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Banks Vs Fintechs – Who should be Afraid? (Part Two)

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Fintech

A New Type of Disruptor

There are two categories of companies that don’t get enough attention and they aren’t the typical disruptors you think about when you’re talking about banks being disrupted.

Read part one here

The first set comprises 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 are 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 on 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.

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These companies do not only have the advantages that the banks have, they even have stronger inherent advantages. Let’s consider some of these 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).

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This is an unbeatable pool of customers to distribute products and services to.

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 go for Amazon, Microsoft and co.

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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.

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A Strong and Reliable Brand

In Nigeria today, one can argue that Facebook is more popular than a lot of the banking brands 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 banks’ data look like child’s play.

Imagine how tailored and super relevant the financial products and services will be with the amount of data that these companies already have.

Should the Banks be Concerned?

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.

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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 are in better positions 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 better experiences 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 customers’ 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.

Conclusion

My submission, therefore, is that it is really hard to disrupt banks. Fintechs are innovating in 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.

Writer: Segun Adeyemi

Nairametrics frequently publishes articles from experts such as financial analysts, economists, researchers and investors. We also feature articles from guest writers and bloggers who wish to push their views and opinions through our platform. To get your articles on Nairametrics, kindly send an email to [email protected] and we will publish it within 24 hours of approval by our editorial team.

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Guinness Nigeria Plc jostles to improve from its insipid 2020 financial year

In the 2021 financial year, the task before the company is to drive its strategic objectives to bring the company back to profitability.

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Baker Magunda, Guinness Nigeria Plc, Baileys, Why Guinness is a stock to pick - RenCap 

Guinness Nigeria Plc has started its 2021 financial year with a loss, just like the company did in 2020. However, this time, the value of the loss adds up to N841 million for the opening quarter. In 2020, it was N370 million, which set the tone for what eventually degenerated into a truly horrible and uninspiring financial year. A year that saw loss position in the aggregate 12 months period peak at N12.6billion.

READ: Brewery sector: A quarter to forget

READ: Guinness’ parent company expects alcohol sales to improve as restaurants and bars gradually reopen

Apparently, all that could possibly go wrong with Guinness, did go wrong. From what in retrospect, turned out to be an over-ambitious outlook at the start of the year, to the effects of not giving immense attention to controllable costs, rise in inflation with its resultant pressure in decreased consumer spending, and the crippling effects of the unprecedented COVID-19 pandemic; no company could have asked for worse.

However, the horrendous performance was not peculiar to Guinness Nigeria alone. The results from its competitors, such as the International Breweries Plc, and Nigerian Breweries Plc, amid appalling industry figures recorded, proved that 2020 has been a tumultuous year indeed for all companies operating in the brewery manufacturing sector.

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READ: No trophy for International Breweries after bland Q2 results

The analysis of FY 2020

How poor was the 2020 FY performance of Guinness Nigeria and what can be inferred from its Q1 2021 reports? For a company in the habit of declaring dividends especially after the N5.5billion profit in 2019, how did the company move from that profit margin to a loss of N12.6billion just 12months after?

  • Profit declined by 129.1% from N5.5billion Profit after Tax in 2019 to N12.6billion Loss after Tax in 2020. This Steep decline was evident in all arrears from top-line to bottom.
  • Gross profit down by 16.9% to N33.33billion in 2020 as against N40.13billion reported in 2019
  • Revenue plunged 21% to N104.41billion in 2020, from N131.5billion generated in 2019.
  • Cost of sales did show some improvement, moving from the N91.4billion expended in 2019 to N71.1billion in 2020 – a 22% decrease.
  • Administrative cost continued the rising trajectory to N14.3billion in 2020 from N9.9billion in 2019.
  • Finance cost rose to N4.5billion from N2.6billion in 2019, while finance income declined from N750.9million to N301million in 2020.

READ: PZ incurs N1 billion in exchange rate loss 

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Speaking on 2020 results, Mr. Baker Magunda, Managing Director/CEO, Guinness Nigeria Plc said,

“The last quarter performance of fiscal 2020 was significantly impacted by restrictions due to COVID-19, exacerbating the already challenging economic environment. Closures of on-trade premises (bars, lounges, clubs, and dine-in restaurants), which represents the major part of the consumption occasion for our products and bans on celebratory occasions, impacted sales.

“Demand was also impacted by reduced consumer income, unemployment concerns due to the shutdown of a large number of businesses, and increases of VAT and excise throughout the year.”

READ: R.T. Briscoe declares N618.9 million loss in H1 2020, as sales of vehicles fall 

Magunda further explained that, “Distribution was impacted by the ban of inter-state, and in some cases intra-state travel. Although, Management worked diligently with regulatory authorities to minimize the impact, this hampered our distributors’ ability to restock and have our brands available for purchase.”

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The analysis of Q1 2021

In the 2021 financial year, the task before the company is to drive its strategic objectives to bring the company back to profitability. The Chairman, Mr Babatunde Abayomi Savage, recognizes that this would be no stroll in the park, as he affirmed that despite predictions that the coming year will be challenging globally due to the new normal, “we believe we have experienced our full share of the impact and are now geared to go back to profitability.”

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READ: MTN, Airtel, Glo, other Telcos’ operating costs drop to N1.756 trillion in 2019

The opening quarter for 2021 (July-September) saw improvements in sales volumes on the back of eased restrictions from the COVID-19 necessitated lockdown.

  • Revenue posted is N30.02billion, 11.64% increase from the N26.89billion recorded in the corresponding period of 2020.
  • However, Cost of sales worsened by 21.1%, increasing from N18.9billion in Q1 2020 to N23.01billion in Q1 2021.
  • Marketing and distribution expenses, as well as administration expenses, showed marginal reduction, depicting management interest in controlling these variables.

READ: Q1’20: Okomu Oil’s result is more proof that essentials always win

Bottomline

Generally speaking, results for the opening quarter show signs of improvement, but the tax component was the primary factor responsible for masking the progress obtained in Q1 and eroding promising signs.

With the gradual re-opening of its previously closed company buildings in Benin City, and the shift in focus from the largely underwhelming lager segment to investing more in spirits, it will be interesting to see how this impacts volumes and revenue in subsequent quarters, despite the apparent economic conditions.

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Why Treasury Bills at 2% is actually a good thing

While the current prevailing rate of 2% might not be good news for investors, the low rates could be better for the Nigerian economy.

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Implications of the new CBN stance on treasury bill sale to individuals, Nigerian Treasury Bills Market Witnessed Bullish Run on High Liquidity Last week

Latest stop rates from the Nigerian Treasury Bill auction held last week revealed some of the lowest rates for the nation’s T-Bills market in recent times. The 91-day bills had stop rates of 1% and the 182-day bills was also 1%. For the full year, the 364-day bills had an equally low rate of 2%. This is actually a good thing, as investors will become more creative, amongst other benefits.

If you were a frequent Treasury bills investor in the pre-COVID-19 era, you will most likely agree that one of the favorite markets for risk-averse investors, has taken a major dip over the past year. In 2019, the rate was as high as 13.029% – enough to give you a fighting chance with the equally high rate of inflation, as opposed to a savings account offering around 4%.

READ: FG liberalizes the Mining sector, grants 5 years tax concession to miners

However, while the current prevailing rate of 2% might not be good news for investors; theoretically, the low rates could be better for the Nigerian economy.

Double digits risk-free rates impede development

At the very basic level, having a risk-free investment that yields a guaranteed interest rate of about 15%, means that investors can put in their funds and fold their hands. Therefore, the option of making less risky investments become less alluring, as the lower rates can easily be mitigated by the relative safety of the principal (and return!) – something many businesses cannot boast of today.

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READ: NB Plc to raise additional N20 billion from its N100 billion Commercial Paper

Put simply, why should business owners risk employing people and possibly make losses, when they can invest in Treasury bills? After all, they too are exposed to the same inflation rate.

Unsurprisingly, this has contributed its own fair share in impeding the growth of the nation. Think about the percentage of the income of Nigerian financial institutions like banks that are from Treasury Bills. Conservatively, Nigerian PFA’s also have a significant percentage of their funds in Treasury bills – doing little and gaining little. It is always about the “cheapest to deliver.”

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READ: U.S public listed company allocates $425 million into Bitcoin

No society can effectively spur development with only safe investments, as it comes with its own benefits like creating more jobs, building the stock market, and ultimately strengthening the industries in the country.

‘Model’ economies have really low risk-free interest rates

Some of the largest economies like the US, Japan, and Germany are known to have some of the lowest rates for risk-free assets. Whilst their rates cannot also be isolated from their equally low borrowing costs, the facts are crystal clear.

From a demand and supply standpoint, at 15%, it means that what the government is willing to pay to get capital is high. This makes it even more expensive for the government to fund infrastructural development.

READ: Safest, regulated Cryptocurrency, Arcoin backed by U.S. Treasury securities

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From a private sector standpoint, it is by taking risks that angel investors emerge, companies get seed funding, and further development is enhanced. Without this development, very few jobs will be created. Interestingly, most of the countries with the highest amount of venture capitalist investments have some of the lowest rates for risk-free assets.

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How investments should be done

There is an old investment strategy known as “Carry Trade.” The way it works is simple – you borrow at a low-interest rate, convert the borrowed amount into another currency, and invest in assets that provide higher rates of return in that currency. If Treasury Bills offer such high rates, “foreign investments” of this nature will not aid in the overall development of the economy. As long as the exchange rate is stable, investors get to make a killing with no value-added. This is just one of the many lapses of investing in high risk-free assets.

READ: Crypto: Popular Hedge Fund, Grayscale record best quarter ever

With the rates low, people can now invest the way investment should be done. Investors will now be forced to be creative. Consequently, this will birth even further infrastructural developments. For example, with this rate sustained, mortgage-backed securities and other forms of infrastructural funding can now take place.

Though, it is not without its own limitations, keeping the free money low is always a better option.

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#ENDSARS Protests: Why this is different

The #ENDSARS is not just a protest about rogue police officers, it is larger than that and this is why.

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In June 2019, the Hong Kong Government revealed plans to implement a controversial law that allows the extradition of Hong Kong citizens to mainland China.  

As the government dithered, pockets of protests broke out, which triggered clashes with Policemen that most protesters viewed as excessive. Within days, protesters went from a few thousands to over 2 million, the largest in the history of Hong Kong.  

By the time the government decided to pull back the bill; the protesters, many of them young, were already demanding for more than just a withdrawal of the bill. They wanted the police investigated and prosecuted for using excessive force, amnesty for protesters, and a right to vote for all.  

The protests lasted for about 6 months only to be dissipated by social distancing requirements, due to the COVID-19 pandemic. Before then, protesters had grounded the economy, which drove the Hong Kong economy into a recession and $3 billion in stimulus.  

Nigeria is experiencing its own version of protests similar to that of Hong Kong, except that it does not have any money to inject as stimulus. The latest protests were triggered by anger over the alleged violent killings and extortion by the controversial anti-robbery unit of the police, known as SARS or FSARS.  

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For years, young Nigerians, mostly via social media, have called for the unit to be disbanded and rogue elements in the force brought to justice. Despite repeated promises by the government, they have failed to heed to their demands, triggering a new wave of protests that has now spread across the country. 

From demanding an end to SARS, prosecution of rogue police officers, and reforms; Protesters are more emboldened, threatening to continue if all their demands are not met. The government is scrambling to contain a situation that is escalating and could dangerously metamorphose into violent clashes with authorities, leading to loss of lives and destruction of properties 

There is also fear that this week’s protest could be sustained for more days, if not weeksYou only need to look at the economy of the Nigerian Youth to understand why this is such a critical moment. 

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According to data from the National Bureau of Statistics, Youth unemployment is at an all-time high of 34.9%, making up 64.3% of total unemployed Nigerians. University students have also been at home for months, due to the 7 months ASUU strike.  

Their parents are also facing tougher economic conditions with inflation rate galloping past 13%, after multiple devaluations and the removal of fuel subsidy. It was just a matter of time for them to find a rallying point to vent their frustration. 

There is still a window for the government to deescalate tensions, and it is not just by accepting the terms of protesters on paper and making bogus pronouncements. Nigerian youths want concrete actions and it starts by making immediate changes in the leadership of the Police – the rogue unit in particular. Officers suspected of murdering innocent Nigerians need to be made to face justice.  

The government also needs to urgently resolve its dispute with the Academic Staff Union of Universities (ASUU) on the Integrated Payroll and Personnel Information System (IPPIS). Students and young Nigerians also need to be offered grants and palliatives to help them cushion the effects of an economic crunch that is in no way their making.  

Proceeds from the Nigerian Youth Investment Funds should be disbursed immediately to those who have applied. The government also needs to introduce student loan schemes for millions of Nigerian youths, who can’t afford to pay for quality university education.  

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The National Assembly also needs to introduce laws that protect young Nigerians from police brutality, status profiling and wrongful arrest. Investments in mega tech hubs across the country, establishment of recreation zones in major cities must be carried out by State Governments, to keep them engaged in activities that can better their lives.  

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No investor, local or foreign will put money in any country where its youths are in long-drawn protest with the governmentAs the economic cost of the protests for the last few days continues to mountthe negative effects could be more dire than a deeper recession. 

#ENDSARS does not just represent a protest against rogue Police officers; it is a symptom of the poor state of the economy, which for months has only gotten worse. Fortunately, the agitation can still be managed but time is running out.  

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