Why Fintechs will do a better job than banks in Nigeria’s retail lending

There is no better description of the Nigerian business environment today than George Orwell’s Animal Farm; everyone – small, medium, big businesses and government – must manipulate each other to survive or die trying. In the financial services sector, big banks are currently acting the role of the bullies reminding everyone that “all animals are not born equal”.

Since the turn of the decade when digital technology took over every facet of people’s lives, a lot of innovation has gone into making financial services better, safer, faster and much of the inconvenience consumers usually face have been reduced.

For instance, digital technology has made savings once more attractive unlike before when people had to work the distance to a bank branch, spend countless hours on endless queues to get the cashier to take their money and put it in the bank vault or make profit with it. In the same vein, lending which used to be a hallowed terrain for mostly banks and microfinance institutions has also been demystified by talented tech savvy young Nigerians using a laptop and a table. Small enterprises that would have died for lack of funds to build their businesses now have a lifeline – albeit with expensive payback packages – from fintech lenders.

But it must be said that when analysing those responsible for the digital transformation in financial services, it is often taken for granted that some Nigerian banks have always embraced technology in delivering their services and have contributed immensely to the making of the fintech landscape in the country. For instance, it was a few of the banks in collaboration with Accenture and other technology providers that led to the founding of Interswitch, one of the foremost fintech startups in the country.

There is no reason the banks and fintech startups cannot coexist and even benefit from their relationship particularly with regards to retail lending.

Inasmuch as retail lending is seen by many as representing a massive opportunity for growing the Nigerian economy, traditional banks have for many years shied away from playing a decisive role in the space creating a lacuna for startups with technology to fill.

Only 1.3 per cent of Nigerians have easy access to bank loans according to a report from Enhancing Financial Innovation in Africa (EFInA). This leaves about 98 per cent of people without access.

In the past, banks have looked at them as very “risky” but startups chose to embrace them as opportunities. In that sense, fintech businesses like Paylater, Branch, Renmoney, Mines, Kiakia to name a few have thrived.

But in recent times, banks are starting to retrace their steps following a lull in lending over the past three years as non-performing loans continue to grow in the aftermath of a sharp drop in oil prices that made it difficult for borrowers to service their loans, forcing banks to write off a huge chunk of credit extended to the oil and gas sector, to which most lenders were heavily exposed.

The biggest lenders like GTBank have announced plans to increase their focus on retail lending by the end of 2019, this new agenda covers from personal loans to car financing and mortgage among others, as part of efforts to grow their loan books. Some banks have even started calling their customers on the phone to offer them loans.

However the banks’ pace in reclaiming lost ground in lending has some startup founders very worried and even afraid for their future. At an interview in March, a founder who will remain anonymous told BusinessDay that banks are likely to resort to aggressive acquisition of startups they see as threat in the space.

It is important to note that while banks may have most of the advantages in the space to enable them muscle out competition from startups, it may be in the best interest of small businesses for the former to allow the latter to lead the charge.

“Banks should stick to banking and not try to own digitalisation and collaborate more with digital startups,” says James Mworia, Group CEO, Centum Investments, Kenya at the Annual Investment Meeting (AIM), which held in Dubai in April.

In the end, retail lending is still about the small businesses that need funding to grow and fintech startups by their structure and experience servicing consumer lenders have proven they may be a better fit.

To be candid, the challenges that forced banks to stay away from retail lending are yet to be addressed hence the need for banks to lead from the back this time. Millions of Nigerians still lack credit history and identification database which makes it difficult for banks to give loans without prior records. There is also the difficulty in recovering bad loans which has made banks wary of lending to many Nigerians.

Fintech startups on the other hand are not weighed down by identities or bad loans. Sometimes while leveraging individuals’ accounts on social media, these startups have addressed the problem of credit scoring and through an app without any physical confirmation, given loans via smartphones in minutes.

A retail lending space driven by startups does not relegate the banks or make them irrelevant, the critical part of the chain – the money – still resides with them. Moreover, by providing the financial support to the startups, they also get a skin in the game and reduce the cost of deploying new human resources to chase lenders. However, with fintech startups in front, banks can have all the time they need to create new solutions, in so doing diversify shareholders’ capital.