A new wave of competition for the retail segment of banking has been activated with MTN and Airtel eyeing a large chunk of the market that has sustained the profitability of many Deposit Money Banks (DMBs) for decades.
The hustle and fierce contest among DMBs and payment platforms for control of retail banking market is already sending jitters through boardrooms of many lenders after leading telcos, MTN and Airtel, were recently granted final approvals to operate mobile money (Momo) Payment Service Banks (PSBs), about six months after they were granted provisional licences.
The authorisation has paved way for them to delve into banking operations with a few non-permissible areas as lending and foreign exchange (FX) operations. The approval, which bank chiefs had earlier made frantic efforts to stall, has unearthed the underbellies of conventional bank players, who seem nervous about the coming of the telcos, as they hold a competitive edge in the retail goldmine.
While the telecoms giants are yet to start operations, the competition has kicked off in earnest with aggressive headhunting of quality hands. The Guardian learnt at the weekend that the telcos have started a “targeted poaching” of fintech experts from leading banks with mouth-watering offers on the table.
Why is this so? With advancement in digital technologies, many fintech firms started providing all the services as retail banks through Internet platforms and smartphone apps.
In just over 10 years, fintech/payments firms have largely increased their share in retail banking sector, while traditional banks still hold tightly to corporate banking services, servicing only small or large companies and corporate bodies.
Some of the payments firms giving traditional banks a run for their money include: Flutterwave, Opay, Remitta, Kuda, Konga, Paga, Carbon, Paystack, Interswitch, MoMo and Unified Payment, which account for over 60 per cent of the nation’s retail transactions in the last two years.
For instance, in the first quarter of 2020, payment firms accounted for 60 per cent (N102.4 billion) of the total value of mobile transactions of N172.1 billion, with traditional banks accounting for the remaining 40 per cent, having a huge share of bank transfers, mobile payment business and non-merchant point of sales transactions through the deployment of multiple kiosks across the country, particularly in neighbourhoods where banks or Automated Teller Machines (ATMs) are not available.
“The payment firms are not contended with stealing a chunk of the retail market from commercials banks, but are daily displacing the banks and installing themselves as the new retail kings,” lamented an investment banker in one of the nation’s first generation banks.
But a top banker boasted at the weekend that sourcing talents from conventional banks is an acknowledgment of “our superiority in deposit mobilisation and financial services.”
The source added that there is no way the telcos would out-compete banks whose core business is deposit mobilisation and financial intermediation. Another source said the move is less about superiority than a deliberate move by telcos to bridge the capacity gap and catch up with the DMBs. There is a consensus in the general financial service space that telcos are better equipped to compete in the retail market more swiftly.
David Adonri, a financial and investment expert, told The Guardian, yesterday, that the threat is real “because of the type of competition it (Momo PSB) introduces” to banking business.
“Currently, telcos provide the communication channels through which communication occurs in the finance industry. Telcos also serve as the backbone for the facilitation of virtual transactions by banks.
“Without telcos infrastructure, fintech innovations, which drive financial services today, will be impossible. Considering the heavy reliance of banks and, indeed, the entire finance industry on telcos while rendering their services and in regulatory compliance, an unfair competition may arise where the banks are disadvantaged,” Adonri pointed out.
INDEED, banks were brought to their kneels recently when they had a payment dispute with telcos over the use of Unstructured Supplementary Service Data (USSD). The service was suspended until the Central Bank of Nigeria (CBN) and other stakeholders intervened to give assurances on payment of outstanding debts.
With telcos, which hold and control the payment service infrastructure, now coming into the market as a player, Adonri said, “they can easily establish a competitive edge over banks and take over the industry in no time.
“And if the PSB licence given to telcos goes beyond being payment agents to include taking of deposits and granting of credits,” the financial expert noted.“The days of existence of some traditional banks may be numbered. However, if telcos are prevented from being deposit-taking and credit granting financial institutions, the backbone of traditional banking business will remain intact.”
Whereas the specific details of the licence granted to the telecoms giants have not been accessed, PSB guidelines list granting of loans/advances/guarantees, accepting foreign currency deposits, dealing in the foreign exchange market and underwriting risks among the non-permissible activities.
On the contrary, PSB operators are at liberty to accept deposits from individuals and small businesses, carry out payments and remittances (including inbound cross-border personal remittances), sell FX realised from inbound cross-border personal remittances to authorised foreign exchange dealers, issue debit/credit cards and operate electronic wallets.
With potential incursion into the service frontiers by the two leading telcos, Ken Ife, a professor of economics and consultant to the Economic Community of West African States (ECOWAS), said “the banks now know that the telcos are out for their lunch.”
Ife is, however, optimistic that any initiative that would capture over 80 million Nigerians outside the financial system would help to deliver double-digit growth to both information and communication technology and financial service sectors concurrently, making the competition ahead a potential win-win battle.
“The PSB licensing to telcos is something the banks should worry about. This was something that was long in the making, banks fought it for a while, and have had time to think about their responses. Those who are more adaptable will compete better. The telcos have the upper hand in the consumer space and will gain critical mass immediately because of this. I expect the more adaptable banks to collaborate with telcos to end with a win-win for both,” Victor Ogiemwonyi, a retired investment banker, told The Guardian.
With over 40 per cent of Nigerians outside the financial system, the competition for new customers is not a zero-sum game. Experts have, however, suggested that with innovation and the right investors, every party has an opportunity to expand its customer base.
Johnson Chukwu, an economist and investment consultant, agreed that the emerging trend is a major disruption but not near a make-or-mar situation for the banks, which are saddled with exclusive mandates PSBs cannot cover. He listed letter of credit and several other niche businesses that could still make the conventional banks very relevant.
“You will also notice that the revenues coming from commissions and fees have increased over the years because the banks have also leveraged technology to reposition themselves in ATMs, Point of Sale (PoS), virtual payment platforms among other options. The banks are responding well. Their incomes from non-conventional banking have increased tremendously,” Chukwu argued.
MEANWHILE, banking chiefs are said to be in a panic mode, calling on their digital units to up their ante even “if that will mean shutting down a few non-viable physical offices to free more investment for digital assets.”
It would be recalled that Standard Chartered Plc, earlier in the year, announced that it would shut down, at least, 50 per cent of its branches as part of a digital presence strategy. That announcement has had a bandwagon effect on the industry. While some banks may not have announced office closure, they have been quiet about the status of some branches that were closed at the height of the COVID-19 pandemic but remained shut till date.
Indeed, talks about collaboration, partnership, outsourcing, acquisition and other business arrangement had commenced long before the final approvals for PSB were granted. A source privy to strategy directions of some banks said discussions are ongoing on acquisitions as well.
“In the coming months, some fintech firms, which are start-ups, would be acquired by banks, which are eager to consolidate their position and increase their market share in the ecosystem. There will be more partnerships, which are being firmed up,” the source hinted.
Telcos are unearthing the growing worry over emergence of shadow banking. There are dozens of cheaper payment platforms and wallets fishing in the same space with banks.
Findings have suggested that young and technology savvy Nigerians are moving their financial services from conventional banks to fintech, which offer more convenience and options at far cheaper charges.
MTN, on its part, is planning to kick off its PSB operation in the last quarter of the year, while Airtel, which is fighting hard to take off “as soon as possible” will unveil its plan this month.
DMBs have a first-mover advantage in the fintech space, having established themselves long before MTN and Airtel applied for licences to operate PSBs. Some banks have stand-alone fintech that have become household names while others run full-fledged departments that manage integrated digital services.
Yet, experts believe telcos have the big data advantage to compete for retail depositors, who are majorly yearning for new service. The competition will most likely be fought in the agent banking space, where banks have established themselves. With PSB licence, the telcos will most likely sign up agents to compete with those banks.
It was gathered that with the PSB license, MTN would be permitted to use its technology and agency banking to mobilise deposits and enable transfers from unbanked consumers in rural regions and any other location in Nigeria where they exist.
PSBs are expected to operate in rural areas and areas where Nigerians do not have bank accounts. This indicates that MTN expects to have at least 50 per cent of physical access points (also known as kiosks) in rural areas.
Further checks showed that with the license, MTN might start to deploy ATMs in some locations to enable customers’ withdrawal of cash just like commercial banks.
Analysts explained that PSBs could also utilise client deposits to their advantage because consumers might not always come to take their money, the deposits could be placed in short-term assets, allowing the PSBs to generate a rapid profit.
The CBN had stated that at any time, not less than 75 per cent of the deposits they acquire must be retained in treasury bills and other short-term Federal Government debt instruments, implying that they would put the majority of the funds in secure assets.
The CBN also requires that all funds above a PSB’s operational float (the amount required to operate daily) be placed with deposit money institutions (commercial banks). This implies that, while many people see them as a threat to banks, they are supported by the banks, as their deposits can be placed with any bank of their choice.
Speaking on the development, a telecoms expert, Kehinde Aluko, said Glo and 9mobile had previously being issued licences but their impact have been minimal.
“I am very happy that the CBN has given licences to MTN and Airtel. It would bring a significant impact to the game. My bet is only on MTN though, because they have the experience and the execution DNA to make it happen,” he stated.
When asked if PSBs inability to provide loans limit their impact on financial inclusion, Aluko said no, because PSBs can partner with lenders, which can provide their customers credits.
“From a business model point of view, it may even be beneficial as PSBs can earn fees without the burden that NPLs (nonperforming loans) bring to the balance sheet. But it comes at the risk of diluting the relationship they may have with their customers,” he added.