Democratisation of banking services puts focus on relationships over products

West Africa’s retail banking industry is growing at a rapid pace, with growing competition in the once under-served retail banking and SME spaces. Banks are now leveraging technology to serve what were once unprofitable market segments. However, non-traditional competitors have grown significantly, providing services traditionally exclusive to banks. These developments require banks to have strategic technology infrastructure in place coupled with strong risk practices to grow a sustainable retail banking businesses.

In line with Central Bank of Nigeria’s 2020 vision to develop and modernise the country’s payments system, Nigeria’s financial services industry has put greater emphasis on the neglected unbanked population through technology. Banks face the cost of maintaining extensive branch networks while having their market share encroached upon by the ever-growing presence of payments solutions companies and mobile operators providing low-cost alternatives.

Customer service key
The African continent has very high population growth rates, along with strong structural and economic growth and robust internet and mobile penetration. West Africa currently comprises 18 countries with a total population of over 250 million, more than half of whom are Nigerian. While the banking industry in Nigeria has a renewed focus on retail banking, especially in the last few years, it is not as yet a very profitable business. Banks still rely on their corporate clients for business. Despite the vast potential of the market, it is becoming increasingly costly to run retail banking in the region. The cost-to-income ratio for an established retail bank in developed markets can be about 30%. In Nigeria it ranges between 40% to over 60%.

Democratisation of the banking business means that the business is now defined by customers and the competition and not just the bank. The strongest competition in retail banking is coming not from other banks, but from non-bank service providers. The main challenge in retail banking is to build lasting customer relations and not simply focusing on products. Today, most people change banks because of customer service issues, not because of technology or even safety.

West Africa’s banking sector recognises the need for product innovation, streamlined operations and strong customer relationships. Banks in Nigeria and elsewhere in West Africa will have to make the strategic decision to look at deepening the customer relationship through individualised product offerings and pricing. However, there is tremendous potential to grow by tapping into the unbanked population of over 50% that exists in most West African nations.

Reaching the unbanked
In sub-Sahara Africa only 34% of the population hold bank accounts as of 2014 according to the World Bank. Infrastructure and electronic processes within the Nigerian banking system remain complex, making brick-and-mortar solutions more viable for reaching out to the unbanked. However this solution is costly and banks are looking to use agency banking and alternate channels instead. Agency banking has its own problems due to a general lack of good agents as well as issues relating to cost efficiency and security. In addition it is hard for banks to make a cost-benefit analysis as the agency maintains the relationship with the customer, not the bank. As a result, agency banking has yet to take off strongly in Nigeria.

Since agency banking is not gaining as much traction in Nigeria, banks are looking to mobile banking as a solution. The Central Bank of Nigeria is working on a bank verification number project where a unique identity is given to clients. This project would address issues surrounding security and fraud in mobile banking. While almost everyone has a mobile phone in West Africa only a small percentage of those phones are smartphones, making mobile banking penetration extremely low. The challenge is that the banking system has not developed the functionality to capture non-smartphone users. Telcos in Nigeria like elsewhere in Africa have not been very successful in capturing non-smartphone users due to strict regulations from the central bank, providing an opportunity for banks to come up with innovative solutions.

Optimising customer data
As with technology disrupters today, banking might soon become an asset light business. Banks may earn more from fees than their balance sheet. They need to quicken their turnaround time, create omni-channel support and enable real-time decision-making. While banking operations have traditionally been hierarchical, digitisation is changing this. In moving from analogue to digital, operations are becoming more affordable, straightforward, and accessible, resulting in an exponential increase in uptake.

Banks have a lot of information about customers but have not been able to monetise or create value from it. Most banks have yet to get a single view of the customer, something that can only happen when the data is consolidated from its current silos. Banks receive two types of data—transaction data and relationship data—which help create a profile of the customer. Banks need to leverage this data to empower front end operations to help relationship managers serve customers better, creating a seamless engagement across all touch points. This coupled with a high level of customer service will deepen client relationships and wallet share.

Going forward, retail banks in West Africa will need to decide if their strategy is product or customer focused and build their technology and staff skills around it. How to reach the unbanked through mobile and the role of the branch in the future present huge opportunities for banks that are able to compete and innovate in this space. Mobile banking has pushed digitisation across the bank and in order to compete with non-industry players, banks must capitalise on the amount of customer data they have to turn it into a value-added resource.