Problems Confronting Traditional Banks in Nigeria

Nigeria’s financial center, Nigeria’s economy, has transformed in a revolutionary manner throughout the years. Traditional banks, in their physical appearance and traditional way, are traditional intermediation wizards in finance, playing intermediary functions of saving, lending cash, and paying. But banking in Nigeria today is reforming at a very, very fast rate, threatening to obliterate the monopoly and long-term viability of such stodgy banks by an interrelated group of issues. This in-depth research considers hi-tech threats to stodgy banks in Nigeria, walking on the razor-thin wire between technology start-ups, regulation development, business cycles, shifting customers’ needs, and new agile challengers. There is a concern that policymakers, bank managers, and clients should be attentive to such issues as they define the future of Nigeria’s banking.

1. Fintech Penetration and Revolution of Technology

One of the most challenging challenges facing traditional banks globally and even in Nigeria is the relentless flow of technology disruption. Their arrival and meteoric rise into business are accompanied by paradigm-breaking products by definition, which revolutionarily outrun traditional banking form and mechanics. Fintech newcomers have no legacy and regulatory baggage and thus are highly likely to provide leaner, customer-focused, and lower-cost products that instantly eat into the profitability and market share of established banks.

-Mobile Payments and Digital Wallets: Fintech companies have led the expansion of mobile payment systems and digital wallets that provide cheap and convenient transaction services to most Nigerians, especially the unbanked and underbanked. The platforms provide cheaper transactions and easy registration than banks, with daily record-breaking transaction volumes. Among the most widely used are OPay, Paga, and PalmPay. They have reached this far because it is just too easy to access and use them. Physical banks therefore need to step up their mobile banking themselves in an attempt to be viable competitors.

-Digital Lending Sites: FinTech lenders apply sophisticated algorithms and third-party data points to decide creditworthiness and disburse cash quicker than banks. The web sites will be attractive to consumers and small businesses who wouldn’t otherwise be able to have access to credit from the bank because of harsh collateral requirements or slow application process. Speed and convenience of web lending are very strong influences to which the mainstream banks are pressured to rise with a lessened lending process burden and devising new credit rating tools.

-Blockchain Technology and Cryptocurrencies: Despite being far from being in its nascent phase among Nigeria, blockchain technology and cryptocurrencies are a probable chance of being an upcoming long-run threat to the traditional banking system. Decentralization and openness of blockchain have the capability to redefine asset management, cross-border payments, and payment systems at their very core. Widespread application of the cryptocurrencies more so in spite of local loopholes in the Nigerian regulatory spheres is a promise of tomorrow where the current banks will be forced to respond or acquire such emergent technology to stay relevant.

-Institute of Banking and Finance

-There exists bank research on AI and ML to offer customer personalization, automate repetitive work, identify frauds, and improve risk management. Banks are investing more dollars on these technologies but installing them on top of current infrastructure and acquiring necessary skills is a monumental task. Having the ability to leverage the power of AI and ML will be banks’ game-changer to increase efficiency and customer experience to the maximum possible extent.

2. Regulatory Environment and Cost of Compliance:

The Nigerian banking industry is confronted with a challenging and fast-changing regulatory environment which is controlled by the Central Bank of Nigeria (CBN) and other regulators. Even though regulation is necessary in furthering financial stability as well as consumer protection, increasing cost of compliance may be a bulk problem to traditional banks.

-T-KYC and AML Rules: In-depth T-KYC and AML rules would make sure that banks would be required to have effective customer identification and due diligence controls. Ponderous and costly for traditional banks with large numbers of customers and a geographically spread branch network, such controls are indispensable to combat anti-financial crime. Fintech players, whose typically flexible technology platform can potentially make it possible, can immediately track electronic T-KYC failure.

-Data Privacy and Security Regulations:

With the increasing digitalization of financial products, data privacy and security are now the topmost priorities. The Nigeria Data Protection Regulation (NDPR) has certain regulations for banks capturing, processing, and storing customers’ information. This compliance is also followed by enormous investment in data governance platforms and cyber security infrastructure, an enormous capital outlay for legacy banks.

-Capital Adequacy and Liquidity Requirements: The CBN prescribes minimum adequacy levels of capital and liquidity requirements for the purpose of ensuring the solvency and stability of the banks. Although they are necessary for financial system stability, they lower the credit capacity and profitability of conventional banks, especially in times of economic downturn.

-Fintech Regulation and Levelling the Playing Field: The rapid expansion of the Fintech sector attracted the attention of the government. Although the CBN took the lead in laying down guidelines to the majority of Fintech companies, regulation was at a nascent stage. The conventional banks would prefer to complain of a level playing field, accusing some of the Fintech companies of exercising less regulatory influence, thus getting a strategic advantage.

3. Economic Volatility and Macroeconomic Determinants:

The Nigerian economy over the years has been volatile, conditioned by macroeconomic determinants of oil price volatility, exchange rate volatility, inflation, and unemployment. All the macroeconomic determinants condition the performance and stability of traditional banks.

-Asset Quality and Non-Performing Loans (NPLs): During recession, business failure and unemployment are usually intensified, thus with a likelihood of causing challenges in paying loans by consumers. This can cause a surge in NPLs, which is also likely to destroy the profitability and capital base of traditional banks. Management of asset quality and credit risk hedging is always a challenge in the Nigerian economic system.

– Exchange Rate Volatility: For situations where the banks have large foreign currency exposures, exchange rate volatility will influence their value of foreign currency-denominated assets and liabilities, profitability, and capital base. Exchange rate volatility of the Naira is typical for conventional banks.

-Inflation and Interest Rate Management: If inflation goes unchecked, it can erode the real value of deposits and loans, and CBN monetary policy interest rates used to control inflation can also impact the banks’ net interest margins. Nigerian conventional banks maintain a delicate balance to walk between interest rates and inflation.

-Economic Growth and Demand for Loans: Demand for loans and other banking products is related to the overall well-being of the economy proportionally. Slowing economic growth can reduce profitability and demand for loans in conventional banks.

4. Shifting Customer Preferences and Expectations

The customers of the banking industry are experiencing very high expectations, driven by what they perceive in other web services. Nigerian bank customers are becoming more demanding for convenience, speed, personalization, and real-time digital interactions. Formal procedures and legacy architecture of the traditional banks prevent these changing expectations to be fulfilled.

-Digital Channel Demand: Customers increasingly want to communicate with banks electronically using mobile banking applications, websites for online banking, and social media. The conventional banks will have to extensively invest in building their digital capacities so that they can provide end-to-end seamless online customer experience.

-Customer Experience and Personalization: Customers demand personal attention and customized financial products. Fintech competitors can leverage data analytics more to understand customers’ needs better and deliver personalization. Traditional banks need to enhance their data analytics and customer relationship management capabilities to deliver more personalization.

-Speed and Efficiency: The client needs speedy and efficient service, whether opening an account, executing a transaction, or solving a problem. The conventional banks need to make their procedures lean and less bureaucratic in an effort to enhance speed and efficiency.

-Financial Literacy and Inclusion: Despite more financial inclusion in Nigeria, most of its people remain unbanked or underbanked. Traditional banks have to develop low-cost and innovative products and services to serve such a segment and complement efforts at financial inclusion.

5. Competition from Non-Traditional Players:

Apart from the Fintech firms, the conventional Nigerian banks also increasingly encounter competition from other non-traditional players like the telecommunication players (telcos) and retailers entering the banking sector.

-Telco-Led Mobile Money: Telcos with their huge mobile customer base can well and truly change the payment segment with their mobile money product. They can bank on their own network and customer loyalty in an effort to make the financial product accessible and affordable, especially to the unbanked customer base. Regulation, although having been a driving factor towards their entry hitherto, cannot smother the hope of telco-led mobile money as an inspiring competitive trigger.

-Retail Enterprises Providing Financial Services: A few of the major retail companies are also considering how they can provide financial services to consumers, i.e., credit facilities and payment processing. Their brand name and loyalty already established will be helpful.

-Agent Banking and Branchless Banking: Agent banking and other branchless banking structures enable the conventional players and unconventional players to gain the reach at low cost vis-a-vis the conventional branch structures. It is used for the objective of generating competition towards the provision of core banking services.

6. Legacy Systems and Infrastructure

Nearly all the legacy banks in Nigeria have operated with legacy IT that are mostly clunky, siloed, and more difficult to integrate with tomorrow technologies. Legacy systems will be an obstacle to innovation, able to support changes easily according to the marketplace in timely manner, and providing seamless digital experiences.

– Maintenance Expenses: Legacy system maintenance and modernization are costly, depriving funds otherwise utilized in newer technology.

– Integration Challenges: Legacy system migration to new digital platforms and Fintech solutions is cumbersome and slow.

– Scalability Challenges: Legacy systems are hard to scale to accommodate the growing number of digital transactions and data.

-Security Risks: Legacy systems are more susceptible to cyber attack and data theft.

7. Talent Acquisition and Retention

Legacy banks have to catch up with the fast pace of technological advancement by competing to acquire and retain capability in digital technology, data analytics, cyber security, and innovation. Competing with Fintech companies and other industries for the same talent might be a tall order, however.

-The skill gap: The enormous digital and financial tech skills gap confronting Nigeria needs to be bridged by the traditional banks through investment in reskilling training, new hiring, employee development programs for existing employees, and new hires.

-Compensation packages and benefits: Better compensation packages and benefits are offered by the fintech companies, and it is becoming increasingly difficult for the traditional banks to retain staff.

-Organizational Culture: Organizational culture in traditional banks being hierarchical and bureaucratic is not likely to attract young, technology-acclimatized professionals who prefer freewheeling and innovative work settings.

8. Cybersecurity Threats and Frauds:

Greater use of the digital channel also exposed the traditional banks to greater cybersecurity frauds and threats. Customer money and information are being protected against cyber attacks.

– High-level cyber attacks: Cybercrime attackers have sophisticated skill, and their threat to the bank system and customer security is ghastly.

– Breaches: Tremendous loss of money, loss of reputation, and regulatory body fines.

-Hacktivism: Hacktivism and cyber attacks have also led to cyber frauds such as account takeover and phishing.

-Investment in Cybersecurity: Conventional banks will have no other choice but to invest significantly in strong cybersecurity controls such as advanced threat detection technology, encryption of data, and employee training so that they avoid such forms of attacks.

-Financial Inclusion and Reaching the Unbanked

In spite of the fervor of the efforts in financial deepening, the greater number of Nigerians remains unbanked or underbanked. Conventional bank branch networks are hindered by distance between branches, lack of per capita incomes, and evasion of formal financial services to access these kinds of markets.

-Branch Network Expansion Cost: Branch network expansion in rural markets is a costly process.

-Service Affordability: The majority of the unbanked are poor segments who cannot afford banks’ formal services.

-Unawareness and Lack of Trust: Some segments of society are not very aware of the benefits of formal banking and also do not trust banks.

-Innovative Financial Inclusion Solutions: Banks will be forced to implement innovative and low-cost channels such as mobile banking, agent banking, and Fintech alliances in an attempt to bank the unbanked.

9. Public Trust and Perception

Improved customer care, transparency, ethics, and solidity reputation of institutions have the ability to move the minds of the people as well as the trust towards the traditional banks. Failure in customer service, lack of transparency, or unethical behaviors have the capacity to kill the confidence of the customers and trigger customer loss.

-Problems in Customer Services: Irresponsiveness of the customer services will easily dismantle the reputation of the bank and allure switch customers towards the competition.

-Fee and Transparency: Fee transparency has the potential to easily become a customer trust-breaking issue.

-Misconduct with Ethics: Accounting fraud or unethical behavior will effortlessly create massive damage to the bank’s reputation.

-Sustaining and Building Trust: Indigenous banks must place high premium on customer care, transparency, and extremely high ethics standards in a bid to realize the vision of building and sustaining public trust.

Conclusion

Nigerian indigenous banks are faced with the challenge of overcoming the vices of the time that are crying out for paradigm shift towards their business model and strategy. Fintech disruption, compliance burden, economic uncertainty, changing customer needs, and competition from non-banking players are transforming the bank’s business dynamics. To be in a position to flourish in such an economy of high competition, commercial banks would have to adopt digital disruption, be innovative and agile, turn their back to the customer, improve the quality of cybersecurity, and lead the pace for economic inclusion initiatives on the mass platform. Anything less than that, losing its market share, profitability, and ultimately its survival in the Nigerian economy is inevitable. Nigerian traditional banks’ fate lies in being resilient enough to survive the storm and return as stronger, better, customer-centric banks. This will rely on visionary leadership, deployment of technology, and human capital investment with a focus towards welcoming collaboration with Fintech companies and other players in planning towards a greater, more inclusive future for Nigerian finance.