Last week, I did a two-hour Q/A in an invitation-only event organized by a Fund. At the end, from my perspective, the biggest challenge to Nigerian banks is the collapse of the regulatory moat. In my session, we discussed many things – these three are just a few I want to share.
The term economic moat refers to a business’ ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms. Just like a medieval castle, the moat serves to protect those inside the fortress and their riches from outsiders.In most ancestral African communities, the king would live at the summit of hills or areas surrounded by water bodies or geographic bodies that convey territorial advantages over enemies.
(If you visit Ovim in Abia State, my clan Ugwunta is the custodian of the Nkwo (a deity), providing the high priest Obi Ovum. If war breaks out, they would beat the ikoro (big gong), alerting the community that war had broken out. Immediately, young men will activate a war dance Anwuriwu which on hearing it young men are transfigured to be in war spirit. Common men can climb palm trees with bar hands (no strappers) and do things unimaginable. As the young men go to war, some stay with rocks which are in abundance to ensure no enemy can make it to Ugwunta. Ugwunta is on a hill, providing a strategic moat. Small history which exists largely orally these days )
- Collapse of Regulatory Moat: Most banks in Nigeria will continue to see erosion of market cap as investors look beyond them as institutions to create leverageable value. Unlike in the past few years where regulatory moat protected banks, we are now seeing the Central Bank of Nigeria (CBN) opening them to new competition. Fintech startups, specialized independent advisors, neobanks, etc will further pick the banks apart. By 2025, more than 60% of “bank incomes” will be destroyed by these new competitors. Yet, the new competitors will capture only a small portion. (If you use a fintech on a transaction and pays $10 instead of $100 with a bank, $90 has been dissipated which the customer keeps).
- The Lost Decade: Nigerian banks have shown they cannot create great value for investors. The largest bank in Nigeria by market cap (GTBank) is worth less than $3 billion. The banks have just completed a lost decade where from 2009 to 2019, investors did not see any significant value in the stock market, even in a time when global bank equities performed fairly well.
- By 2025: A digital-only-bank will become the preferred bank in Nigeria for young people between 18-30 years. That bank will be fee-less and have superb-service. With no agile business model to match these fintechs, banks will continue to have erosion of value.
I began the Q/A with a 30-min presentation that examined the bank sector and the fintech world in Nigeria. I will be unable to share more here, unfortunately.