The Nigerian banking sector is going through a redesign, resulting to two distinguishable classes which are Tier I and Tier II banks. GTBank leads the Tier I banks with its massive balance sheet and innovation capabilities supported by industry-leading market valuation. Diamond Bank, Wema Bank, and FCMB are some of the members of the Tier II banks. Unity Bank, SunTrust Bank and Jaiz Bank are in their own class but we will keep them as part of the Tier II class also.
In terms of innovation, the Tier I banks like Zenith Bank, UBA, Access Bank, GTBank and First Bank are using their stronger positions to put more pressures on the Tier II banks. As banks pursue technology investments which will not just run their operations, but also transform them, the disproportionate asset positions are evident and worrisome. As typical with technology, if the Tier II banks cannot build good ones, they will fall behind and may struggle to ever catch up.
GTBank can buy most of the banks except, may be, the two following it, using the prevailing market capitalization. This widening position will continue because GTBank has since ceased to be just a bank, transmuting itself into a financial ecosystem where e-commerce, lending, and other activities co-exist, at scale. Right inside GTBank, there are many fintech entities, being run with efficiency, delivering sector leading cost-to-income ratio that even top U.S. banks like Bank of America, Citibank and PNC Bank will aspire for. GTBank is a premier Nigerian institution and one that symbolizes the best of the Nigerian business management.
The Tier II Banks
These are banks with challenging balance sheets. They continue to lose market share with decimated market capitalization. Some suffered multi-pronged crises of poorly performing loans with exposures to the oil and gas industry, which contracted, when the global oil prices dropped, triggering loan defaults. Also, some took loans in foreign currency before the Naira deteriorated in value. Some will need to raise capital through bonds or new shares to improve their balance sheets and meet required regulatory financial ratios on capital adequacy and other metrics. They are under immense stress with the competitive pressures from the Tier I banks; most are facing existential threats. For the ones that cannot succeed in bond markets, the option may be mergers and acquisitions. It is not really well with most Tier II banks in Nigeria.
With the specter of GTBank and other Tier 1 banks looming in the sector, I want to discuss how these Tier II banks can find value and accelerate revenue growth. Yes, deposit base has to increase, in these banks.
But first, we note the following key points:
Nigerian Banking is Competitive
The industry is ferociously competitive because the economy is largely small. We have the population but we do not have many with the pockets. Nigeria economy is smaller than the economy of Michigan State in U.S.; Michigan has a population of 10 million people while Nigeria is in excess of 180 million. The implication is that we have very few people that banks can make money from. So everyone pursues those select few, making the sector increasingly competitive.
For the realignment of this observation, innovation is very critical. In the early 1990s, Diamond Bank was one of the most innovative banks in Nigeria. Its pioneering Diamond Integrated Banking System (DIBS) which made it possible for a bank customer to put money in one branch and access it from any other Diamond Bank branch, gave it market share, from the old generation banks . That was a golden era in Nigerian banking with so many innovations, including in pricing. The invention of COT (commission on turnover) provided capital that funded growth and transformed the sector as they made good profits, and they invested in modern technology. But ever since, disruption has been muted and innovation is largely incremental. Tier II banks must come up with ideas beyond the needs, expectations to perception of customers just as DIBS provided to Diamond Bank the tools to take market share from the older banks.(Other new generation banks like Zenith, GTBank, STB (now UBA) , etc had their own incarnations of innovations that improved customer experiences)
All Digital Is An Illusion
The world is going digital and that means everyone has to go digital, the saying goes. But in Nigeria, making money is still in the meatspace (i.e the physical world). Cyberspace is an illusion if you want to survive in the short term banking sector in Nigeria; you cannot abandon the physical world. While the apps can get you college students and likes, the people that have the money are not yet online. This is the perspective that must drive Tier II banks as they work on strategy. The apps will not grow revenue despite making you look trendy. Nevertheless, investing in digital channels is strategic but that does not mean that the meatspace should be forgotten.
The increasing level of digital transactions in the industry has exacerbated the confusion with everyone pursuing digital strategy with the risk of neglecting where the money is (the physical world of Nigeria). Digital transaction is nothing but having “digital cheques”; it changes nothing in your balance sheet except that customers are interacting via new channels. Sure, it saves you money from hiring tellers, opening new branches and paying salaries as operations move digital, but that will not solve any systemic problem if the root cause is not addressed. Most times, the root cause is not digital. That your customers are using lighter cheque books to move their money around does not mean lighter cheque is where the solution is. The digital channels are important, but in Nigeria today, they are not where the vehicles the Tier II banks need to compete against the Tier I banks are located. With most of the industry fees curtailed, how much moved, while important in many ways, is not as critical as when COT (commission on turnover) was the order of the day. The key is deposit base and finding and discovering new class of customers, not already over-marketed.
Source of Customer Acquisition
If Tier II banks check carefully, despite the increasing digital transactions, customer acquisition has not moved heavily into the digital space.Though BVN can provide the vehicle for people to open accounts online, the reality is that the segments that will do this are not the people with the big cheques. If the meatspace is where the customers originate, you have to deepen efforts in that space. Apps are great but they cannot bring deposits that matter. The business of banking is deposit base and interest making. Finding quality customers in today’s Nigeria will not come from those signing via apps, for the first time, but those you engage through the meatspace. Bringing new deposits and not how the money is moved around must be paramount in the minds of the bank CEOs.
Solution for Meatspace is Key
To make money in Nigeria, you have to operate in the physical space. While investments in the digital will continue, finding how technology can help to improve customer conversion and acquisition in the physical must drive strategy. In our practice where we have worked with banks, I have tried to correct the fixation that getting digital right will solve all problems. Nigeria is still about 5 years away from the digital era and for some of the Tier II banks, that is an eternity. They need to survive right now because most are facing existential threats.
The Fintech Problem
Fintech is a problem but they will not eat the banks in Nigeria. As noted above, those doing digital are not the ones with the money. These are college students and largely lower spectrum of the middle class. (I do not consider using a bank app or website to move money or check balances as fintech. Most of the things called fintech will become typical product features of any modern Nigerian bank.) Yet, banks can make these institutions irrelevant by introducing better products, at scale. They have the data and records and can build better products that any of the fintechs cannot do. The key thing is making sure you are aware of the risks coming from fintechs. I do expect the banks to introduce a special connect fee thereby putting the fintechs at disadvantage, if things go really out of hand. I do not understand why a firm will collect 3-5% on a customer transaction and expect me to process the transaction for free. Once connection fees are put in place, customers will begin to avoid the fintechs, understanding that banks offer free alternatives. Banks have the capacities to make many fintechs irrelevant in the Nigerian banking sector just as Internet Explorer made Netscape Navigator. How to build a product like this can be inspired by Visa’s Verified by Visa where the customer in the process of confirming payment sees the extra fees the bank will charge it. They will likely abort the ongoing transaction and switch to the bank’s channel. Where banks fail in this area, they will risk becoming the centers of Smiling Curves with the fintechs at the edges enjoying most of the values.
Blockchain – Remittance is a Dead Sector
Within a decade, moving money around the world will be free. It is already done. Circle which Goldman Sachs invested allows Americans and Europeans to move money at zero fee across the Atlantic. Do not waste your efforts on remittance technology because you cannot compete with free. And that reminds me, if you have a technical team, put efforts to see how blockchain can improve your business process and save you so much money.
The Growth Model for Tier II Banks
Tier II banks must accelerate agency banking with more investments to bring more customers into their systems. Those customers are not in the digital or even in the financial system. BVN has provided insights that many Nigerians are not banked, yet. This is an opportunity for Tier II banks.
The roadmap is to develop a technology that will help make citizens/shops extension of bank branches so that banks are closer to the people that need them, at better cost model. We do not need full scale branches to reach villages and communities. Technology provides the capabilities to scale this and also make it cost-competitive.
The herdsmen who move tens of cows have more values to a bank than college students who barely have enough for three square meals. But the college students are accessible while the herdsmen are not. Find a way to reach them and provide banking services and boost your revenue.
Agency banking with proprietary technology supported with tokens, BVN and mobile kiosks will deliver the magic. The transactions will be capped to avoid fraud and risk-management tools embedded. As these agency banking systems mature, banks can close and sell off expensive branches which may not be necessary in 5 years as the immersive digital economy evolves.
A technology that provides innovation, at scale, delivering good cost-to-income ratio, even when improving deposit base, is what the Tier II banks need. They need to pursue this strategy, building specialization and competence, in the niche markets. They need to know what farmers, herdsmen, artisans etc need on the overall constructs of banking in order to deliver value to them. In the past, some banks started branches in markets developing capabilities in meeting the needs of traders. Now is the time to go to carpenters, artisans, herdsmen and farmers, because they are latent opportunities which are waiting to be unlocked.