Article summary
- Nigerian leading banks increased their spending on software acquisitions in 2022, driven by the need for digital transformation and adapting to the remote and digital banking demands brought on by the Covid-19 pandemic.
- Access Bank led the way in software spending, reporting a 128% jump in costs compared to the previous year. Zenith Bank also continued its investment in software, while other tier-one banks, such as UBA and GTCO, saw varying changes in their software spending.
- Despite the increased spending, a significant portion of software expenditure by Nigerian banks still goes to foreign providers, highlighting the need for greater investment in local IT companies to reduce reliance on foreign vendors and foster the growth of the local tech ecosystem.
The race for digital transformation in Nigeria’s leading banks picked up in 2022, with at least N42.4 billion incurred during the year as IT expenses compared to N43.9 billion spent in the corresponding year of 2021.
The tier one banks featured in this report are FUGAZ, which includes FBN Holding, UBA, GTCO, Access Bank, and Zenith Bank.
FBNH is yet to release its 2022 FY audited accounts; thus, their spending is excluded for the current year.
In general, the banks have spent more on software acquisition in 2022 compared to the previous four years. In 2019, spending on software was about N26.5 billion, dropping to N21.3 billion in the COVID-19 year of 2020.
Ramp up in software cost
Nigerian banks are making significant investments in software solutions to optimize their operations, enhance the customer experience, and bolster security measures.
These investments cover a wide range of areas, including core banking systems, customer relationship management (CRM) software, mobile banking, and payment apps.
Others include anti-fraud and security software, risk management systems, business intelligence and analytics tools, electronic document management systems (EDMS), and treasury and capital market software.
They have also continued to invest heavily in technology as new innovations such as artificial intelligence, Web 3, IoT, blockchain, digital identity, and cloud computing instigate the need to increase IT spending.
The House of Representatives has also recently adopted a motion asking the CBN to direct commercial banks to overhaul the existing online/electronic banking platforms for the efficient conduct of electronic banking operations.
Impact of Covid-19
The outbreak of the COVID-19 pandemic has significantly influenced the spending patterns of banks when it comes to software acquisitions. The pandemic has prompted a rapid shift in consumer behaviour and forced banks to adapt to the new normal of remote and digital banking.
With physical branches and in-person interactions being limited or restricted, banks have recognized the urgent need to invest in software solutions that can facilitate remote operations, ensure seamless digital customer experiences, and enhance cybersecurity measures.
The increased demand for contactless banking and the surge in online transactions have also underscored the importance of robust mobile banking applications, secure payment gateways, and reliable digital platforms.
As a result, banks are allocating more resources towards acquiring and enhancing software solutions that support these functionalities.
The pandemic has also highlighted the criticality of data analysis and business intelligence tools for banks to gain insights into changing customer preferences, identify emerging risks, and make informed decisions in an uncertain economic environment.
Banks are also recognizing the significance of ensuring a seamless and secure remote working environment for their employees to maintain productivity and protect sensitive financial data.
Banks actual spend
Global rising inflation and exchange rate depreciation also increased the cost of technology for most of the banks under review.
Access Bank led the spending on software acquisition costs during the year as it reported a cost of N18.3 billion, representing a 128% jump when compared to N8 billion incurred a year earlier. The bank also led others in IT operating expenses incurred during the year.
It led other tier-1 banks in IT spending for the year 2022, according to the bank’s audited financial statements. Access Bank’s IT spending increased by 73%, from N25.8 billion in 2021 to N44.6 billion in 2022. The bank’s IT spending accounted for 13% of its operating expenses for the year, which stood at N341.7 billion.
Industry experts have said that all banks in Nigeria will have to overhaul their IT infrastructure to meet the rising demands for electronic transactions.
This became more expedient as the Central Bank of Nigeria is limiting the amount of cash in circulation, and the next round of scarcity is expected after the CBN phases out the old N1,000, N500, and N200 notes at the end of this year.
According to Mr. Tolulope Adeyinka, the Fintech Business Development Manager at Mastercard, it is crucial for Nigerian banks to invest in advanced technologies now in order to improve their capacity ahead of the full implementation of the cashless policy in December this year.
In a conversation with Nairametrics, he emphasized that the recent cash shortage and the resulting crisis could have been even more severe if not for the presence of fintech companies that helped alleviate the pressure on the banks’ inadequate infrastructure.
However, he noted that fintechs themselves will need to invest further to expand their capacity as more Nigerians transition to their platforms.
Adeyinka highlighted the urgency for banks to prioritize investments in superior technology and increase their capacity. He mentioned that the federal government has already declared that the cashless policy will be fully implemented by December 2023.
Therefore, the issue of cash scarcity is likely to arise again at that time. Adeyinka expressed his expectation that by then, both fintech companies and banks will have made significant investments to address the current capacity issues.
He stated,
- “It is now imminent for banks to see how they can invest in better technology and increase capacity. Of course, you know that the federal government has said that this cashless policy is going to be fully implemented by December 2023.
- So, at that time, this issue of cash is probably going to come up again. By that time, we expect that a lot of fintechs and banks will have invested enough because the problem we’re experiencing now is a capacity problem. And we feel that before December, it should have been resolved,” he said.
Apart from Access Bank, Zenith Bank continued with their investment in software during the year, purchasing software valued at about N14.8 billion. It spent N14.3 billion on software acquisitions a year earlier.
Zenith Bank incurred N30.9 billion on IT infrastructure in 2022, an 8% increase from N28.7 billion in 2021. GTCO reported a sum of N5.8 billion (up 33%) in 2022 while UBA incurred a cost of N3.4 billion down 36.5% from the N5.3 billion spent a year earlier.
FBN Holding has yet to release its audited financial statements for 2022.
Zenith Bank remains the highest spender since Covid, spending a combined N29.2 billion between 2021 and 2022. Access Bank comes next with N26.3 billion.
Taking a cue from the recent experience, Zenith Bank last month announced that it had started the process of installing a brand-new IT infrastructure to cope with the surging demand for online banking transactions.
Nigerian tech loses out
Unfortunately, a significant portion of the banks’ software expenditure is flowing to foreign providers such as Oracle, Microsoft, Google, Infosys, and AWS, who offer a comprehensive range of cloud-enabled services.
This reliance on foreign software providers poses a challenge to the development of the local IT sector and highlights the need for increased investment in domestic technology solutions.
By supporting local IT companies and fostering innovation within the country, Nigerian banks can not only reduce their reliance on foreign providers but also contribute to the growth of the local tech ecosystem.
This, in turn, will create job opportunities, drive economic development, and ultimately result in a more sustainable and self-reliant IT industry.
I think we all need to wake up to who is really at fault when our bank transfers fail constantly…
This article only highlights the narrow-minded perspective of the banking industry regarding the significance of having an internal technology development team.
Nigerian banks to recognize the importance of having an internal technology development team and stop treating Capex on technology infrastructure as something that can be “outsourced.”
They need to build top engineering teams internally to enhance their technology stack, offer better customer experiences, and remain competitive in the modern financial services environment. Their peers around the world, JP Morgan, HSBC, Goldman Sachs, Wise, Monzo, Nubank, etc are all doing this already and well.
When will the banking industry in Nigeria wake up and realize that they need to evolve internally in order to meet the demands of the modern financial services industry.
When is the Zenith Bank AGM for the 2022 financial year coming up?