Monday, March 08, 2021 / 07:00PM / By
Teslim Shitta-Bey, Chief Economist/ Managing Editor,Proshare / Header Image
Nigerian banks are in the middle of a slugfest. With sliding revenues and stunted profits in 2020, local deposit money institutions are punching from the ring corners as they fight for an increased market share of the agency banking market. Indeed, several deposit money banks (DMBs) have pulled off their soft gloves to battle for the heart, souls, and minds of underbanked customers, particularly in rural and suburban communities. The fight for the rural customer has led to an explosion of what is now known as 'agency banking'.
Banks Turn the Screws as The Battle for the Unbanked Deepens
The new battle for the unbanked has become a contest of wits, innovation, and power. The art of the fight has not been about size but vision. Tier 1 banks in the country have increasingly built digital market muscle and have seen electronic banking become a progressively important part of the revenue mix.
With COVID-19 stabbing holes in corporate wallets and customers drifting away from peer-to-peer (P2P) contact, the new lords of the banking arena are those banks that show a capacity to deliver services with minimal interpersonal contact but with optimal service delivery quality. In 2020 Nigerian banks were believed to have seen a surge in digital incomes as a result of the COVID-19 global health pandemic as customers opted for the purportedly friendlier electronic platforms for conducting their businesses. However, that conclusion was neither accurate nor the story complete (see chart 1 below).
Chart 1 POS Transactions of Nigerian Banks in 2020 (Jan-Sept)
Source: Central Bank of Nigeria (CBN) Proshare Research
Making Digital Migration Count
Digital banking transactions for Nigerian banks were uneven in 2020. Tier 1 banks appear to have made the jump on their Tier 2 rivals as revenues from digital transactions rose for the bigger banks relative to their smaller competitors. For example, between 2019 and 2020 Access Bank Plc saw electronic banking income rise from N18.96bn in 2019 to N38.79bn in 2020 representing a growth of +104.5%. This is not surprising, Access Bank has been one of the most aggressive banks in the race for digital dominance, its acquisition of Diamond Bank in 2019 gave it a major boost in upscaling its digital distribution and technical capacity. The bank's product sandboxes indicate that it would shortly increase its digital penetration initiative across the African continent. The bank appears to have lifted itself well above the digital finance tarmac.
UBA came in with lower growth in its digital income between 2019 and 2020 with its e-banking revenue rising from N26bn in 2019 to N27.87bn in 2020, the rise was +7.19% which was comparatively slim compared to the industry leader in this business segment. Considering the bank's desire for a greater proportion of the African deposit money bank market, the bank would need to ramp up its digital presence across continental markets.
Coming behind UBA between 2019 and 2020 was ETI, one of Africa's largest banking franchises with a presence in thirty-five countries and business transactions in 23 continental currencies. ETI saw its electronic banking income rise mildly by +5.90% from N27.81bn in 2019 to N29.45bn in 2020. ETI surprisingly lagged well behind their fellow Tier 1 competitor, Access Bank, in e-revenues. Given its continental spread in West and East Africa, analysts had expected that the ETI banking group would turn in stronger income growth in its digital retail banking business between 2019 and 2020.
So why did ETI's e-revenue growth look comparatively weaker than its other Tier 1 counterparts, Access Bank and , between 2019 and 2020? An executive of in explaining the relatively slower e-revenue growth between 2019 and 2020 noted that "For the debit and credit card business, fewer individual and corporate travels affected this income line. Previously, many people traveled on vacation, official and other assignments requiring them to use debit or credit cards for shopping at airports, retail malls, etc. With the COVID-19-induced lockdowns, card service fee incomes, unfortunately, took a tumble. For the automated teller machine (ATM) business, the drop had to do with regulatory induced reduction or caps in fees that were experienced in some countries. It was part of government/regulators way of easing the burden of lockdowns on citizens".
"Concerning agency banking, we have recognized that it is one of the services that banks will need to reach a wider customer base going forward, and we have pushed ahead on this frontier". According to the official "We call our agency banking businesses "Xpress Points". Currently, we have over 70,000 accredited agents across our 33 markets in Africa in terms of physical branches we have slightly over 700 across our 33 countries in Africa". FBNH has just recently announced about 86,000 agents across its local Nigerian markets. revenue however slithered marginally upwards by +1.56% from N48.03bn in 2019 to N48.78bn in 2020. Nigeria's oldest banking brand has done well to grow the number of agents it has groomed in the last two years but revenue growth from its digital banking business has not been preppy. The Holdco needs to improve its turnover per agent. The group also needs to improve income from its ATMs and debit and credit card business.
Notably, of the thirteen banks listed on the Nigerian Stock Exchange (NSE), only four recorded growths in their electronic banking incomes in the first nine months of 2020 while nine banks experienced contractions, it should be noted that the data refers to 9months 2019 and 2020 except in the cases of Fidelity Bank and ETI which refer to full-year numbers (see table 1 below).
Table 1 e-Banking: Building A Larger Franchise
Digital Banking: The COVID-19 Bogeyman Strikes Back
The most harshly affected bank by falling digital banking income was Zenith Bank Plc which saw digital income slide by -47.74%. This was followed by Wema Bank where electronic banking revenue slumped from N2.79bn in 2019 to N2.02bn in 2020, the drop represented a -27.60% decline. Close on the heels of the Wema Bank drop was GT Bank which slid -25.63% from N11.04bn in 2019 to N8.21bn in 2020, the GT Bank and Zenith Bank dips were worrisome as both banks were considered prime movers of the digital banking makeover and belong to the rarefied group of Tier 1 DMBs.
A major problem with banks during COVID-19's eye of the storm (between Q1 and Q3 2020 ) was the ceiling placed over digital service charges that limited banks' ability to raise service revenues during the period. Another challenge was that travel businesses and hospitality services went into remission as the virus torpedoed earlier travel plans. The large use of POS points and ATM outlets by holidaymakers and other visitors evaporated by mid-2020 leading to a drop in banking income from these alternative digital channels.
Agency Banking: The Art of War
"Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win." - Sun Tzu
The penetration of the unbanked rural and semi-urban markets will become a major battleground for banks in 2021 as they try to grow their retail businesses and ensure smoother service delivery in this market segment.
The battle for the lower consumer pyramid will become hard, fast, and uncompromising as the bigger banks attempt to rapidly expand their agency banking spread despite the constraints imposed by the COVID-19 pandemic.
In a recent African Digital Banking Transformation Report 2020 which was published by the African Banker magazine and titled "Building a Digital-First Bank", the report noted that "The number of Africans with bank accounts increased from 170m in 2012 to nearly 300m in 2017 and is forecast to reach 450m by 2022, according to consultants McKinsey. However, most Africans do not have access to traditional banks and the number of bank branches has not changed on the continent over the past five years, so access to physical branches is not improving".
The report also observed that "The banking sector's revenues in Africa as a whole are expected to increase from US$86bn in 2017 to US$129bn in 2022 but 68% of this income comes from just five markets: South Africa, Nigeria, Egypt, Angola, and Morocco...Nevertheless, the growing prevalence of cheaper smartphones and feature phones across Africa should allow more people to open bank accounts".
In other words, agency banking will be a major force for improving customers' access to banking services over the next twelve months with technology becoming ascendant as banks try to elbow their way into the consciousness of a larger number of users of mobile electronic payment and settlement platforms and channels.
Illustration 1 the Agency Bank As Warrior
What is becoming apparent is that size and location are twin characteristics that are forming the basis for aggression in competition for service delivery in rural and semi-urban markets. Big agents could deliver agency banking service at relatively lower costs as they take advantage of location and scale. However, smaller agent banks exhibit stronger value propositions in tinier communities here the volume of transactions per visit and the number of visits typically indicate lower economies and slightly higher costs per transaction. Banks are therefore likely to gradually scale up the size of their agents to increase transaction per agent and reduce cost per transaction allowing these agents to achieve lower breakeven margins (see illustration 2 below).
Illustration 2 When Banks Compete to Play Agency Hardball
Banks will be expected to increase commitments to agents in months ahead as brand competition extends to agency transactions and agents are assisted to become more dominant in their different markets. In the local Nigerian market, the method adopted appears to be a mix between co-location agency in which agents perform payment and settlement operations regardless of the resident bank that customers typically use for their transactions and bank-specific agency in which agents are attached to designated banks exclusively.
How the different models of co-location and the exclusive agency framework will shape the way banks expand into new MSME markets shortly. Exclusive agents carry out transactions for other banks but may limit the kind of service rendered.
Agency infrastructure, location, and training may become crucial parts of the competitive agency landscape in the months ahead. Banks may need to find different ways of working through the evolving competitive landscape as they explore the concept of Co-opetition which sees banking rivals collaborate within a competitive framework (see illustration 3 below).
Illustration 3 Getting Agencies Working Hard for Their Pay
A likely blind spot for deposit money banks (DMBs), however, is the entry of the national postal service company into the fray. The entry of NIPOST into the provision of agency banking would intensify competition as NIPOST leverages its national postal locations and logistics services to provide packaged cross-service value propositions that DMBs would find difficult to compete with.
NIPOST could provide postal banking services with limited national capital outlay using existing facilities. This would mean NIPOST would serve as a national agency bank providing co-location retail payment and settlement functions for banks it has contracts with while also moving documents and goods across communities riding on the integration of its logistics platform with its payment/settlement solution.
NIPOST could also decide to wing a micro-credit product based on communal knowledge and collective credit arrangements that leverage postal savings accounts. Postal services and rural communities have had a longstanding romance that could end in a new commercial marriage.
This would put smaller agents under pressure as they try to compete with NIPOST's location, distribution, and logistic strengths. If NIPOST chooses to enter the agency banking business the market structure could shift in decisive ways.
NIPOST would have the advantage of good locations across local communities in 774 local governments nationwide. However, its large network would still leave pockets of 'black zones' that it cannot reach thereby providing opportunities for small and medium-sized bank agency vendors to get in on the 'action' (see illustration 4 below).
Illustration 4 Looking at NIPOST's Potential Agency Strategy
Nevertheless, the federal competition and consumer protection council (FCCPC) may need to decide whether this market structure would breach its standards for market competition and anti-trust rules.
Digital Banking; A Second Look at The Playfield
The digital banking playfield is pushing into more aggressive areas of competitiveness as incomes from digital operations become increasingly significant to deposit money banks (DMBs). With the transaction experiences of bank customers shifting from terrestrial experiences to digital interfaces the ability of banks to provide a fresh and engaging user experience (UX) and user interface (UI) will separate those that ride the oncoming service delivery Tsunami and those that do not. Banks that do not align operations towards an increasingly consumer-facing digital reality will discover themselves stark naked when the technology tide runs out.
The push towards rural and semi-urban retail penetration amongst Tier 1 banks will likely bring better service delivery to local communities and reduce the cost of transactions in these areas. The concept of being deliberate could see a major leap in rural participation in the formal financial services sector and a geometric growth in bank digital incomes.
Chart 2 Nigeria's E-banking Transactions-Mixed Fruit
Source: Annual Financial Statements of banks 2020, Proshare Research
...of Sand and Sandboxes
With the Central Bank of Nigeria (CBN) finalizing the framework for regulatory sandbox operations in the country, the extension of customers' digital experiences could stretch a few notches as mobile Apps break the barriers between the formal and informal sectors of the economy (see chart 3 below).
Chart 3 Nigeria: Breaking Barriers Through Mobile Apps
Source: Central Bank of Nigeria, Proshare Research
On 14th January 2021, the Central Bank of Nigeria (the "CBN") released a final long-awaited framework for regulatory sandbox operations in the country (the 2Framework"). The framework came barely seven months after the CBN released an exposure draft framework (the "Draft"), on 23rd June 2020. The CBN in its final framework emphasizes a commitment to building a financial services sector that actively promotes innovation, effective service delivery, healthy competition, and financial inclusion. Giving a thumbs up to the operations of agency banks in the country.
However, a problem with the framework is that it seems to have put leg cuffs on the scope of activities of fintech companies and banks by assuming that their activities will mainly be limited to the introduction of payment solutions. This puts a damper on the 'innovation' and 'effective service delivery' it states as the benefits of the regulated sandboxes. Indeed, the apparent concentration of the activities of sandboxes to payment solutions throws sand in the cogwheels of financial innovativeness.
The restrictive nature of CBN's sandboxes denies the regulator the opportunity of gaining insight into how digital currency or cryptocurrency could work within a framework that does not compromise national security, financial system stability, and regulatory oversight. If the CBN requires the best of intellectual effort to emerge from sandboxes it may need to relax the stringent framework and allow innovators the full breadth of their intellect within the limits of regulatory governance.
If sandboxes are supported to thrive in an aggressively creative melting pot, the country could experience faster-paced financial inclusion and economic growth and development.
Back of the Cheque Book
The section title is an oxymoron, going forward there will be no checkbooks as the digital age would have moved into full gear with customers operating in a binary world where paper and paper-based asset validation would have been as contemporary as the dinosaur. The digital exchange of value has been accelerated by the incidence of the COVID-19 pandemic and regardless of the romantic sentiments of a 'return' to normal, banking transactions will majorly be digital codes passing through a cathode of algorithms that balance books instantly with military precision. Sandboxes will play with ideas that will upset the traditional banking apple cart, and those starring numbly at happenings will end up in a cold and uncomfortable competitive market space.
The competition will become intense as banks assert greater influence over informal market payment and settlement transactions but beyond payments, the banks will battle for micro-lending business which may start with micro-leasing, micro-insurance, and sale and leaseback arrangements for microenterprises. Michael Porter's five forces of competition may be a useful framework for sketching out the broad outlines of competitive strategy (see illustration 5 below).
Illustration 5 Nigerian E-Banking and Porter's Five Forces
Nigerian Tier 1 banks may suffer bumpy rides in the market for rural and suburban retail businesses as they jostle to outdo one another in the increasingly attractive micro and small enterprise market space. The nudging, bullying, and scratching may playout as catfights in which ultimately the rural and semi-urban individual and business dweller will end as the chief beneficiary. However, in the words of the ancient Chinese army general, Sun Tzu "The supreme art of war is to subdue the enemy without fighting."