By Deji Oguntonade, Payments Director, Nigeria, Rockefeller Philanthropy Advisors
Today, banks in Nigeria have an Achilles’ heel in two areas: innovation and collaboration. These weaknesses are part of why we are currently witnessing stagnation in the banking industry. Historically, one of banking’s “greatest” innovations has been its use of technology to deepen access to its products and services via retail banking. While this approach worked for quite a while, it has lost its steam in recent years, and banks are now struggling to deepen adoption via agent banking to maintain dominance in the financial space over other emerging institutions.
Indeed, retail banking has struggled over the past 12 years, and in the last 3 years, we have witnessed the flattening of the profitability curve or even decline. Given these trends, banks should consider ending their singular dependence on a retail banking strategy and instead return to the wholesale strategy they abandoned years ago.
Damned if you do, damned if you don’t
We are all familiar with this phrase made even more popular by the cartoon character Bart Simpson: “You are damned if you do, and you’re damned if you don’t.” This phrase captures the banking community’s fears about open banking since its early Payment Systems Directive (PSD2) days in Europe. Specifically, banks fear that open banking is part of a grand plan to neutralise their dominance of the financial space and allow some fintech newcomers to take over.
However, these fears are misguided, and there are opportunities that banks can unlock amid the emergence of open banking. So, first, let us shift from a “damned if you do” perspective to a “win-win” perspective.
Indeed, fintech companies and other financial institutions (FI’s)—rather than oil companies, manufacturing, or service-related enterprises—will be the new cash cows that are nimble, highly innovative, and ready and equipped to tread the path less travelled by banks. However, they are the unicorns of tomorrow who cannot grow into Pegasus status without Application Programming Interface (APIs)—an essential input from the highly equipped and capable stables of the banks.
So, what would you call a bank that has a blessing of unicorns in its stable? Your guess is as good as mine: perhaps highly successful, a unicorn incubator, or a unicorn (albeit born-again) itself multiple times over? That is the longer-term vision that banks should strive to achieve. For banks, it is time to grow big by shrinking—not unlike the recent past, when merchant banks were the poster children of the financial industry due to their focus on wholesale customers and huge returns gained by servicing these customers on a low asset base with highly skilled workers (credit, risk, relationship management, treasury, etc.)
A win-win for banks: adopting a wholesale strategy using APIs
What banks need to do is to distill their most valuable assets into APIs. A lot has been said about banks going digital and closing branches as they convert customers to digital channels. I dare say that this approach has not been too successful because banks still want to be in the driver’s seat in pushing retail banking which requires huge investment in physical touchpoints to serve the last mile customer. However, shareholder pressure will never allow traditional banks to actualise this. Already, five-year-old companies are becoming more capitalised than banks which have been around for decades. Investors are no longer looking up to banks that are stuck in their old ways and failing to maximise the use of their capabilities to grow their wealth. Therefore, more than ever, banks will face more shareholder pressure as it becomes even more difficult for them to attract knowledgeable investors.
As a result, banks should focus on their core strengths rather than compete half-heartedly (sometimes arrogantly) in unfamiliar terrain. For example, banks have some clear advantages, such as:
- A repository of customer data insights
- A better understanding of the regulator/regulations
- Earned its customers’ trust over the years
- A better ability to mitigate financial risks
And it is also clear that fintech companies are better known for:
- Taking risks (huge leaps of faith)
- Being customer-centric
- Charting new paths
- Focusing on niche solutions
- Using technology to deepen adoption
- Being “asset-light”
- Having the ability to attract funding to grow business ideas faster
How can banks combine all these strengths into win-win scenarios? From my perspective, banks should further strengthen their core competencies as listed above, as this will give them the leverage and ability to woo fintech companies and sell to them:
- Excess capacity
- Access to customer data
- Regulatory know-how
- Risk-based processes and infrastructure
- Take advantage of its trusted name (before it’s too late)
If banks follow this approach in their collaboration with fintech companies, bank customers gain unfettered access to speedy innovation. Some may respond to such collaboration by starting a debate over “who owns the customer.” In my opinion, those concerns are overstated and represent one of the main reasons why we have stunted growth in the digital space in Nigeria today.
Heads you win, tails you win
To overcome their Achilles’ heel of innovation and collaboration, banks should consider both sides of an imaginary coin and imagine them to both have positive outcomes when they are flipped.
In the first scenario, banks give fintech companies access to their customers’ data with consent from the customer. Banks can make money from the fintech companies by charging for this access. Imagine thousands of fintech companies exploring various opportunities that have been overlooked by banks over the years and need to purchase access to these. In other words, fintech companies should do more of the retail customer-facing innovation, whilst banks focus on wholesale customer-facing innovation to support the fintech companies.
In a second scenario, banks no longer have absolute control over what their customers can do with their relationships with them. The customer can decide which platform it wants to use to initiate a transaction and still use their bank account to achieve this. Banks cannot stop this from happening, so why not scale up their services to be the chosen bank where these customers and fintech companies deposit their money? Banks can only achieve this if they improve their quality of service and focus on providing the best wholesale services to fintech companies, which are now their new Most Valuable Customers (MVCs).
In conclusion, the good news is that the wholesale way of doing business is not new to the banking industry. Rather, banks can adopt this approach to today’s context, use the known tools of the moment, and position themselves to take advantage of the new era.