Future of Banking

By Rafiq Raji, PhD

This past week, I was a guest speaker at “Digital Banking Nigeria 2017” (8 February 2017), an event organised by India’s Infosys and Lagos-headquartered CWG Plc, information technology solutions providers. My speech was on the future of banking in Nigeria. That is, amid digital disruptions to an industry slow to catch up. 

About 40 percent of Nigeria’s 88 million adult population is financially excluded. Digital financial services (DFS), increasingly embraced by Nigerian banks and their customers, make it cheaper to increase the number of the banked, currently 53 percent. Research done by the Lagos Business School (LBS) – “Digital Financial Services in Nigeria: State of the Market Report 2016” – suggests mobile money adoption remains relatively tepid, however: 0.1 percent in 2015. This is despite mobile phone ownership of almost 90 percent. And some 20 million Nigerians would probably own a smartphone by 2018 – almost half of the banked adult population of about 47 million – some suggest. Of course, a distinction has to be made between mobile money, an electronic wallet service, and the use of internet banking services via smart mobile devices. The latter has caught on, with an increasing number of Nigerians using their mobile devices to transfer funds, pay for services and so on. And the former? Not so much. Only 1.2 percent of electronic payments in 2016 were done using a mobile channel, based on data from the National Bureau of Statistics (NBS). And even as point-of-sale terminals are now quite pervasive, only 1.2 percent of e-payments in 2016 were done using the channel. What about automated teller machine (ATM) cards? Just 8 percent. According to NBS data, the predominant electronic payment channels, in 2016 at least, were NIBSS instant payments (59 percent) and NIBSS electronic fund transfers (22 percent); both of which can be done via internet banking. For DFS to successfully increase the country’s GDP by 12.4 percent (US$88 billion) by 2025 as envisaged by McKinsey, a global consultancy, mobile money adoption has to rise significantly from current lows. But who will lead the charge? Bank-led mobile money operators, eight of the twenty-one licensed by the Central Bank of Nigeria (CBN), are able to serve their customers relatively cheaply; about half the cost of non-bank led ones, LBS research suggests.

Social financial networks
The fundamental thesis of my presentation was that the real threat to the banking industry may not be the so-called fintech companies and mobile network operators so much as the customers themselves. Two phenomena in particular: social networks and virtual currencies. MMM, a social financial network, though a ponzi scheme, and unabashedly so, has somehow managed to attract 3 million ‘sane’ Nigerians. And despite the CBN’s frantic efforts at curtailing the menace, its disintermediation effects continue. When warned of the risks of MMM, subscribers, as if in a trance, are almost fanatical in defence of the scheme. More importantly, note how almost 10 percent of the banked Nigerian population were successfully organized, albeit for a promised enticing return of 30 percent, for financial intermediation activities with no more than a website. And in a manner that effectively made the regulator impotent. Still, that even some ordinarily cautious Nigerians jettisoned reason to invest in the scheme points to a gap in the banking industry: savings accounts offer a paltry 5 percent. It also points to the possibility of financial intermediation outside of the traditional financial services industry. Banks beware.

Digital currencies
Bitcoin, a digital currency, is increasingly gaining ground as a store of value. (Incidentally, MMM subscribers can now give ‘help’ with Bitcoin.) And it is open-source: no central bank owns or controls it and anyone and everyone can use it. Imagine a scenario where bank account holders withdraw money en masse from their local currency accounts to buy foreign exchange for the sole purpose of acquiring bitcoin. The transactions they are used for thereafter are almost entirely out of the reach of central banks. Up to a point. In most developing countries – most African ones at least, where there are no bitcoin exchanges, the authorities are effectively powerless. But what about the countries where digital currency exchanges are domiciled, China, say? As it turns out, the People’s Bank of China (PBoC) announced last Thursday (9 February 2017) that it would close any of them that violated regulations, a move that caused bitcoin prices to drop sharply. African central banks are still looking on.

Open-source biometrics
Aadhaar, a cloud-based biometric identification system set up by the Indian government, initially to ensure that intended recipients (who get assigned a unique 12-digit number) of welfare payments are actually the ones that receive them, would this year have on record all of India’s adult population. Together with an online database of citizens’ documents (tax filings, bank statements, etc) called “India Stack” and a “Unified Payments Interface”, the digital ID and document ecosystem would, when fully operational, be nothing short of revolutionary for what is still largely an informal economy. Whether it is the acquisition of a phone line or job application, all that is required to verify a person’s identity is now no more than a fingerprint scan. In the Nigerian case, the Bank Verification Number (BVN) is analogous, but unfortunately not as useful. Having a BVN does not exempt you from onerous know-your-customer (KYC) checks if you wanted to open a bank account elsewhere. Besides, the so-called unbanked and underbanked Nigerians, who though may not have bank accounts, ordinarily own a mobile phone. And their biometric data? They reside with mobile network operators and their regulator. Banks of the future would be agile, open-source and collaborative.

Also published in my BusinessDay Nigeria column (Tuesdays). See link viz. http://www.businessdayonline.com/future-of-banking/

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