDIC). This is the first subtle feature that takes time to build and very difficult to beat.
Scale
By the very nature of banking business, banks need to be big to be successful. They need to be able to pay for the right infrastructure, people, processes and systems that are required as a highly-regulated entity and more importantly, they need a balance sheet that is strong enough to withstand economic stress. The bigger the bank, the more the confidence as a result of the varied spread of assets and base of deposits and considering the fact that no matter the bank size, the same compliance and standards are required. The scale also enables the banks to offer a variety of products under the same umbrella thereby diversifying their revenue base and limiting their risk.
Regulation
The financial services space is a highly regulated industry. This is permissible because of how strategic the banking sector is to the economy. Banks understand and help craft regulation and employ hundreds of people to ensure they’re complying with regulatory guidelines. While on the surface, this is supposed to be a disadvantage as it increases their cost structure, it puts existing banks at an almost untouchable level because it gives them all the advantages inherent in an oligopolistic market and makes it very difficult for real disruption to happen from outside.
Customer Base and Distribution
There are about 65 million active bank customers with about 108 million individual and corporate accounts in Nigeria spread across approximately 21 banks, that’s an average of 3 million customers per bank (according to NIBSS as at end of March 2018). The numbers are not a lot if you consider Nigeria’s estimated population but if you look at those actual numbers, they’re not small. No pure FinTech company has a customer base close to that, in fact, no tech company in Nigeria with such customer base easily comes to mind. Customer acquisition is hard and expensive and this is something the banks have been able to find a way around over the years. What this means is that banks have ubiquitous distribution through branches and other channels and can distribute products to a wide spread of people, businesses and even government, access cheap deposit and build a large balance sheet.
Cash
Beyond scale and customer base, the banking industry is one of the most profitable industries in Nigeria. And Nigerian banks are some of the most profitable (in terms of profit margins) in the world. In 2017, Zenith Bank recorded a profit of N157 billion after tax, GTB was N170 billion, Access Bank did N80 billion, UBA was 78.6 billion. In the same 2017, The whole startup ecosystem in Nigeria was reported to have raised about $114.6 million which is less than the 2017 profit of any of this singular banks. Although this might not be a good comparison, the point here is peradventure the disruption battle becomes a cash battle between banks and tech startups (which usually becomes the case), Nigerian FinTech companies don’t seem ready yet.
Data
I strongly believe Nigerian banks do not currently do enough with the enormous customer data at their disposal and I had written about it in a previous post. Data is another major goldmine that the banks are seating on and it portends a lot of opportunities for them when they decide to start paying attention to it. The thing about data is that it has to be large enough to make sense. Data also has a network effect, so even if a startup has all the cash in the world, they can’t just easily go and buy the same data and building such a database takes time.
Domain Expertise
This is something that is unusually overlooked and underrated. The business of banking is not as simple as we make it look and just being able to write codes and speak some finance jargons doesn’t mean you really understand how banking works and that you will kill all the banks. Banks have built decades of experience and have unique expertise in areas such as credit underwriting underpinned both by data and judgment, asset allocation, liquidity management, risk assessment and many other areas that most FinTech companies lack competency in. This experience will come to bear when push comes to shove and when it’s time to build a sustainable and profitable financial services business.
I am sure any banker reading this by now will probably be feeling pompous and be like “Abegi, wetin all these FinTechs dey do sef? They can’t disrupt jack!” But wait, while I honestly believe these strong advantages means that banks aren’t most likely to be killed by FinTechs, there are companies that are in a better position to take on the banks and have the potential to make the banks irrelevant much earlier than anyone can imagine because such companies also possess some of the key attributes that make the banks tick.
A New Type of Disruptor
There are two categories of companies that don’t get enough attention and aren’t the typical disruptors you think about when you’re talking about banks being disrupted.
The first sets are the telcos. This is an obvious one that African banks are very wary of as we have seen the example with mobile money majorly popularised with the success and impact of M-Pesa in Kenya and other telco mobile money offerings in other African markets. If you consider the structure of telcos, they have the brand recognition, scale, the distribution, data, cash, and can also meet the regulatory requirements similar to such that is required of the banks. Perhaps their weak point is lack of expertise/knowledge in the financial services space but this is something they can catch up with within a short time.
The second category of companies is even a more likely and bigger threat than anticipated. The companies are the big international technology giants like Apple, Facebook, Alphabet (Google), Amazon, WeChat, and co. These companies do not only have the advantages that the banks have, they even have a stronger inherent advantage. Let’s consider some of this advantages one by one.
Larger Customer Base, Scale and Distribution
The big tech companies arguably have the largest customer base of any business category in the world. I can’t think of any other company that can boast of over 2 billion registered users globally apart from Facebook or any other company that has the penetration level of Google. Bringing it home, it can be estimated that Facebook has about 50 million active users in Nigeria across their different platforms. This number is more than the stipulated number of Unique BVNs linked to Bank Accounts of 45 million (BVN is Nigeria’s Bank Verification Number). This is an unbeatable pool of customers to distribute products and services.
Network Effects
The network effect is a concept whereby a platform becomes more valuable for members as new customers join the platform. With this feature, it becomes pretty easy for these tech companies to not just grow really fast but to build another moat that even the banks cannot compete with.
A Large Cash Base
The tech companies don’t just have the scale and network effects, they also have loads of cash to play and experiment with. Apple had a cash reserve of $285 billion as at December 2017, (that’s more than half the GDP of Nigeria), Facebook has over $25 billion, Google has about $90 billion, similar amounts for Amazon, Microsoft and co. These companies are the only few companies globally that can outspend the banks if/when the race for offering financial services to customers becomes a battle of cash.
A Strong and Reliable Brand
In Nigeria today, one can argue that Facebook is more popular than a lot of the banking brand considering that there are people who know Facebook and Google even when they’ve never used the internet. The strong brand recognition that these companies have built means that they don’t even have to do too much to get customers to trust them with their money.
Customer Experience DNA
The big tech giants are special when it comes to customer experience. They have been able to scale to an enormous size while maintaining a strong user experience focus that banks can’t even come close to. Where the banks have had to make a trade-off between scale and user experience, the tech companies have been able to brilliantly operate at the intersection of both and a major reason this is possible is that they have been able to properly leverage data.
Data
Despite the recent privacy and data concerns and the increasing customer awareness to the enormous amount of data that the big tech companies have about everyone, it doesn’t seem like so many people have a choice or are able to do much about it. While the banks have some insightful financial data about consumers, the data that the big tech giants have on customers makes the bank data look like child’s play. Imagine how tailored and super relevant the financial products and services will be with the amount of data these companies already have.
While I think this is something every bank should really be thinking about, the consolation for Nigerian banks is that Nigeria is not that much of priority for a lot of the big tech companies because they are still very busy making giant strides across developed markets and disrupting other industries that their impact or threat on the financial services industry isn’t so worrisome yet. But we cannot deny the fact that these companies are coming and have what it takes to make a significant dent on the financial services industry more than the FinTech companies, if and when they choose to participate.
I think there is a more proactive solution that happens at the intersection of banks and FinTechs.
While banks might be strong on their own, I believe they can be made significantly stronger and in a better position to maintain future relevance with the adoption and incorporation of new innovations that are being introduced by startups.
There is also a major weakness in the banks that FinTechs are well suited to tackle head-on.
The scale of banks means that they are generalists, so there’s usually a trade-off. While scale reduces risk, it also means that the banks don’t get to delight a specific set of customers. It is essentially because of this lack of focus and deficiencies in customer services that FinTech companies have come on board to focus on specific areas of financial services and try to create a better experience for the customers.
The biggest advantage for FinTechs is the ability to bring transparency, efficiency and better user experience to every area where the traditional banks have been offering below par services to customers. FinTechs are able to do this because of a focused approach that ensures products are well tailored to meet customer’s specific needs, a low cost structure that makes it possible to offer more affordable rates, lack of legacy structures and over-regulation that enables them serve segments of the market ignored by the banks and a nimble disposition that provides the speed to move faster and incorporate the latest trends and innovation in product and service delivery.
While it remains a struggle for FinTechs to achieve scale independently, banks struggle to delight their customers and are at the threat of being made irrelevant by telcos and popular global tech companies.
My submission, therefore, is that it is really hard to disrupt banks. FinTechs are innovating the financial services space but aren’t necessarily disrupting as much as we all like to think. The real disruption to banks in Africa and even globally is more likely to come from telcos and global tech giants than from typical pure FinTechs. I believe that the best bet for banks and FinTechs to stand a good chance of retaining relevance in the future is to work together. The FinTechs have one or two things to teach the banks about new customer expectations and digital transformation and the banks can help FinTech companies scale and build sustainable and viable businesses. A partnership offers the banks a potential path to new markets, new products and growth opportunities. This is not new because most of the “successful FinTech startups” in Africa today have some form of strong bank affiliations.
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