Cashless policy, fintech companies and future of commercial banks

Fintech, short for financial technology, is transforming the financial landscape, rapidly changing the ways that financial services are provided to businesses and customers. CHIJIOKE IREMEKA writes that recently, financial technology companies have started taking over the business of e-payment from the conventional commercial banks following the nationwide crisis-ridden and shoddy implementation of the Central Bank of Nigeria (CBN) cashless policy that rendered the commercial banks grossly inefficient in providing e-payment services to their customers.

Currently, the conventional banking system in Nigeria is facing fierce competition from financial technology companies popularly known as Fintech, majorly as a fallout of the shoddy implementation of the cashless policy of the CBN which put unprecedented and intense pressure on the network of the commercial banks, undermining their ability to provide e-payment services to their teeming customers.

Consequently, the customers are switching from commercial banks to the Fintech companies across the country for better and more efficient online banking transactions.

Telecom companies, with their large and established user bases, are making quick inroad into the world of digital finance. Fintech may have opened the door for new avenues to provide financial services to more than a hundred million unbanked people in Nigeria, and people are taking notice and rushing to them.

Amid the chaotic situation in which the nation has found itself over the cashless policy implementation, traditional banks must step up their game to remain at the forefront in the provision of financial services in Nigeria. With both fintech and telecoms out in full swing to attract users, the traditional financial institutions must effectively and practically position themselves as the top choice in this three-way race.

At this time of poor services in the banks, the fintech industry has done remarkable work in providing financial services to the youth, the age demographic least likely to have a traditional bank account. This may lead to an entire generation of Nigerians seeing fintech as the only viable option for their banking needs, while dismissing traditional banks as slow and antiquated institutions.

The last few years have been very kind to the Nigerian fintech industry. With 150 to 200 fintech startups calling Nigeria home, the country seems poised to become the uncontested African leader in the industry.

The sector raised around $440 million in investments in 2020, and more than $600 million in 2021, amounting to nearly a quarter of the total funds attracted by African tech startups. That figure rises to almost two-thirds in the case of Nigeria.

The growth of Nigerian fintech is perfect proof of the untapped potential in African economies. Fintech startups have enjoyed success and growth in Nigeria due to certain factors, including the low penetration of banking services, a youthful population making good use of an explosion in smartphone ownership, and the recent regulatory changes that have increased the number of cashless transactions.

To remain relevant in the country’s financial services and maximise their shareholders’ wealth, the Nigeria’s conventional banks would need to put their fingers on the pulse of the modern banking techniques as the CBN implements its cashless policy amid Naira redesign.

While the conventional banks are struggling to grapple with the effect of the Naira swap, cashless policy and developing infrastructures to support the new policy, the fintech companies had long developed the structure required to lead the country’s cashless policy.

Unfortunately, this is happening when banks are losing their trained Information Technology (IT) technicians in droves to better job openings abroad, a fact that bank chiefs have acknowledged to be affecting their Internet banking. The few available technicians are said to be less equipped as the fintech technicians whose daily businesses revolve around online financial solutions. Majority of them do not have physical address.

A chief information officer in one of the banks, who spoke to The Guardian on the condition of anonymity, said the crises caused by the implementation of the cashless policy and Naira redesign were compounded by shortage of technology-skilled workforce in the banking sector.

“The japa crisis has impacted negatively on banking operations. Most of our skilled and tech-savvy guys have resigned and relocated abroad for bigger pay, security and better working environment and condition. One of our bank’s branches did not open for three days because the branch manager, head of operations and cash officer left the same month. So, they could not open, and the head office had to intervene. Within the last one-year, we have lost about 200 good hands. Most of the bank employees that left proceeded on their yearly annual leave and from there resigned their appointment,” the source said.

“Unfortunately, many bank apps do not have the capacity for the number of transactions we are witnessing at the same time now. Banks must upgrade and quickly be on the alert to forestall possible cyber-attack. They need a stronger firewall now than ever,” a telecoms expert, Kehinde Aluko, advised, urging banks to upgrade their online platforms, USSD and their applications.

The prevalent hitches in the conventional banking became visible with access to cash remaining inadequate, compounded by inability of the Automated Teller Machines (ATMs) to dispense cash, and spiral failures of Point of Sales (PoS) machines as well as prolonged downtime in Internet banking.

The situation has reiterated the need for aggressive investment in the e-payment space of the banking sector, if they can withstand the wave of takeover from the fintech as majority of bank customers are currently opening accounts with fintech companies to aid their day-day business requirement.
The Guardian learnt that a new generation bank had to disable its app recently to avoid total collapse of the applications and guard against possible hacking. This brought further hardship to the customers. Some transactions that appeared to have gone through on the platform, which could take as much as 30 minutes to deliver, were later discovered to have failed, yet the funds were not reversed even when the initiator had been debited.

A petty trader at Agboju Market, FESTAC, in Amuwo Odofin Local Government Area of Lagos State, Helen George, said she had to open an account with one of the Fintech companies, PalmPay, to ease her business transactions, especially receiving payment and making payment to purchase wares.

“I had to open a Palmpay account to enable me run my business. I noticed that the online apps were faster in making transfers and receiving money. Before I downloaded the PalmPayApp, I was using a normal bank account. Sometimes, I will make transfers and they will not deliver. Sometimes, it will take a whole day for my account to be credited after someone had paid in money.

“In most cases, it’s around 2am that some of the credit alerts would come in. Sometimes the transactions bounce back and I will not be credited, yet my goods would have gone. I have given someone my goods and later discovered that the transfer the person made didn’t go through.

“I have lost money doing this, other people have experienced the same thing. So, when I discovered that these financial apps were more effective and faster in this trying time, I downloaded the PalmPay and it has been helpful to me. The transfer charges are as low N10 when transferring to commercial bank accounts. The charges are much lower when transferring between two online platforms.

“When I downloaded the app, my first five transactions were free before the charges started. Also, their customer care services are good and fast in attending to customers unlike the normal banking system that would tell you to come back after five or seven working days if the transaction is not reverted.

“There was a day I made a transaction that didn’t go through but I was debited. I chatted up their customer care centre and they responded immediately. That same night my account was credited. This will not happen in the commercial bank,” the woman recounted.

Asked whether she feels comfortable and safe with the app, she said: “I normally use the online bank to receive or make payment during the day, but once I got home at night, I move the money to my normal bank account. I’m scared of what happened during the MMM ponzi scheme. I don’t want to lose money. So, I don’t leave huge amount of money in the PalmPay account. I always move the money into my United Bank for Africa (UBA) account.”

Fintech is assumed to be a modern movement, yet the use of technology to assist financial services is not a recent phenomenon. The global fintech market was valued at about $127.66 billion in 2018, and grew to about $309, 98 billion by 2022.

Financial services are an industry that introduced credit cards in the 1950s, Internet banking in the 1990s and since the turn of the millennium, contactless payment technology. Fintech has been in the public conscience since the past three years. The takeoff of this term has come from startups—actors not within the inner circle of financial services, taking a more prominent role within the ecosystem.

The Guardian learnt that in the wake of the naira swap crisis in the country, customers were demanding more from the banks. Technology now empowers customers to scrutinise their service providers. The perception of fintech is a technology used to disrupt the conventional banking, but the banks’ services have been suboptimal to this point. Fintech startups are broadly focused on the concept of unbundling banks, offering one type of product/service and concentrating on doing it well. Innovation has been largely driven on the front-end within these specialised offerings, mainly through improving customer-facing facets of financial services.

But the drive for digital banking was part of CBN’s cashless policy introduced in 2011. At the commencement of the cashless policy, total number of ATMs across Nigerian banks was 10, 000, which grew to 17, 000 in 2015 and 18, 000 in 2017, before reaching 22, 500 as of December 2022, according to statistics from CBN.

Also, the data from Shared Agent Network Expansion Facilities (SANEF) revealed that the number of PoS terminals rose from around 155, 000 to 1.1 million as of April 2022, while the number of active banking agents is over 1.9 million. These digital infrastructures have been overstretched by the 45 per cent banked population across the country. Failure of ATMs to dispense cash, exorbitant charges by PoS agents and inability to get cash over the counter in banking halls lately have made Nigerians to increase their use of Unstructured Supplementary Service Data (USSD) and bank apps.

The hope that USSD platforms would help to reduce the pressure turned out to be a nightmare for most users as transactions collapse in the recent times and bank customers are losing even as the banks are smiling with giant balance sheet.

For instance, in 2022, the financial statements of some 10 banks revealed that in the first nine months, they recorded N900. 92 billion Profit Before Tax (PBT), despite slow performance of the nation’s economy. The N900, 92 billion represents 21.40 per cent increase from the N742.95 billion PBT recorded in the same period of 2021.

Thus, amid huge financial turnover recorded in the first three quarters of 2022 by banks in the country and claims of N100 billion investment in electronic channels, digital banking has remained very challenging for many Nigerians with the latest full implementation of the new cash policy.

The Association of Corporate Affairs Managers of Banks (ACAMB) had, in a statement on the naira redesign, revealed that from Internet banking to mobile apps, ATMs, PoS merchants, mobile wallets, USSD codes, agents and digital franchises, among others, not less than 80 per cent of Nigerians now enjoy one form of digital or cashless transaction or another, powered by investments of over N100 billion by banks.”

President of the association, Rasheed Bolarinwa, said the commitments by Deposit Money Banks (DMBs) had seen Nigeria rising steadily and recognised as having arguably Africa’s most advanced digital financial services industry and one of the world’s top 10 real-time payment markets.

Despite ACAMB’s claims, The Guardian observed that the hitches that characterised the implementation of the CBN cashless policy were a testament that there was no prior stress test conducted on banks’ infrastructure to ascertain their capacity to sustain the cashless policy before the country went all out to implement it.

Asked why he opened an Opay online account, Adebayo Lekan, said: “It’s faster and easier to operate for payment and receiving of payment. The online payment solution own by the commercial banks are failing big time because of networks but Opay accounts and others are very effective now.

“Since we are now on cashless economy now, it’s easier for me to operate through my smartphone. At least, the smartphones work very well with these online financial apps. The apps’ networks are more reliable than the banks’ networks. That is why you see most banks’ customers opening a digital account.”

For Joseph Obiora, the only online payment platforms that work well now are those of fintech. He runs three different digital apps – Opay, PalmPay and PiggyVest. According to him, opening an account with a fintech company is a popular alternative to opening a bank account as fintech accounts are quick to open and cheaper to use than a traditional bank account.

“There are some minor differences compared to a traditional bank account. There are no cheque books and it is not possible to deposit cash into the account, as the transaction is entirely online. One of the benefits of opening an account with a fintech company is that the account is opened online without any visit being required,” he added.

Way out
A tech expert and Managing Director, Zardalic Securities Limited, Donworchester Motouh, spoke on the challenges that the mass switching to fintech companies for better banking services pose for the commercial banks and how the banks can tackle them.

“The banks may consider an integration that would see to setting up of fintech companies that would directly man their online transactions, especially with their huge financial outlook. If the banks will be able to set up these fintech firms to act independently, make profits from other firms that may require their services but focus on the bank (the investor), the banks which have many other financial services that they handle will be able to match the fintech firms technology for technology. It would bolster the digital financial service environment. This would, in no doubt, help the CBN’s cashless policy,” he explained.

Some stakeholders are of the opinion that the endgame of banks investing in startups may cause confusion.

“Acquiring the invested companies also results in integration difficulties and the zero-sum game of cannibalising existing offerings via the startups’ own. The incentive to be involved and keep a finger on the pulse also runs the gambit of alienating other investors and distracting the founders’ unfettered direction.

“Taking equity stakes in startups should be more of a collaborative exercise for banks. One of the core value-adds that a corporate investor provides, is that they have a sandbox of clients and activities that are potential customers of the startup.

“Instead of investing with a view to perhaps acquiring the startup at a later date and hoarding it for itself, bank investors should open up their own client roster to the startup. Such iterative tests would allow for the startup to validate itself and for the bank to provide a value differentiator to clients, while demonstrating internally what industry innovation really looks like.

“Banks should also be more innovative with their capital and start upshot fintech ventures, labs completely separate from the main operation. This could be in the form of spun off independent groups, capitalised with equity and with no internal transfer pricing or involvement from the parent, staffed either with capable internal staff or external hires who receive ‘founding stock.’

“As the only shareholder, the banks will have control through the board, which can correctly steer the company through independent directors and the founding team’s motivation.”

However, The Guardian investigation showed that the fintech companies still need to do a lot of work to gain the people’s confidence as many people are still skeptical about cyber-criminality that that could be associated with online banking and transactions.

Some of the fintech companies in Nigeria’s air space are Flutterwave, Piggyvest, Paystack, Bankly, Remita/SystemSpecs, Moniepoint (TeamApt), Lidya, Carbon, Kuda, Risevest, Trove App, Bamboo, Interswitch, Opay, Chippercash, Paga, e-Tranzact, Cred-Pal, V Bank By VFD, Eyowo, Fint, PalmPay, Fair Money, WalletAfrica, Cellulant and NowNow.