Information and Communication Technology (ICT) is facilitating the process of socio-economic development in Nigeria. It has offered new ways of exchanging information, and transacting businesses, efficiently and cheaply. It has also changed the dynamic natures of financial, entertainment and communication industries and provided better means of using the human and institutional capabilities of the nation in both the public and private sectors. Increasingly, ICT is rapidly moving Nigeria towards knowledge-based economic structures and information societies, comprising networks of individuals, firms and states that are linked electronically and in interdependent global relationships.
This ICT worked in the Nigerian banking sector. It brought into existence a new generation of banking institutions, about thirty years ago. About three decades ago, some Nigerian entrepreneurs saw opportunities that they could use better service delivery, anchored on technology, to redesign the structure of Nigeria’s banking industry.
But behind the mess, there is something good from that period. We ended up having great companies which are still very critical in modern Nigeria. Sure, most of those companies survived and flourished through innovation,…
These are some samples of companies starred during this time. In short, the phrase “New Generation Banks”, came into the lexicon during that era.
- Diamond Bank Plc – born 1990
- Zenith Bank – 1990
- Fidelity Bank – 1988
- Access Bank – 1989
- GTBank – Jan 1990
- (STB for modern UBA) – 1990
- Access Bank – 1989
These new banks grew as they competed effectively in the sector. They anchored their businesses on the use of technology to accelerate productivity. They thrived and took market shares from the old banks like First Bank, Union Bank and the defunct Afribank.
The Power of ICT on Productivity
Before the advent of the new generation banks in Nigeria, people waited for hours to collect money from their accounts. Going to bank was largely an all-day affair. But through automation, the new generation banks brought productivity which reduced that time significantly. That process made it possible that people could get into a bank, and within minutes, they are out. By automating their routine banking processes with ICT, the new banks brought new dimensions of service in the industry. They won hearts, did well and created superior values, monetarily, for their investors.
Also, because the banks were using technology, they used lesser number of staff to execute their jobs. They employed fewer people, compared with the older banks, using business process automation systems. (Sure, the older banks had more branches and could have needed more hands.) The efficiency in their operations helped in improving their profits. Today, the most formidable banks in Nigeria are members of those new generation banks. Some of the old banks have gone while the remaining ones are shadows of their previous pedigrees. In this early part of the 21st century, the best of Nigerian banking is seen through the lens of the new banks.
Productivity is a very important business construct. In the banking sector, ICT has cushioned it in all dimensions of the business processes. One of the finest products ever launched in the Nigerian banking sector is Diamond Bank Integrated Banking System (DIBS). ICT made that product a possibility and that generated huge productivity in the industry as it was being copied.
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.
The Challenge from Internet: Fintech
While ICT provided unprecedented productivity in the Nigerian banking sector, Internet is seriously “destroying” value. This is a “problem”. ICT made them, Internet could destroy some of them. Internet is bringing the construct of creative destruction in the Nigerian banking sector where values are destroyed and new opportunities unlocked. But those new opportunities are not going to be, exclusively, within the controls of the banks.
What Internet is doing today is expanding distribution of banking services thereby putting pressure on banks to control pricing on their own terms. Before Internet, they could charge huge fees to transfer money for clients to foreign accounts via their treasury departments, but today, with internet, there are options. The customers could simply use their debit and credit cards to settle the bills without first spending money on bank fees.
Internet created the fintech and that is not necessarily a good thing for most of the banks. Fintech brings competition to the banks. Fintech offers lending, remittance, payment, transfer and other services which banks used to be the only institutions handling. This means with expanded access, the absolute power on pricing moves away from banks.
Brilliance of ICT, the Burden of Internet
ICT provided huge value, through industry-level productivity in the sector. It was good business overall because the banks generated value by few employees to do many things. But by expanding the distribution, Internet offers many challenges to them.
It is not just the banking sector that is going through this value-shattering redesign. We have seen the impact of Internet is restructuring how business sectors operate over the last few years. I provide the following examples:
- Movie Theater: By Internet making distribution accessible and also expanding its scale, the movie theaters have lost the control to dictate, absolutely, on when to release movies. This has affected their business models reducing their overall pricing powers and values. With companies like Netflix, iROKOtv and Youtube, the channels have since widened. That is why the industry is largely struggling.
- Airlines: Airlines made so much money through information asymmetry. The travel agent and customer had limited scale to compare prices across airlines. But with arrival of Kayak, Internet has made the distribution of that pricing easier at scale. Immediately, the power moves to the users who have access to compare ticket prices, putting pressure on airlines to price to remain relevant
- Library: We used to have libraries that had opening hours. Today, with Google and Wikipedia, we have expanded distribution, where from our homes, we can simply access dossiers of work. Libraries are losing their impacts and influence because of Internet
- Education: Most people do not even bother spending money going back to school to re-learn. They take quality materials online to educate themselves. Most for-profit universities in U.S. have been collapsing because their demand has dropped significantly.
- Media: I have written extensively on the law of diminishing abundance of Internet where having more readers does not mean more success. Internet has made distribution of content easier thereby making every newspaper and magazine a global business. With that, power has moved to the aggregagors like Google and Facebook who control access to contents.
In this videocast, I discuss what I am calling the Law of Diminishing Abundance of Internet. It is a construct that some companies become poorer even when they are growing in numbers of customers reached.That applies to industrial sectors like publishing and telecoms. The lesson here is that risk in any business model must be examined from the lens of this mirage abundance which Internet has provided in some sectors.
- Commerce: As Amazon.com shows the world, Internet had demonstrated that it can attack any industry it wants. We have seen many U.S. malls gone because Amazon has made it harder for the retailers to compete. Internet has shaped commerce by making distribution accessible and that reduces competition to operational efficiency and pricing. It commoditizes many elements of our retail business processes, making it harder that retailers with huge real estate burdens, cannot compete against Amazon.
The Future: Unbounded Internet
Internet has unleashed competition in the Nigerian banking sector. They do not just compete among themselves, they are competing with global institutions. With Stripe, a Nigerian entrepreneur can bank with a bank in U.S. through the Stripe Atlas which makes it possible to operate a U.S. business bank account without even living in U.S. This would not have been possible without Internet. This unbounded capability of the Internet is the reason why the future, of financial services, could be uncertain because new challenges will come.
With Stripe Atlas, entrepreneurs can easily incorporate a U.S. company, set up a U.S. bank account, and start accepting payments with Stripe. Starting today, it’s available to developers and entrepreneurs globally.
The promise of the internet is that location matters less. However, geographic barriers and associated complexity make it difficult to start a global business in many parts of the world.
With distribution model that is technically free, Internet will continue to put pressure in the banking sector, as new models of competitions will keep evolving.
Yet, what Internet is doing today may be tip of the iceberg. There are still many ways we can see immense dislocation in the Nigerian banking sector:
- Robotics/Automation: Nigerian financial sector, very soon, will begin the process of having robots do many lending decisions as they do in U.S. It could be the banks or the fintech that will do this, but irrespective, automation of lending using data from BVN and other sources will happen. The implication is that more workers will be cut. Most credit card applications decisions in U.S. are evaluated by machines. Internet will massively accelerate the scale of this automation.
- Machine Learning/ Artificial Intelligence + blockchain: No one could bound the potential of these emerging technologies in the financial sector. There is the inherent risk that we may not even need banking the way we have it today especially if you combine AI with blockchain. With blockchain, the Central Bank of Nigeria may not have a lot of work to do because the people will be the custodians. This product of the Internet, blockchain, is another element on the possibilities and challenges of the future which Internet is bringing to the financial sector
- Poor Value Transfer: Under limited construct, Internet is not good in transferring value. The money MTN is losing over Skype and WhatsApp is not going to the OTT services. The value is destroyed, in the industry. Sure the consumers save and can use it for something else. The implication is that Internet can destroy most of the value we have in today’s banking. And that is a possibility. How? read below
- Removing Friction in Commerce: The essence of firms is to make sure that demand and supply have lesser friction. If you can use internet to remove that friction between demand and supply ( i.e. they can come together, with ease), you do not need firms. For example, if a saver can efficiently find a borrower, there is no need, partly, to go to a bank to put money to earn interest. If Internet attacks that, the heartbeat of most business sectors will be damaged.
The Winning Consumers
The good news about everything is that consumers will win. Financial services will become affordable owing to the Internet. That means the principle of creative destruction is working. That is one thing the Internet is sure of providing – great value to consumers. As I have noted, there will not be fintech without Internet. We are happy for that. The implication is that no one should wish that we go backward – everyone has to figure out how to survive and succeed in the new Internet redesign of the financial industry.
ICT provided productivity, making old banking business processes better. Internet is unbounded and no one knows what the future will bring. But one thing is certain: it offers huge expansions in distribution channels. That always puts pressure on incumbents on pricing power. Nigerian banks must ferociously redesign themselves to live in the age of Internet because what is constant is change and unprecedented level of competition, which is unbounded and unconstrained as none can quantity the future scale.
Simply, Internet commoditizes business processes in the financial sector. The implication is that price competitiveness is what matters. Any bank that cannot figure it out, i.e. how to price competitively within the abundance of Internet, will see erosion of values. When consumers have unbounded access through unlimited distribution channels to immense product supplies, price falls, because information asymmetry is gone. Add the fact that consumers can easily compare prices and product quality, at scale, you will see that commanding hefty fees will go.
For our banks, the future is full of possibilities. There is no going back to pre-Internet age. The promise lies ahead. But the challenges will be huge. The unbounded nature of Internet provides many factors no one can easily ascertain what the implications will be. The best thing to do is to be prepared: understand the trend and be on top of it. Just as Google became the most important “media” firm by aggregating contents online, while not creating any, thereby commoditizing whatever anyone creates online, as the only true gateway for people to discover contents, banks have the unique positions to also assert themselves that for whatever the web brings, banks will be paid their taxes. You become the entry point into the financial world for many consumers and that position has enormous strength.The future cannot be unborn tomorrow and yet dead yesterday.