In making this presentation we would first of all highlight the major developments that have characterised the evolution of the Banking system in the country as currently configured. In this regard we would look at some details on the following issues; Mobile Banking, Agent Banking, Cryptocurrency and thereafter conclude the presentation by focusing on the theme: FinTech: The future of Banking in Nigeria. We would then bring the presentation to a close with some concluding observations.
Banking In Nigeria
It is common knowledge that banking was brought to us by the Colonial masters who saw banking as an essential infrastructure for the doing of business particularly business between the colonies and the metro pole. Therefore it was in the insurable interest of these past overlords that banking business was encouraged in the colonies to facilitate trade relationship. It is a matter for the records that banking business in Nigeria was pioneered in 1892 by the establishment of the African Banking Corporation and British West Africa, now First Bank of Nigeria Plc. While in 1925, Anglo-Egyptian Bank and National Bank of South Africa gave birth to Barclays Bank in Nigeria. In 1948, the British and French Bank for Commerce and industry started operations in Nigeria, which became the United Bank for Africa. The first domestic bank in Nigeria was established in 1929 and was called Industrial and Commercial Bank. This Bank was liquidated in 1930 and was replaced with Mercantile Bank in 1931. A development that hallmarked the lack of depth in expertise in the management of banks in the early years of banking in the country was the spate of failures and harvest of distress amongst most of these early banks.
The African Continental Bank was established in 1949 as the only sustainable indigenous Bank after the liquidation of the Industrial and Commercial Bank. An agriculture Bank was established in 1947 called the Nigerian Farmers and Commercial Bank. What we have attempted to do here is simply to profile the commencement of banking operations in the country to better contextualize the discussions we are going to herein engage in particularly as we attempt a periscope an outline of the bank of the future in the context of recent game changing developments as adumbrated by the attempt to leverage on technology to chart a competitive course for the bank of the future. It is a matter for the records that the Nigerian banking scene as it evolved had witnessed many landmark developments over the years which would be impractical to try to capture here otherwise we might unnecessarily bulk out what promises to be a loaded presentation. But we may be remiss in undertaking this assignment if do not attempt to profile some of the landmark developments which have left definitive imprint so as to impact the evolving Nigerian banking environment of today.
The other important development in banking in Nigeria was the Consolidation program which was announced on July 6, 2004 with an initial deadline for compliance stated for December 31, 2005. Under the exercise banks were encouraged to embark on Mergers and Acquisitions to attain the 25 billion Naira minimum capital base. The argument being that the banks were not properly capitalized to book big ticket credit considering single obligor requirements and to promote financial system stability based on the argument that size could be antidote to failure. The share audacity of this regulatory guideline is better captured when it is recalled that the Authorities had asked the banks to recapitalize to the tune of 2 Billion Naira and they were challenged and the Regulator did not have any option but to accommodate the banks by granting a number of postponements to the issued deadline. The Consolidation program no doubt drastically reconfigured the banking environment as the number of banks in the country collapsed from 89 to 25 more or else as preferred by the Regulator.
The Asset Management Corporation of Nigeria was established by an Act of the National Assembly on July 2010 with an intended 10 year lifespan to assist in distress resolution by acquiring the poor quality assets of the failing banks at a discount so as to give such banks a new lease on life. The AMCON had a start-up capital of 50 billion Naira provided by the Central Bank with additional 0.3% of total assets of participating Commercial banks. As a distress resolution vehicle the question out there is the expiry date of AMCON now that the initial lifespan on establishment has come and gone and to the best of our knowledge there has been no discussion regarding its liquidation but rather it if fair to conclude that the Institution has found new important role to play as it takes over ownership of businesses that have not been able to live up to what was expected under the bad loan takeover arrangement. It will be grossly incomplete if we fail to highlight the fact that Nigerians woke up in the morning of August 2009 to be confronted with the unprecedented news that five Commercial bank CEOs were summarily relieved of their responsibilities with new helms men appointed as part of the distress resolution strategy. The other matter worthy of mention is the way and manner the banks have surprisingly sustained growth trajectory in their profitability in spite of the recession which the country has now notionally exited. Therefore it might be fair to conclude that probably the one important challenge banks in the country have confronted so far is coping with the rapid and frequent shift in policy as the authorities struggled under severe pressure to achieve some stability of the exchange rates.
Central Banking
The Act establishing the Central Bank of Nigeria was promulgated in 1958 with the Bank commencing operations on July 1, 1959. A major negative development from the point of view of the effective operations of the Central Bank was the 1997 Amendment which brought the CBN under the supervision of the Ministry of Finance. This amendment placed enormous powers on the Ministry of Finance while leaving the CBN with a subjugated role in the monitoring of the financial institutions with little room for the Bank to exercise discretionary powers. This obnoxious Act was repealed in 1998 with a measure of autonomy returned to the CBN to carry out its traditional functions. In additional to regulating the banking system, the CBN also took the responsibility for nurturing the money and capital markets. In furtherance of this, the CBN introduced treasury bills in 1960 treasury Certificates in 1968 and facilitated the establishment of Lagos Stock Exchange in 1961 and the capital issues committee now known as the Securities & Exchange Commission in the early 1970. The more recent attempt by the legislature to import a Chairman of the Board of Central Bank instead of the Governor playing that role have so far not succeeded as it is most definitely not consistent with best practice.
Financial Inclusion
Financial inclusion has continued to assume increasing recognition across the globe among policy makers, researchers and development oriented organizations. Its importance derives from the promise it holds as a tool for economic development, particularly in the areas of poverty reduction, employment generation, wealth creation and improving welfare and general standard of living. In 2008 a study revealed that about 53.0% of adults were excluded from financial services in the country. This exclusion rate reduced to about 46.3% in 2010 and the latest survey in 2013 estimated access to financial services in the country at 34.9 million adults the equivalent of 39.7% were excluded from access to financial services. No doubt this situation must have improved following the many recent positive developments aimed at extending banking services to the under banked. In this regard we recall the three phases of the Rural Banking Program and the attempt to leverage on development with technology to facilitate higher rate of inclusion.
Payments System
It goes without saying that the payments system plays a very critical role in any economy, being the channel through which financial resources flow from one segment to another. An effective and efficient system represents the major foundation of the modern market economy. Essentially, there are three pivotal roles for the payments system, namely; the Monetary Policy Role, the financial stability role and the overall economic role. The Nigerian payments system witnessed remarkable achievement with the introduction of a number of initiatives under the Payments System Vision 2020, the implementation of Bank Verification Number (BVN) scheme to address issues associated with the absence of unique identifier of bank customers across the country to put an end to identity theft which has been a worrisome phenomenon. There is no doubt that considerable progress has been made with the payments system as evidenced by the time it takes for third party instruments to be cleared for value to be given.
Financial Stability Supervisory Framework
The supervisory function of CBN is structured into four departments.
- Financial Policy and Regulatory Department.
- Banking and Supervision Department.
- Other Financial Supervision Department.
- Consumer Protection Department.
Financial Policy and Regulation Department develops and implements policies and regulations aimed at ensuring financial stability. It also licenses and grants approvals for banks and other financial institutions to commence operations.
Mobile Banking
Mobile banking has been defined as the provision and availability of banking and financial services with the help of mobile telecommunication devices. The scope of offered services may include facilities to conduct bank and stock market transactions, to administer accounts and to access customized information. According to this model mobile banking can be said to consist of three inter related concepts; mobile accounting, mobile brokerage, mobile financial services. Most services in this category designated accounting and brokerage are transaction based. The non-transaction based services of an informational nature are however essential for conducting transactions for instance balance enquiry might be needed before committing to the remittance of money.
In common parlance mobile banking is a service provided by a bank or other financial institution that allows its customers to conduct financial transactions remotely using a mobile device such as a smartphone or tablet. Unlike the related internet banking it uses software, usually called an app. provided by the financial institution for the purpose. Mobile banking is usually available on a 24-hour basis. Some financial institutions have restrictions on which accounts may be accessed through mobile banking, as well as a limit on the amount that can be transacted.
Transactions through mobile banking may include obtaining account balances and lists of latest transactions, electronic bill payments and funds transfer between a customer’s or another’s accounts. Some app. also enable copies of statements to be downloaded and sometimes printed at the customer’s premises; while some banks charge a fee for mailing hardcopies of bank statements.
From the bank’s point of view, mobile banking reduces the cost of handling transactions by reducing the need for customers to visit a bank branch for non-cash withdrawal and deposits transactions. Mobile banking does not handle transactions involving cash, and a customer needs to visit an ATM or bank branch for cash withdrawals or deposits. Many apps now have a remote deposit option; using the device’s camera to digitally transmit cheques to their financial institution. Mobile banking sure differs from mobile payments which involves the use of a mobile device to pay for goods or services either at the point of sale or remotely, analogously to the use of a debit or credit card to effect payment.
Future Functional In Mobile Banking
The following are the key functional trends possible in the world of Mobile Banking. With the advent of technology and increasing use of smartphone and tablet based devices, the use of Mobile Banking functionality would enable customers connect across entire customer life cycle much comprehensively than before. Some of the areas of this possible functional enrichments using Mobile Banking include:
*Communication enrichment-Video Interaction with agents, advisors.
*Pervasive Transactions capability-Comprehensive “Mobile Wallet.”
*Connect with new customer segment using games and social network.
*Content monetization- Micro level revenue themes such as music, e-book download.
*Vertical positioning-Positioning offerings over mobile banking specific industries.
*Horizontal positioning-Positioning offerings over mobile banking across all the industries.
*Personalization of corporate banking services-Personalization experience for multiple roles and hierarchies in corporate banking as against the enhancement in the current context.
*Building Brand-Build the bank’s brand while enhancing the “Mobile real estate.”
Challenges Of Mobile Banking
Security
As with most internet connected devices, as well as mobile-telephony devices, cybercrime rates are escalating year-on-year. The type of cybercrimes which may affect mobile-banking might range from unauthorized use while the owner is not present, to remote hacking, or even jamming or interference via internet or telephone network data streams. In the banking world, currency rates may change by the millisecond. Security of financial transactions, being executed from remote location and transmission of financial information over the air, are the most complicated challenges that need to be addressed jointly by mobile application developers, wireless network services providers and the banks’ IT departments.
The following aspects need to be addressed to offer a secure infrastructure for financial transaction over wireless network.
- Physical part of the hand-held device. If the bank is offering smart-card based security the physical security of the device is more important.
- Security of any thick-client application running on the device. In case the device is stolen the hacker should require at least an ID/Password to access the application.
- Authentication of the device with service provider before initiating a transaction. This would ensure that unauthorized devices are not connected to perform financial transactions.
- User ID/Password authentication of bank’s customer.
- Encryption of the data being transmitted over the air.
- Encryption of the data that would be stored on the advice for later online analysis by the customer.
One-time password (OTP) are the latest tool used by financial and banking service providers in the fight against cyber fraud. Instead of relying on traditional memorized passwords, OTPs are requested by consumers each time they want to perform transactions using the online or mobile banking interface. When the request is received the password is sent to the customer’s phone via SMS. The password expires once it has been used or once its scheduled life cycle has expired. It is therefore extremely important that SMS gateway providers can provide a decent quality of service for banks and financial institutions with regard to SMS services. The provision of Service Level Agreement (SLA) is then a requirement for the industry; it is necessary to give the bank customer delivery guarantees of all messages, as well as measurements on the speed of delivery, throughput, etc. SLAs give the service parameters in which a messaging solution is guaranteed to perform.
Scalability And Reliability
Another challenge for the bank is to be able to scale up the mobile banking infrastructure to handle exponential growth of the customer base. With mobile banking, the customer may be sitting in any part of the world (true anytime and anywhere banking) and therefore there is the need for the bank to ensure that the systems are up and running in a true 24×7 fashion. As customers find mobile banking more and more useful, their expectations for solution will increase. Due to the nature of the connectivity between the bank and its customers, it would be impractical to expect customers to regularly visit banks or connect to a web site for regular upgrade of their mobile banking application. It will be expected that the mobile application itself check the upgrades and updates and downloads necessary patches. However, there could be many issues in implementing this approach such as upgrade/synchronization of other dependent components. It should be noted that studies have shown that a huge concern about having mobile banking more widely used, is banking customer’s unwillingness to adapt. Many consumers, whether they are misinformed or not, do not want to begin using mobile banking for several reasons. These could include the learning curve associated with new technology, having fears about possible security compromises, just simply not wanting to start using technology, etc.
In the particular Nigerian situation, mobile banking was first launched in 2009 by a partnership which comprised MBA graduate students who had met at a Business School in America after an approval was given by the Central Bank of Nigeria. This initiative which operated under the designation; ‘Paga’ was then used to remit funds either from mobile phones or internet related channels or by going directly to appointed Agents. This Organization also had account relationship with some banks in the country. It was not until April 1, 2015 that the Central Bank issued approved guidelines for Mobile Money Services in the country. These guidelines essentially recognized two models for the operation of Mobile Money services in the Country; Bank and/or its Consortium as lead or non-bank led by a corporate entity duly licensed by the Central Bank. A cog in the wheel is the stipulation of the minimum capitalization which was kept at a prohibitive level of 2 billion Naira. And in my opinion these operators would be hard pressed to differentiate themselves now by unique value addition to sustain their going concern in a deluge of many such services in the Nigerian economy which heightens the competitive pressure
Agency Banking
A banking agent is a retail or postal outlet contracted by a financial institution or a mobile network operator to process client’s transactions. Rather than a branch retailer, it is the owner or an employee of the retail outlet who conducts the transactions and lets clients deposit, withdraw, and transfer funds from their employer. Banking agents can be pharmacies, supermarkets, convenience stores, lottery outlets, post offices, and many more.
Agents are usually equipped with a combination of point-of sale (POS) card reader, mobile phone, barcode scanner to scan bills for bill payment transactions, personal identification number (PIN) pads, and sometimes personal computers that connect with the bank’s server using a personal dial-up or other data connection. Clients that transact at the agent use a magstripe bank card or their mobile phone to access their bank account or e-wallet respectively. Identification of customers is normally done through a PIN, but could also involve biometrics. With regard to the transaction verification, authorization, and settlement platform, banking agents are similar to any other remote bank channel.
Banking agents help financial institutions to divert existing customers from crowded branches providing a ‘complementary’, often more convenient channel. Other financial institutions, especially in developing markets, use agents to reach an ‘additional’ client segment or geography. Reaching poor clients in rural areas is often prohibitively expensive for financial institutions since transaction numbers and volumes do not cover the cost of a branch. In such an environment banking agents that piggy-back on low income people during their first-time access to a range of financial services. Also, low-income clients often feel more comfortable banking at their local store than walking into a marble branch.
Banking agents are the backbone of mobile banking, i.e. performing transactions over a mobile device most often a mobile phone. To enable clients to convert cash into electronic money and vice versa which can then be sent over their mobile, clients will have to visit a branch, automated teller machine or banking agent. Especially in remote and rural locations, where cash is still the most important way to pay and transact, a mobile banking service is dependent on banking agents to enable clients to effectively use the services. Lower transaction cost (closer to client’s home; clients will still visit convenience stores for groceries anyway, etc. ), longer opening hours, shorter queues than in branches, more accessibility for illiterates and the very poor who might feel intimidated in branches. For agents increased sales from additional foot-traffic, differentiation from other businesses, reputation arising from affiliation with well-known financial institution, additional revenue from commissions and incentives.
For financial institutions increased customer base and market share, increased coverage and penetration with low cost solution in areas with potentially less number and volume of transactions, increased revenue from additional investment, interest, and fee income, improved indirect branch productivity by reducing congestion. For the client, there is no difference in accessing his or her bank account at the agent or in a branch or at an ATM. However, besides, signing a contract with the financial institution it will be working for, the banking agent also has to open a bank account at the same time In addition the store has to deposit a certain amount of cash into that account which will serve as the banking agent’s ‘ working capital’. In many cases, rather than asking the agent to come up with the cash deposit the financial institution will extend the store a credit line. The size of the credit line is normally not standardized, but adapted individually to each agent depending on its size, the expected volume of transactions and how long the agent has already been working with the bank. This is how the credit line will be used during each transaction; Client withdraws money (‘cash-out transaction): agent account is credited in same amount. Client’s deposits money (‘cash-in transaction): agent account is debited in same amount. In case the agent’s credit line had reached its limit, and the agent’s bank account does not have sufficient funds to cover the received funds, the POS will block and can only be deblocked if the funds have been deposited in the agent bank account. For the case of a customer using a bank card the transactions process is popular application and therefore would not delay us here.
And when transaction volumes are relatively low, a banking agent’s staff may process banking transactions in addition to their normal sales. The banking equipment is located behind the store’s general cashier. Posters and marketing materials may be limited to a small display next to the EFTPOS terminal and a small sign outside the store. A banking agent may set up dedicated store which is similar to a mini-branch, i.e. a small shop with around 1-3 tellers, but transactions are processed by non-bank staff. In most cases, the store will be branded by the bank to actually win the trust of the rural dwellers.
Brazil is probably the most developed market where banking agents have significantly increased the financial system infrastructure. Seventy –four institutions are currently managing around 105,000 points of sale in Brazil that reach all 5,561 municipalities. Within only 5 years, the banking agent network facilitated 12.4 million new bank accounts and today the network comprises 56 per cent of all points of sale in the Brazilian financial system. Financial institutions in other Latin-America markets such as Peru, Colombia, and Mexico have started to learn from the Brazilian experience, adjusted their regulation, and established their own banking agent networks. Pioneers in other regions can be found in Kenya, Mongolia, South Africa, and the Philippines.
Detailed guidelines for Agency Banking in Nigeria was issued by the Central Bank on February, 2013 to regulate the relationship aimed at the provision of minimum standards for the effective operation of Agent Banking relationship in the country. In the Nigerian situation the relationship could be either bank or non-bank led particularly Mobile money operators. The scope of permissible activities as detailed in the guidelines includes essentially the performance of basic banking operations. The major benefits expected to be achieved under this scheme is to promote greater financial inclusion by reaching the unbanked and by making services available for hours beyond what should be expected with banks as they keep to their regular banking hours. Though the license is renewable biennially with monitoring scheduled annually, no comprehensive report of the Agent banking experience in the country has so far been advertised. It is on record that some of the banks in the country have taken advantage of the scheme to contribute their quota to more financial inclusion and to that extent grow their customer base.
Cryptocurrency
Cryptocurrency is a digital asset designed to work as a medium of exchange using Crypography to secure the transaction and to control the creation of additional units of the currency. To qualify as a medium of exchange we might wish to interrogate here to what extent digital currencies meet known essential attributes of legal tender currency; store of value, medium of exchange and unit of account etc. Crypocurrencies are often classified as subsets of digital currencies and are also classified as a subset of alternative currencies and virtual currencies. Bitcoin became the first decentralized crypto currency in 2009. I did not believe that this unit of currency has been along for this long because I only became conscious of them as I started hearing about them not too long ago particularly when the Central Bank of Nigeria commenced issuing notices cautioning the banking public to beware of such digital phenomenon which do not have its endorsement. And since then numerous crypto currencies have been created. These are frequently referred to as altcoins, as a blend of bitcoin alternative. These digital currencies use decentralized control transaction database in the manner of a distributed ledger.
Decentralized cryptocurrency is produced by the entire crypocurrency system collectively, at a rate which is defined when the system is created and which is publicly known. In centralized banking and economic systems such as the Federal Reserve System, corporate boards or governments control the supply of currency is achieved by printing units of fiat money or demanding additions to digital banking ledgers. In case of decentralized cryptocurrency, companies or governments cannot produce new units, and have not so far provided backing for other firms, banks or corporate entities which hold asset value measured in it. The underlying technical system upon which decentralized cryptocurrencies are based was created by a group of individuals known as Satoshi Nakamoto.
As at March 2015, hundreds of crypocurrrency specifications exist; most are similar to and derived from the first fully implemented decentralized cryptocurrency; bitcoin. Within cryptocurrency system the safety, integrity and balance of ledgers is maintained by a community of mutually distrustful parties referred to as miners: members of the general public using their computers to help validate and timestamp transactions adding them to the ledger in accordance with a particular time stamping scheme. The security of cryptocurrency ledgers is based on the assumption that the majority of miners are honestly trying to maintain the ledger, have financial incentive to do so.
Most cryptocurrrencies are designed to gradually decrease production of currency, placing an ultimate cap on the total amount of currency that will ever be in circulation, mimicking precious metals. Compared with ordinary currencies held by financial institutions or kept as cash on hand, cryptocurrencies can be more difficult to be seized by law enforcement. This difficulty is derived from leveraging cryptographic technologies. Cryptocurrencies such as bitcoin are pseudonymous, though additions such as Zerocoin have been recommended which would allow for true anonymity.
Central Bank representatives have stated that the adoption of cryptocurrencies such as bitcoin poses a significant challenge to Central Banks’ ability to influence the price of credit for the whole economy. They have also stated that as trade using cryptocurrencies becomes more popular, there is bound to be a loss of customer confidence in fait currencies. It would also make it more difficult for statistical agencies to gather data on economic activity, which are used by governments to steer the economy. Therefore it is important to note that virtual currencies pose a new challenge to central banks’ over the important functions of monetary and exchange rate policy.
The legal status of cryptocurrencies varies substantially from country to country and it is still undefined or changing in many of them. While some countries have explicitly allowed their use, others have banned or restricted it. Likewise, various government agencies, departments, and courts have classified bitcoins differently. For instance China Central Bank banned the handling of bitcoins by financial institutions in China during an extremely fast adoption period in early 2014. In Russia, though cryptocurrencies are legal, it is however illegal to actually purchase goods with any currency other than the Russian ruble!
On March 25, 2014, the United States Internal Revenue Services ruled that bitcoin will be treated as property for tax purposes as opposed to currency. This means bitcoin will be subject to capital gains tax. One benefit of this ruling is that it clarifies the legality of bitcoin. No longer do investors have to worry that investments in or profit made from bitcoins are illegal or how to report them to the IRS. In a paper published by researchers from Oxford and Warwick, it was shown that bitcoin has some characteristic more like the precious metals market than traditional currencies, hence in agreement with the IRS decision even if based on different premise.
As the popularity of and demand for online currencies increased since the inception of bitcoin in 2009, so do concerns that such an unregulated person to person global economy that cryptocurrencies offer, may become a threat to society. Concerns abound that altcoins may become tools for anonymous web criminals. The fact remains that cryptocurrency network display a marked lack of regulation that attracts many users who seek decentralized exchange and use of currency; however the very same lack of regulations has been critiqued as potentially enabling criminals who seek to evade taxes and launder money.
Transactions that occur through the use and exchange of these altcoins are independent from formal banking systems, and therefore can make tax evasion simpler for individuals. Since charting taxable income for transactions made using existing cryptocurrencies, a mode of exchange that is complex and in some cases impossible to track.
The caution surrounding the adoption of cryptocurrencies is often based on the fact that digital currencies that are managed through advanced encryption techniques do not have central control and as a result cannot have financial security. Banks generally do not offer services for cryptocurrencies and sometimes refuse to offer services to virtual currency companies. There are ways to permanently lose cryptocurrenncy from local storage due to malware or data loss. This can happen through the destruction of the physical media, effectively removing lost cryptocurrencies forever from their markets. Cryptocurrency transactions are normally irreversible after a number of blocks confirm the transaction. One of the features crypotocurrency lacks in comparison to credit cards is consumer protection against fraud. Traditional financial products have strong consumer protections. However if bitcoins are lost or stolen, there is no intermediary with the power to limit consumer losses. Regulators in several countries have warned against their use and some have taken concrete regulatory measures to dissuade users. The bottomline is that there are many criteria that crypocurrencies must satisfy before they can become mainstream. However what is certainly incontrovertible is the fact that the evolution of digital currency and its future acceptance pose severe imponderables for the future of banking practice as we know them today.
Despite that bitcoin is seen by most traditional finance players as most unstable and complicated, with doubts regarding its inherent value, some player still hold out the hope that virtual currencies have the potential to greatly affect the more traditional ways of doing business. But virtual currency is not regulated in Nigeria as in many other jurisdictions across the globe. Logically it is difficult to fault the logic of the Central Bank that it is not in a position to regulate what it does not own. Asking the Central Bank to regulate virtual currencies is tantamount to asking the Bank to regulate the internet. The Securities and Exchange Commission has also issued a note of warning to investors to give a wide berth to virtual currencies as an investment vehicle. Therefore in the interim we would wish to join the regulatory authorities to caution regarding dealings in Virtual Currencies and to remind all that they do so at their own risk as there is no recognized Institution in the country that is in a position to intervene with such investment as an adjudicator. But I must confess to being taken a back during my recent visit to Abuja to find an advert inviting the public to come and familiarize themselves on how to deal in Virtual Currency. So really the jury is still out as we most certainly have not heard the last on this scheme except to observe that if at all it does take off, it has the distinct potential of altering fundamentally the way business is done today.
FinTech NEW FACE OF BANKING.
It remains an unassailable fact to observe that banking in Nigeria has evolved with the adoption of Financial Technology which would seem to have galloped in tandem with the boost in the subscription level of mobile phones users in the country and this development has to a considerable extent redefine the banking ecosystem. FinTech is set to redefine banking business in a way that will deliver efficient services in a manner that will really capture the needs of the millennial; the digitally savvy generation. The generation Y as they are fondly called; a segment that is becoming the fastest growing in the world and in effect impacting economies and industries across the globe. This generation lives in a digital world and are used to digital channels and social media to meet their digital lifestyle. The millennial is in constant need of a 24 hour banking service that would fit into their lifestyle; a bank they can take with them, one without borders that offers them the opportunity to transact business anytime, anywhere and any day.
Available data demonstrates that Nigeria is becoming Africa’s FinTech hub after experiencing a boost in mobile operations. According to a report by Finextra in 2011 mobile money operations in Nigeria grew from an average monthly transaction value of 5 million dollars to 142.8 million dollars in 2016. A high mobile phone use is another factor to consider. It is believed that there are over 23 million smart phones in use with an estimated 150 million active subscriber lines. KPMG estimated that investment in Nigeria FinTech in two years exceeded 200 million dollars.
The promise of FinTech is great. It is shaking up a stodgy banking system and helping to build a more efficient one, especially for consumers and small businesses. In the particular Nigerian situation where about 84 million people representing about 47 per cent of the population are unbanked and since mobile phone penetration has attained unbelievably much higher levels, such a scenario provides a perfect setup to leverage FinTech for better result in the desirable direction of more financial inclusion. Also global investment in financial technology ventures tripled if not even quadrupled over the near term clearly signifying that the digital revolution has arrived in the financial sector. It is still however unclear whether this presents more of a challenge or an opportunity for the industry players, but established financial service players are starting to take bold steps to engage with emerging innovations. What is certainly discernible even now is that as a rule of thumb that new generation banks have tended to embrace aggressively innovation driven by emerging technology as a differentiation competitive strategy.
Activities that would allow banks to rejig their operating architecture include openness, collaboration and investment. Openness to innovation is at the heart of the digital revolution. For relatively large organizations this means engaging with external technology solutions, knowledge capital and resources, and often opening up the organization’s own intellectual property, assets and expertise to outside innovators to help generate new ideas, change organizational culture, identity and attract new skills, and discover new areas for growth.
Traditionally, financial services institutions have partnered with others in their own industry especially to share processes or services considered non-core which help all collaborators reduce their costs or create new market opportunities. But we believe that the level of collaboration would have to be upstaged in the future to build ties with those in different industries and with different outlooks, and to identify new ways to generate value. Venture investing has always been at the heart of the start-up innovation model. Now, more than ever, established financial services firms are taking this route to try and generate innovation for their businesses.
Embracing these themes and creating the right foundations will allow banks to disrupt their own business models rather than sit on the sidelines watching challenger models disintermediate them. But such themes also create challenges when it comes to the rate of change and approach to risk hardwired into the way banks currently adapt to innovation. Anticipating this, banks are creating new businesses within their existing structures that adapt and collaborate to meet challenges and make faster use of their enduring source of competitive advantage; the customer.
The impact of the digital revolution on current banking players is not well defined. Digital disruption had the potential to shrink the role and relevance of today’s banks, and simultaneously help them create better, faster, cheaper services that make them an even more essential part of everyday life for institutions and individuals. To make the impact positive, banks are acknowledging that they need to shake themselves out of institutional complacency and recognize that merely navigating waves of regulation and waiting for interest rates to rise won’t protect them from obsolescence. Embracing openness and collaboration, and making smart investment is a good place to start. But they will only know they are winning in digital space when bank valuations start to factor in the future value of proven innovations, in addition to protecting their core franchise. The banks of tomorrow therefore are definitely going to have different and progressive approach to delivering banking services to the customer.
Using any measure of size, China is the world’s leader in FinTech. It is by far the biggest market for digital payments accounting for half the global market which is not in itself surprising considering the share size of the market in China as underpinned by its population size. A ranking of the world’s most innovative FinTech firms gave the Chinese companies four of the five top slots in 2016. Today, digital payments account for nearly two-thirds of non-cash payments in China, far surpassing debit and credit cards. While for a change when it comes to FinTech the rest of the world better learn from the developing countries of the world as championed by the Kenya experience embodied by the widely successful M-PESA mobile money system driven by Safaricom in that country. M-PESA has made it possible for a large swathe of the population to gain financial inclusion by providing the opportunity to transact financial services vide the mobile phone, on a continent where typically 70 per cent of the population is unbanked. This organization today has more than 60 per cent of Kenya’s mobile users; which is not bad for a service which was only launched in 2007. In Nigeria the Yellow Mobile Account offered by ICT giant CWG Plc. and GSM major MTN, added over 6 million accounts to an early adopter, Diamond Bank, within the first year of launch. Mobile money Services today is generating 6.7 per cent of Africa’s Gross Domestic Product (GDP).
On the implications of development with digital currency on the regulatory regime, much would depend on the wholesale impact of customer preference and the evolving trajectory of banking business of the future. We can allow our imagination free reign by conceptualizing a world where all money is digital where people prefer instead to keep digital currency units in electronic wallets on phones, watches or other electronic devices. With such development the regulatory environment would be inevitably impacted. But if customers continue to maintain a strong appetite for traditional instruments of transactions such as note and coins, cheques and related products that currently profile banking business then the regulatory authority would continue to be the Central Bank. Already the Kenya’s experience is that the regulation of M-PESA falls under the authority of the Commission that midwifed the scheme rather than the Central Bank. These concerns are beginning to engage the attention of the global regulatory authorities as the recent gathering in 2015 of over 300 central bankers and policy makers from 90 countries of the world who formed the Alliance for Financial Inclusion, dedicated a greater percentage of their time during the meeting deliberating on the likely outline of developments with FinTech which it expressed the belief has the potential to deepen formal financial intermediation of their economies for better results.
What is fascinating is the evolving development whereby retailers are beginning to dabble into the area of financial intermediation. For instance Amazon launched Amazon Cash, a way to shop at its site without a bank card. This service allows customers to add cash to their Amazon.com balance by showing a barcode at a participating retailer, then having the cash applied immediately to their online Amazon account. This product is meant to appeal to those who get paid in cash, but don’t have a bank account or debit card and who don’t use credit cards. An unlikely scenario in Nigeria today. Also Google is also rolling out a new integration on mobile. Users of the Gmail app on Android will be able to send or request money from anyone, including those who don’t have a Gmail address with just a tap.
There is also this virtual Visa Card introduced by Chams Mobile in conjunction with Skye Bank which is calculated to expand financial inclusion to millions of Nigerians by offering low cost mobile banking solution as the card is issued free of charge but also linked to a broad range of financial services. This is a virtual card to the extent that patrons would view an image of their card on their mobile phones, tablets or PCs, whereby all the essential features of a physical card are shown on its virtual form; card number, expiry date and CVV number. This removes the need for carrying a physical plastic card which could still be issued as an optional extra. This is a very diverse product with a number of applications across various businesses and consumer segments which includes co-branding cards for eCommerce companies, gift cards as money could be credited to a recipient‘s mobile phone, a Naira card for Nigerians in diaspora as it can be issued online, a company allowance card and, as a payment card for retail distribution as it’s supported with a unique invoicing service.
CONCLUDING OBSERVATIONS
We wish to conclude in making this presentation by highlighting the fact that Nigerian banks have maintained profitable operations despite the recession which ravaged the economy. But also note that banking almost became a nightmare as bankers had their job cut out for them as they contended with the many frequent changes introduced by the Regulator as it reacted to pressure to produce the magic wand that would stabilize the exchange rate. But we must not however fail to acknowledge the fact that the much needed relative stability in the rates have now been more or less achieved even as we give due credit to the Central Bank for making this feat possible.
We note here that though developments with the operations of Mobile and Agent banking have made considerable in roads, they remain work in progress while we wish to draw the attention of the authorities to the need not to relent in their tracking of developments in this regard to ensure that all concerned are kept on their toes and to have the presence of mind to initiate corrective measures as may be recommended by developments. It is also in other to observe that with the impact of technology on banking that the jury is still out on the future outlook of branch banking as we know it today.
On Cryptocurrency we shared the perspectives of the Central Bank that asking the Central Bank to regulate virtual currencies is utopian as it is not possible to regulate what it has not issued and even as the Bank itself struggles to get a handle with regard to its operations. But the existential reality regarding the operations of virtual currency in the country is staring us all on the face and therefore we must admit here that this is a development whose impact could be far reaching based on the trajectory of its evolution. But we would also wish to add our voice to the fact that dabbling into investment based on this scheme could be risky and would advise patrons to exercise due caution.
It is reassuring that Nigeria is already being regarded as the FinTech hub of Africa based on the level of penetration of mobile money as could be gleaned from the number of mobile phones in use in the country and related investment. We would therefore wish to align ourselves with the goal as encapsulated in the FSS2020 that fidelity has been kept with the determination to make Nigerian banking evolve into Africa major International Financial Center thereby constituting banks in the country into catalysts that would transform the Nigerian economy to attain the ambitious goal of being one of the 20 largest economy in the foreseeable future but most certainly not by the year 2020. It now remains for me to thank you all for your kind and patient attention. May God bless us all.
Dr. Boniface Chizea, FCIB, MIoD, MNIM, KSM, Asaba
