MON, JULY 01 2019-theG&BJournal– Moody’s, the global credit rating agency, today published its commentary on recent plans announced by the Central Bank of Nigeria (CBN) to boost FINTECH uptake in the country. It said the plan will deepen the role of financial technology firms (fintechs) in Nigeria’s (B2 stable) banking system, a credit negative for incumbent banks because it will increase competition.
‘’Increased competition will likely outweigh benefits from growing financial inclusion that come from financial innovation,’’ Moody’s said.
Godwin Emefiele, governor of the Central Bank of Nigeria (CBN), said in a policy speech On 24 June 2019, that the CBN will implement measures to boost the utilisation of unstructured supplementary services data (USSD1), mobile banking, agency banking and payment service banks (PSBs) over the next five years.
Moody’s said it expects Nigeria’s large banks – Access Bank Plc (B2 stable, b32), Zenith Bank Plc (B2stable, b2), First Bank of Nigeria (B2 stable, b3), United Bank for Africa Plc (B2 stable, b2)and Guaranty Trust Bank Plc (B2 stable, b2) – to be better positioned to defend their market shares because they have larger customer bases and large technology budgets.
‘’Likewise, Nigeria’s large banks can withstand temporary profitability erosion as they pursue client acquisition and retention. Small and midsize banks will likely face stiffer competition from fintechs given their higher exposures to SMEs.’’
The CBN proposals cover payment systems and infrastructure, access to credit for micro, small and midsize enterprises (MSMEs), consumer lending, financial inclusion and financial stability among other issues. The CBN will also develop a regulatory sandbox that will enable fintechs and banks to test their innovations in a controlled environment, minimizing risks of financial instability in the Nigerian banking system.
Nigeria’s fintech market is fast-growing, largely dominated by payment service companies such as Interswitch Limited, e-Tranzact, Emerging Market Payments and Unified Payments; consumer payment apps and digital commerce platforms such as Quickteller, KudiMoney, Jumia and KongaPay; and online micro lenders. In October 2018, the CBN issued guidelines for the introduction of PSBs. A PSB license allows non-bank institutions such as telecoms, retail chains and bank agents to offer basic deposit and payment services to their customers.
Moody’s projects that PSBs will challenge incumbent banks because of their ability to develop their own digital platforms, hold deposits and make transfers without partnering with banks.
According to Moody’s, these new entrants will compete with banks, especially on retail banking products, which will negatively pressure banks’ consumer business unit margins. Large telecom companies will be able to leverage their large customer bases, threatening banks’ strategies to mobilise retail deposits via mobile-phone-based platforms, although banks will be able keep deposits where wallets are held in their trust accounts.
Fintechs may also create alternative distribution and payment channels that risk eroding banks’ payment services’ fee income. Nigerian banks have increased fee and commission income from their electronic platforms. In 2018, income from e-banking channels increased by an average 46% for the banks we rate, and the contribution to total fee and commission income increased to 25% from20% in 2017. The contribution of electronic fee income to total fee and commission income increased in 2018 for all the banks we rate.
However, an expanding fintech market will encourage innovation and would modernise Nigeria’s financial markets, providing cheaper access to financial services and boosting financial inclusion. Increasing financial inclusion would support system deposit growth and create consumer lending opportunities for both banks and fintechs (PSBs will not be allowed to lend).
Nigeria is highly under banked, with about 60% of the adult population having no bank account, according to The World Bank’s 2017 Global Findex Database.
‘’In the next 12-24 months, we expect more fintechs to partner with banks because the fintechs lack scale. Nigerian fintechs would also need to upgrade their know-your-customer and data protection infrastructure, which will require substantial investments.’’
‘’By comparison, incumbent banks have the resources to invest and the experience to manage these risks. Some banks are also likely to buy services from fintechs to improve their operations and services. For example, some Nigerian banks are acquiring robotics services from fintechs and automating repetitive processes, fostering partnerships.’’
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