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Tier 1 Reclassification: Technology and the Nigerian Banking Playbook; the New Kings of the Kingdom

Jun 27, 2022   •   by   •   Source: Proshare   •   eye-icon 3326 views
"We live in an era of disruption in which powerful global forces are changing how we live and work. The rise of China, India, and other emerging economies; the rapid spread of digital technologies; the growing challenges to globalization; and, in some countries, the splintering of long-held social contracts are all roiling business, the economy, and society. These and other global trends offer considerable new opportunities to companies, sectors, countries, and individuals that embrace them successfully—but the downside for those who cannot keep up has also grown disproportionately. For business leaders, policymakers, and individuals, figuring out how to navigate these skewed times may require some radical rethinking."- Executive Briefing, McKinsey January 2019              

Tier 1 Banks in the Context of Disruption and Technology -Decentralized Banking

In the future, banks that win the competitive contact sport called business will rely on their ability to adapt technology to fit evolving customer journey experiences. As consumers become mobile and more flexible in their work culture, they would expect the following service standards:

  • Speed
  • Clarity
  • Consistency
  • Interactiveness (adaptability)
  • Best governance practice 

The younger bank customers would also expect to see environmental friendliness and social sensitivity. The digital age of banking would break old barriers by bringing in more customers at cheaper costs and improving market access to rural and urban small to medium-sized enterprises. Technology would also be a boon to microentrepreneurs wanting to service a larger customer base using digital platforms. The ease of merchant payments and settlements using Unstructured Supplementary Service Data (USSD) exemplifies how improved technology can support business growth. Platforms like Facebook, Twitter and Instagram are being used as marketing platforms where merchants and individuals sell in space rather than in a place.

 

Fintechs have started to grant loans and provide commercial payment platforms, but many are beginning to realize their folly at brazenly barging into the risk asset business. Be that as it may, banks cannot be indifferent to the challenge that Fintechs bring in making loans more accessible to customers. While Fintechs lack the credit evaluation competencies of deposit money banks (DMBs), they have the technical capacity to ensure payments and settlements quickly and safely. The evolution of the fintech onslaught into banking-type services would be greater digital oversight by the regulatory authorities and tighter controls over lending activities such as setting reserve requirements and minimum tier 1 capital base for digital mobile lending platforms.

 

Banking is changing. Banks, and their customers, are riding a wave of innovation, reimagination, and reinvention, thereby intensifying retail competition and how customers are serviced. Technology 'cancelled' routine teller functions, but it has also placed less repetitive jobs in the crosshairs of software developers aiming at automating lending and loan recovery decisions as financial service operators increasingly use big data to hedge loan risks and guide loan selection. The AI of banking is not on its way; it is here.   

 

Market analysts note that the anonymous customer no longer exists and growing digital footprints have given Nigerian lenders an insight into the psychology of borrowers and the potential buying habits of customers. The character of customers can be gleaned from the pile of data buried in their income statements, spending habits, investment choices, and saving cycles. These digital footprints apply to both corporate and individual customers.     

 

Indeed, access to massive data on individuals and corporations means that unlike in the past, when knowing the customer was a hit-or-miss affair, the new data age of machine learning (ML) and artificial intelligence (AI) unpacks the customers' lifestyle. However, what might still prove difficult is determining a customer's character, but this is not entirely impossible, or at least it could be made less random by using AI and ML as guardrails for assessing behavioural patterns and customer reliability.

 

With more data about individuals and corporations becoming available to lenders daily, the once far-fetched concept of 'open' banking is moving from fringe speculation to mainstream implementation. Local banks are accessing customer transaction data to build financial solutions that meet customers at their points of pain and are opening up wider opportunities to properly appraise services such as temporary overdrafts to meet short-term cash flow deficiencies based on such things as salary expectations. Loan repayment cycles could establish a digital footprint of a customer's ability and willingness to repay loans to form a 'character map.' 

 

Such character mapping has improved rural financial inclusion and greater female economic participation in places like East Africa, but not everybody has caught the bug. 

 

The Nays Have Their Say

In October 2015, the European Parliament approved a new Payment Services Directive, called PSD2. The new rules were intended to promote the development of innovative mobile online payments through 'open' banking. 

 

However, some financial reviewers were unconvinced that this was the way to go. Mr. Mick McAteer of the UK's Financial Inclusion Centre thought that only digital natives would benefit from the development.https://en.wikipedia.org/wiki/Open_banking - cite_note-bbcdisruptors-9 He said that open banking was "a daft idea" that could worsen lower-income individuals' financial exclusion. McAteer argued that it was naïve for regulators to expect customers to take ownership of their data and negotiate good deals with the banks. He noted that banks could exploit customers based on the higher cost of sundry new products such as payday loans and the misuse of data and personal information that customers could inadvertently make public.

 

The pushback against open banking has not gained broader market support as fintech companies and banks have continued filling the 'white spaces' between customers and financial service providers. The gaps in service delivery in banking are being addressed by institutions that have taken advantage of the spread of telecommunications and the increased penetration of mobile telephony in frontier economies to meet customer service needs.

 

As good as AI applications and open banking appear to be on the surface, they could create significant challenges to individual data privacy. In trying to understand the customer's service experience, banks could face the morality of customer data mining and the selective bias of customer profiling. Highly priced services could be offloaded onto undiscerning customers who find themselves paying premium prices for services they could either ignore or perhaps defer (predatory lending). 

 

This issue is raised and debated in a March 2021 article in the International Monetary Fund's (IMF's) magazine Finance and Development. The writer Nikita Aggarwal, a researcher at the University of Oxford, England, notes a need for a balance between the rise in digital lending and consumer protection. This issue is yet to be resolved satisfactorily in the new digital marketplace. 

 

She observed that 'datafication' of debt was used in increasing loans to poorer customers. Still, she noted that this comes at the cost of predatory pricing of services by banks and the loss of data privacy. Analysts have observed that the loss of data privacy may be accompanied by an improvement in the ability of lenders to assess whether a loan will go bad or not; in other words, loan delinquencies would fall as NPLs decline. There is still much debate on how customers' data is compromised by open banking. Still, Nigeria's Federal Competition and Consumer Protection Council (FCCPC) has more than a few months of work to figure out how to protect financial service customers using digital financial platforms.  

 

But what is clear is that the age of AI and ML is here. Financial service delivery going forward will be more preemptive than reactive, and service providers will be more aware of customers' service expectations and experiences than they were in the past (see illustration 15 below).

 

Illustration 15: Financial Service Delivery in the Age of AI

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Downloadable Versions of Tier 1 Banks Report (PDF)

1. Executive Summary: Nigeria’s Banking Industry: The Case for Redefining Tier 1 Banks - May 28, 2022

2. Full Report: Nigeria’s Banking Industry: The Case for Redefining Tier 1 Banks - May 28, 2022

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