By Deji OguntonadeDirector of Payments, Nigeria, Rockefeller Philanthropy Advisors
Today, Nigerian banks have an Achilles heel in two areas: innovation and collaboration. These weaknesses partly explain why we are currently witnessing stagnation in the banking sector. Historically, one of the bank’s “greatest” innovations has been its use of technology to deepen access to its products and services through retail banking. While this approach has worked for a while, it has faltered in recent years and banks are now struggling to deepen adoption through agent banking to maintain dominance in the financial space over other emerging institutions.
Indeed, retail banking has struggled over the past 12 years, and over the past 3 years we have seen the profitability curve flatten or even decline. Given these trends, banks should consider ending their singular reliance on a retail banking strategy and instead returning to the wholesale strategy they abandoned decades ago. years.
Damn if you do, damn if you don’t
We all know that line made even more popular by cartoon character Bart Simpson: “You’re damned if you do, and you’re damned if you don’t.” This sentence reflects the fears of the banking community regarding open banking since the beginnings of the Payment Systems Directive (PSD2) in Europe. Specifically, banks are concerned that open banking is part of a grand plan to neutralize their dominance of the financial space and allow some fintech newcomers to take over.
However, these fears are misguided and there are opportunities that banks can unlock as open banking emerges. So, first of all, let’s move from a “damned if you do” perspective to a “win-win” perspective.
Indeed, fintech companies and other financial institutions (FIs) – rather than oil companies, manufacturing or service companies – will be the new cash cows that are nimble, highly innovative and ready and equipped to take the path less traveled by people. banks. . However, they are the unicorns of tomorrow that cannot achieve Pegasus status without an application programming interface (API) – a vital input from the highly equipped and capable stables of banks.
So what would you call a bank that has a blessing of unicorns in its stable? Your guess is as good as mine: maybe very successful, a unicorn incubator, or a unicorn (though born again) itself multiple times? This is the longer term vision that banks should strive to achieve. For banks, it’s time to grow by shrinking – much like in the recent past, when merchant banks were the stars of the financial industry due to their focus on wholesale customers and the huge returns earned from serving these clients on a low asset base with highly skilled workers (credit, risk, relationship management, treasury, etc.)
A Win-Win for Banks: Adopting a Wholesale Strategy Using APIs
What banks need to do is distill their most valuable assets into APIs. Much has been made of banks going digital and closing branches as they convert customers to digital channels. I dare say this approach has not been too successful because banks still want to be in the driving seat to push retail banking which requires huge investments in physical touch points to serve the last mile customer. However, shareholder pressure will never allow traditional banks to achieve this. Already, five-year-old companies are increasingly capitalized than banks that have been around for decades. Investors no longer look at banks that are stuck in their old ways and fail to maximize the use of their abilities to grow their wealth. Therefore, more than ever, banks will face increased pressure from shareholders as it becomes even more difficult for them to attract sophisticated investors.
Therefore, banks should focus on their core strengths rather than half-heartedly (sometimes arrogantly) competing on unfamiliar ground. For example, banks have obvious advantages, such as:
- A repository of customer data insights
- A better understanding of the regulator(s)
- Has earned the trust of its customers over the years
- Better ability to mitigate financial risk
And it’s also clear that fintech companies are best known for:
- Take risks (huge leaps of faith)
- Be customer-centric
- Forging new paths
- Focus on niche solutions
- Use technology to deepen adoption
- Being “asset-light”
- Have the ability to attract funding to develop business ideas faster
How can banks combine all these forces in win-win scenarios? From my perspective, banks should further strengthen their core competencies as listed above, as this will give them the leverage and ability to woo fintech companies and sell to them:
- Excess capacity
- Access to customer data
- Regulatory know-how
- Risk-based processes and infrastructure
- Take advantage of his trusted name (before it’s too late)
If banks follow this approach in their collaboration with fintech companies, bank customers benefit from unfettered access to rapid innovation. Some may react to such collaboration by launching a debate on “who owns the customer”. In my opinion, these concerns are overblown and represent one of the main reasons why we are stunted in the digital space in Nigeria today.
Heads you win, tails you win
To overcome their Achilles heel of innovation and collaboration, banks must consider both sides of an imaginary coin and imagine that they will both have positive results when flipped.
In the first scenario, banks give fintech companies access to their customers’ data with the customer’s consent. Banks can make money from fintech companies by charging for this access. Imagine thousands of fintech companies exploring various opportunities that have been overlooked by banks over the years and having to buy access to them. In other words, fintech companies should do more retail customer-facing innovation, while banks focus on wholesale customer-facing innovation to support fintech companies.
In a second scenario, the banks no longer have absolute control over what their customers can do with their relationship with them. The customer can decide which platform they want to use to initiate a transaction and still use their bank account to achieve this. Banks can’t prevent this from happening, so why not expand their services to be the chosen bank where these customers and fintech companies deposit their money? Banks can only achieve this if they improve their quality of service and focus on providing the best wholesale services to fintech companies, who are now their most valuable new customers (MVCs).
In conclusion, the good news is that the wholesale way of doing business is not new to banking. Instead, banks can take this approach in the current environment, use the tools known at the time, and position themselves to take advantage of the new era.