On the 6th of April, 2016 while addressing a church congregation at This Present House (TPH) in Lekki, Lagos, the CEO of Guaranty Trust Bank, Segun Agbaje, made a confident and interesting statement about disruptions in the banking space.
He said, “I confront disruptive technology for survival. I will never sit down and let other people take what I believe is my own business and my own market share. So if you think you’re Paypal or Apple Pay and I’m going to sit back, no, I will do *737 simple banking for every Nigerian and for every dollar or naira you spend, I will spend as well. But I will not give up my market space.”
He went on to talk about how they would beat all the e-commerce players in the marketplace game because he is ready and can afford a free marketplace. I think it was a very interesting and optimistic talk and if you have some spare time, it might be worth watching the full video here.
This is not about the bank CEO’s comments but I observe the same level of confidence in his voice when I speak with some other bank executives. Despite the numerous global reports that banks are at the risk of losing up to 25% of their revenue to fintech companies within the next few years, and comments like Bill Gates’ assertion 24 years ago that “banking is necessary but banks are not,” I do not think that Nigerian banks are losing much sleep over fintechs. I also doubt if any bank has collapsed globally owing to the fact that fintechs stole their market and that it will be happening soon.
Don’t get it twisted though.
Publicly, banks make it look like they are concerned about fintech disruption and they should be, but behind closed doors, I do not think that their worry is much about the fintech companies springing up in Nigeria.
You may notice from my earlier assertion that the GTBank boss made reference to two global tech companies (Apple Pay and Paypal that aren’t even very active in the market yet) and not one Nigerian fintech companies. The reason for this is because the banks know that they have some strong inherent advantages that startups seeking to disrupt them will struggle to overturn.
However, there are companies that have similar advantages and might pose threats but they are not necessarily the fintech startups. With my experience in the fintech space in Nigeria so far, I know that as long as banks dominate on deposits, lending, payments and investing, they will be around for a while. The struggle for fintechs remains the ability to achieve enough scale independently to the point of actually displacing the banks. But before we go too far, what are these inherent advantages that are making the banks overbearing?
Trust (Established Relationship)
Trust is a very valuable currency in the world today, more-so in the financial world. Even though a lot of customers think that their banks are sloppy, they still trust that the banks will be around for a long time and they will have their money whenever they need it. This trust has been built over the years due to established customer relationships and the guarantee of the government through regulation (CBN, NDIC). This is the first subtle feature that takes time to build and is very difficult to beat.
By the very nature of banking business, banks need to be big to be successful. They need to be able to pay for the right infrastructure, people, processes and systems that are required as highly-regulated entities. More importantly, they need balance sheets that are strong enough to withstand economic stress. The bigger the bank, the more the confidence as a result of the varied spread of assets and base of deposits and considering the fact that no matter the bank size, the same compliance and standards are required. The scale also enables the banks to offer a variety of products under the same umbrella, thereby diversifying their revenue base and limiting their risk.
The financial services space is a highly regulated industry. This is permissible because of how strategic the banking sector is to the economy. Banks understand and help craft regulation and employ hundreds of people to ensure that they’re complying with regulatory guidelines. While on the surface, this is supposed to be a disadvantage as it increases their cost structure, it puts existing banks at an almost untouchable level because it gives them all the advantages inherent in an oligopolistic market and makes it very difficult for real disruption to happen from outside.
Customer Base and Distribution
There are about 65 million active bank customers with about 108 million individual and corporate accounts in Nigeria spread across approximately 21 banks. That’s an average of 3 million customers per bank (according to NIBSS as at end of March 2018). The numbers are not a lot if you consider Nigeria’s estimated population but if you look at those actual numbers, they’re not small. No pure fintech company has a customer base close to that, in fact, no tech company in Nigeria with such customer base easily comes to mind. Customer acquisition is hard and expensive and this is something that the banks have been able to find a way around over the years. What this means is that banks have ubiquitous distribution through branches and other channels and can distribute products to a wide spread of people, businesses and even government. They can also access cheap deposits and build large balance sheets.
Beyond scale and customer base, the banking industry is one of the most profitable industries in Nigeria. And Nigerian banks are some of the most profitable (in terms of profit margins) in the world. In 2017, Zenith Bank recorded a profit of N157 billion after tax, GTB had N170 billion, Access Bank did N80 billion, UBA made 78.6 billion. In the same 2017, the whole startup ecosystem in Nigeria was reported to have raised about $114.6 million which is less than the 2017 profit of any of these singular banks. Although this might not be a good comparison, the point here is that if peradventure the disruption battle becomes a cash battle between banks and tech startups (which usually becomes the case), Nigerian fintech companies don’t seem ready yet.
I strongly believe that Nigerian banks do not currently do enough with the enormous customer data at their disposal and I had written about it in a previous post. Data is another major goldmine that the banks are sitting on and it portends a lot of opportunities for them when they decide to start paying attention to it. The thing about data is that it has to be large enough to make sense. Data also has a network effect, so even if a startup has all the cash in the world, it can’t just easily go and buy the same data and building such a database takes time.
This is something that is unusually overlooked and underrated. The business of banking is not as simple as we make it look and just being able to write codes and speak some finance jargons doesn’t that mean you really understand how banking works and that you will kill all the banks. Banks have built decades of experience and have unique expertise in areas such as credit underwriting underpinned both by data and judgment, asset allocation, liquidity management, risk assessment and many other areas that most fintfech companies lack competency in. This experience will come to bear when push comes to shove and when it’s time to build a sustainable and profitable financial services business.
I am sure that by now, any banker reading this will probably be feeling pompous and be like “Abegi, wetin all these Fintechs dey do sef? They can’t disrupt jack!” But wait, while I honestly believe that these strong advantages mean that banks aren’t most likely to be killed by fintechs, there are companies that are in better positions to take on the banks and have the potentials to make the banks irrelevant much earlier than anyone can imagine because such companies also possess some of the key attributes that make the banks tick.
I will discuss them in the concluding part of this article.
Writer: Segun Adeyemi