Incessant failure of transactions spurs growth of digital banks in Nigeria

BY GODWIN ANYEBE

The recent naira redesign by the central bank of Nigeria has led to the expansion of the customer base of digital banks in an unprecedented rate leading to increase in the number of new banks in the country. This development resulted from the traditional banks inability to meet high demands of their customers’ digital payments services, followed by unnecessary customer delays, crashes and frustrations.

In fact, the situation deteriorated that customers could not transact and failed transactions could be on the waiting list for over a week. In many cases, customers were cash-strapped.

The regulatory stipulation for reversal of failed on-us ATM transactions is instant or 24 hours for manual resolution where the instant option fails. On the other hand, failed transactions involving third-party are expected to be resolved in 48 hours. Today, many customers are put on the sideline for as many as two weeks before any green light on their complaints.

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Findings by Daily Times revealed that, this rigidity and its attendant effects are pushing many to digital banks where customers also do not have to worry much about arbitrary and multi-layer charges. Each transfer on a traditional bank app is charged while at least two notifications, which were previously charged N10 each before lawmakers intervened to force it down to N4.

Contrary, some digital banks offer unlimited free transfers. The popular ones, which also give instant uncollateralized but expensive loans, allow their customers at least 30 free transfers in a month. There are also saving options where customers with excess funds could earn close to 20 per cent interest rate.

The current minimum interest on savings, as mandated by the CBN, is 30 per cent of the policy rate (which is 5.2 per cent), which many banks do not comply with. Less-regulated term deposits, which come at a higher cost to customers, are less than two per cent interest yields in many banks.

The crisis which was a moment of acute turmoil for most companies in Nigeria, especially the traditional banks led to the surge in the numbers of digital banks to cater for the increasing demand for improved banking services.

In response to the demand, the banking regulatory authority, the Central Bank of Nigeria (CBN) recently approved licensing digital payment platforms to operate microfinance banking and Point of Sale (PoS) services in Nigeria.

According to report, the banks fall into the fintech ecosystem but serve the same purpose as the conventional banks, which have physical presence.

The report says these fintech platforms operate under various licensing categories and offer multiple services, delivering financial services via mobile apps and other touchpoints.

Also, the CBN database show that about 894 companies have been licensed as microfinance banks as of February 2023. However, only some fully digital companies can be described as digital banks. Except for a few digital banks, some have also obtained licenses from CBN to operate PoS services.

The names of the banks include: Sofri, Mint, Piggyvest, VFD, Moniepoint, FairMoney, Carbon Kuda, Eyowo and Sparkle.

For those who are not well-versed in the financial industry, digital banks are not the same as online or mobile banking platforms. Digital or neobanks share no affiliation with conventional banks. They have no physical branch or banking hall, but similar to their brick-and-mortar counterparts, these platforms offer services like those available at physical banks. The primary difference is in the banking process, which is entirely online for digital platforms.

For the most part, mobile or internet banking are complimentary services promoted by traditional banks. They allow consumers execute remote transactions while still being under the umbrella of a conventional banking system.

Digital bank

According to report, Nigerias digital banking scene is unfolding in two ways. Some banks are switching to cutting-edge technologies to boost their financial services, commonly termed online banking. Other internet-powered branchless banks are increasingly springing up, offering full or limited services. The latter includes neobanks such as Kuda, Waya, VBank, OPay, TransferGo, and TransferWise. While they are early-stage FinTech startups, they pose worthwhile competition to traditional well-established banks.

Checks show that, more than 200 FinTech firms in Nigeria offer online access to digital banking, mobile payments, and commercial and personal financial activities. FinTech investments in the nation had been valued at upwards of US $200 million (PricewaterhouseCoopers report) between 2011 and 2018. McKinseys 2019 report evidenced US $460 million in FinTech investments.

Many Nigerians believe the move is a huge intervention to cushion the digital payment challenges in the conventional banks among many other issues. For some of them, the new banks came to restore hope to bank customers many of whom had been disappointed by the poor services by the traditional banks.

Though there are no verifiable statistics to show the uptick in subscriptions, those privy to the database of some of the financial technology firms, said the inflow in terms of volume and value in the last few weeks has been unprecedented.

Gen Z and Millennials

To Gen Z and millennials, the reasons they shifted to digital banks is because of easy-to-use app they introduced. For Segun Ayoola, a student of University of Ilorin, Kwara State, “since I have been using Kuda Bank app I have never been disappointed because their system is swift, reliable and smooth unlike the conventional banks.”

Also, Idowu Oluokun, an IT profession who resides in Ayobo area of Lagos State, said, “I was formerly banking with Guaranty Trust Bank (GTB) before, but the cash crunch in the first quarter of the year, and my inability to receive or transfer funds from my GTB account forced me to shift my account to Kuda Bank. And since the time I joined Kuda I have never regretted it.”

The reason GenZ and Millennials are embracing digital banks is because of their youth-oriented apps. Friday Atufe, chief operating officer of Strategic Effects Media said, “Millennials are embracing Fintech like Kuda, Opay, Palmpay and others because the online apps are easy to open and some of them don’t charge interest rates like commercial banks. The digital banks also make it convenient for them to opened their accounts from the comfort of their phones unlike commercial banks that will require their physical presence.”

Traders and artisans

Excitingly, it is not only the GenZ and Millennials that have shifted base to digital banks, artisans, traders and many others were angered with the cash crunch experienced with the conventional banks during the naira redesigning programme and decided to transfer their funds to digital banks. Many of them vowed to stop banking with some of the conventional banks any moment the storm is over. True to their words, many of them started registering with one digital bank or the other for solace.

Emmanuel Charles, a food stuff trader, who recently opened an account with one of the new banks said he took the decision when maintaining his old bank account with one of the traditional banks was becoming problematic for him.

According to him, he encountered many digital payment issues in the cause of dealing with his numerous customers at the height of the cash crunch and the resolution time seemed endless.

Before now I used to have series of challenges with payment especially when transfers were made for goods bought. A lot of the time when I complained to the bank their resolution time usually take longer time which always affect my business. But, since a friend introduced me to one of the digital banks- I have not been disappointed by their services- money transfer alerts are always received in good time, and the issue of delay in payment has been nearly impossible.”

Like Charles, a lot of other Nigerians said the introduction of digital banks into the banking system brought respite to their unfortunate encounters with crises-ridden conventional banks during Emefieles naira-redesign-saga. They said this development will gives room for healthy competition and prompt conventional bank to overhaul their system.

Also sharing her thought on this issue, a bar tender at Laurita Hotels and Suits, Abule-egba, Lagos State, Chioma Joseph told our correspondent that from her observation, digital banks are providing solutions to customers’ challenges better than the conventional banks.

According to her, it’s obvious that the digital banks have come to stay because after she embraced the platforms, she no longer experience transaction glitch compare to what she used to experience with the conventional banks.

On his part, a tricycle operator in Lagos, Jerry Ajulo, said with the adoption of digital platform, he has been receiving payments from his customers without any issue, adding that, one cannot try that with the conventional banks.

While reacting to question on whether he will continue using the platform or not, the Auchi Polytechnic graduate stressed that, for him, it’s all about solving problems, as far as the digital platforms are proffering solutions to his problems, he is cool with it, except he sees a better option, he doesn’t think he can stop using the platform for now.

Experts’ opinions

However, Nelson Ochonogor, a digital expert says though the cash crunch led to the migration of the generation Zs, millennials and low-income earners to new banks and that the digital banks are able to run faster but, the traditional banks will catch up sooner or later. He also added that, no neobank can truly operate without the structure laid by the traditional banks.

Basically, it’s just something that moves with time. Traditional banks have certain processes and structure and dont forget, they are heavily regulated by the regulatory authority, while they can move and make things happen fast, because of the regulations they are impeded more than the digital banks or digital banks as they are known.The neobanks basically are not heavily regulated the way the traditional banks are. Secondly, in terms of infrastructure- dont forget most of the infrastructures that are in use now are laid down by the traditional ones over time. The digital banks cannot do what they do without some form of collaboration with the traditional banks because all they do directly or indirectly still involve the commercial banks.”

On the effect of the proliferation of the new banks he said: Because the new banks are new and trending, and their infrastructures speak towards what the millennials and GenZ want, naturally there is going to be tilt toward them. A lot of the people that are putting their money in new banks today are not putting heavy funds because of trust and then spread hence there is limit. For me, it’s safe, but you cannot change the way people think.

“On the economy, it gives room for competition and make the traditional banks to sit and offer better services.

No doubt, digital banks have taken a chunk from the market but the traditional banks are heavily positioned to play very well in the industry even as they serve as go-to banks between the new bank and the people,” he concluded.

Sharing his view on whether the effects of brain drain in the country is part of the dilemma of the conventional banks, Jim Chinasa, MD, Hoop Telecoms said;

Incidentally, I was talking to a colleague recently who heads one of the banks call centre, and because we also service some of the banks we came to a conclusion that, in all of our disaster recovery, sustainability plan, no one ever saw this one coming.”

According to him, “there was no one who saw this one coming not even the banks. We know that from time to time the banks will call us to a meeting to ask for our continuity plan, and disaster recovery plan, but this, never did anyone come with the scenario where an entire department will close down because they have mass resignation…..But, every sector is affected, from banks to the oil and gas to the legal profession, none is spared.”

“It has been mass resignation of our best brains and hands. However, we cannot shut down our economy because those who use to run them are no longer available. It could have been anything. Covid came and dealt with some nation but we are here. We will keep moving but the impact has been massive. It is felt across the different sectors of the economy. If you notice, banks services have nosedived, fewer hands to take care of more problems but, we will weather the storms.” He added.

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