The Rise of Digital-Only Banks in Nigeria

Introduction

The past two years have witnessed Nigeria experience a fast-paced revolution in its financial services sector where digital-only banks emerged and grew. Digital-only banks that have no physical presence in the sense of having brick-and-mortar shops employ technology to provide a variety of banking services using mobile applications and websites. The revolution of digital-only banks in Nigeria is not only a technological revolution but also a socioeconomic revolution. It is a measure of population shift, regulatory change, and demand for financial inclusiveness in a nation with a high unbanked population. This article gives the history, drivers, players, impact, challenges, and future of digital-only banking in Nigeria, complete with information on its origin and journey.

1. Historical Background of Banking in Nigeria

To understand how the digital-only banks thrived in Nigeria, an investigation into Nigeria’s past and banking is needed. The banks have existed in Nigeria since the days of colonialism when the British banks arrived early in the early 20th century to diversify colonial enterprises. The indigenous banks emerged after sometime, and the company continued expanding by taking over the urban towns with dismal services in the rural regions.

By the 1990s and 2000s, Nigeria’s banking sector had undergone a number of reforms to improve stability and confidence in the sector. Consolidation in 2004, spearheaded by then-Central Bank Governor Charles Soludo, merged banks, making them fewer but more costly. The reforms steadied the banking sector but did not go far enough to reduce financial exclusion significantly.

It was during the 2010s, with the spread of the internet and mobile phones, that digital banking emerged. The launch of mobile money like Paga and the embracement of USSD banking by legacy banks marked the start of the transition towards light-tech-based financial products.

2. What Are Digital-Only Banks

Neobanks or online-only banks or challenger banks are branchless banks. They are online banks, and one can use their services via mobile apps and websites, where one can open an account, transfer money, pay bills, get loans, and keep a digital record of their finances. Online-only banks do not have the expensive branch infrastructure, so they can provide competitive fees and next-generation products.

The most noticeable characteristics of digital-only banks are:

-No branches

-Mobile or app-based customer journey

-Simplified onboarding and account opening

-No or minimal fees for transactions

-AI-enabled customer support

-REAL money tracking alert and feature

These technology innovations of the digital era are much favored by Nigeria’s younger generation, which is more receptive to tech-compliant solutions.

3. Top Drivers for Nigeria’s Digital-Only Banks

There is a set of drivers which have been propelling the emergence of digital-only banks in Nigeria:

-Mobile Penetration: Nigeria possesses more than 200 million active mobile lines. Feature phone and smartphone technology allow customers to access banking products via apps and USSD codes.

-Youth Populations: The median age in Nigeria is approximately 18, and thus the youth populations are young and digitally educated. Youth will adopt mobile banking and digital wallets.

-Targeted Inclusive Finance: The National Strategy for Financial Inclusion and the Central Bank of Nigeria (CBN) are aimed at lowering the percentage of unbanked Nigerians. Digital banks offer a tremendous opportunity to increase penetration of financial services to the unbanked.

-Regulatory Innovations: Fintech operators and Payment Service Banks (PSBs) were licensed by the CBN, thereby increasing competition in banking as well as innovation.

-COVID-19 Pandemic: The pandemic hastened the move to online services even more rapidly. Lockdowns and travel restrictions drove Nigerians to online banking as a relatively safer alternative.

-Investor Interest: Investor demand for Nigeria’s fintech has been historic. Venture capital investment enabled the opening of digital-only banks like Kuda Bank and FairMoney.

4. Nigeria’s Digital-Only Banking Key Players

A number of digital-only banks and fintech players have joined Nigeria. The most touted among them are:

-Kuda Bank: It was launched in 2019 and refers to itself as “the bank of the free” with zero card maintenance fee, zero money transfer fee, and instant account opening. It has raised over $90 million in funding and has millions of customers.

-ALAT by Wema: Although supported by a heritage bank (Wema Bank), ALAT is an online bank, with end-to-end banking within its app. It was among the first digital-only banks in Nigeria.

-VBank: Established by VFD Microfinance Bank, VBank provides a complete array of banking services and is centered on customer service and user friendliness. It has been expanding at a rapid rate, with hundreds of thousands of customers.

– Sparkle: Startup Sparkle was founded by Ex-Diamond Bank CEO Uzoma Dozie, and it provides consumer banking and business banking, financial services along with lifestyle perks like e-commerce bridging and share handling.

-FairMoney: There was initial focus on microlending but it currently also has digital banking services. Bill payment, cash advance, and money transfer services are available through a mobile app.

-Moniepoint: It began as a payment system, and Moniepoint became an online bank with a focus on SMEs with payment solutions backed by financial services.

5. Financial Inclusion Impact

Another most relevant impact of Nigeria’s digital-only banks is financial inclusion. Over 38 million Nigerians were unbanked as of 2020, according to Enhancing Financial Innovation and Access (EfinA). Digital banks have managed to keep it low by

– Remote account opening with minimal paperwork

– Reducing branch visits

– Providing services in local languages and easy-to-use interfaces

– Providing banking products to rural and poor segments

All these activities are in conformity with the CBN vision for achieving 95% financial inclusion by 2024. By exclusion targeting as well as exclusion reduction by banks, digital banks have been pivotal in the achievement of this vision.

6. Economic and Societal Impact

Digital-only banks have impacted the Nigerian economy and society in the following ways:

-Increased Savings and Investment: By promoting saving culture via simple-to-use apps, digital banks enable customers to cultivate financial discipline.

-Improved Job Opportunities: There are more fintech companies that have improved employment opportunities for technology, customer services, marketing, and compliance.

– SME Support: All digital banks provide SME-centric services such as loans, inventory management, and payment services.

-Personalized Insights: The digital banks can generate tailored financial services and advice based on customer behavior.

-Low Transaction Cost: The digital banks have lower costs, so the transaction cost is lower.

7. Challenges Facing Digital-Only Banks

In addition to the above, digital-only banks also faced some challenges in expanding:

-Cybersecurity: As they are virtual, they are susceptible to cyber threats like phishing, fraud, and data breach.

-Regulatory Compliance: It could be challenging to maintain pace with the regulatory environment in Nigeria, with evolving rules on data protection, KYC (Know Your Customer), and money laundering.

-Consumer Confidence: Nigerians in general have opted for traditional banks since they are confidence and trust-based.

-Infrastructure Challenges: Unreliable internet and power supply outages in some geographies restrict online banking usage.

-Scalability: With increasing digital banks, there is an issue of offering quality of service and system consistency.

8. Government and Regulator Support

The Nigerian government and regulators have also moved in to make it less challenging to support digital banking:

– CBN Regulatory Sandbox: Gives a sandbox environment for fintech innovation prior to mass deployment.

– Payment Service Bank Licenses: Empowers telcos and fintechs to offer basic banking services.

– Open Banking Regulations: Facilitates interoperability and sharing of data between the financial institutions.

– Consumer Protection Framework: Protects the customers from discrimination and redressal in the event of grievance.

These initiatives enable innovation without risking the financial system.

9. Nigerian Future of Online Banking

The future for online banking in Nigeria is bright. Trends propelled by destinies are:

-Artificial Intelligence and Automation: Customer service and product customization shall be offered through robo-advisors, AI-driven analysis, and bots.

-Historic Opportunity:

-Blockchain and Cryptocurrencies: Blockchain tech shall be leveraged to interconnect banking process with the production of norms establishing security and openness.

-Expansion to Other African Markets: Progressive online Nigerian banks have an easy time expanding the business to other countries on the adjacent continent.

-Telecom and Retailer Partnerships: The partnership can be used to create growth and bundled offers.

-Increased Fiscal Awareness: Online banks will be investing in customer education so that customers can be empowered with the capability of making good fiscal choices.

Digital-only banks will continue to transform Nigerian banking through additional investment, innovation, and regulation.

The advent of digital-only banks in Nigeria is an era in the history of the country. They not only brought convenience and speed to banking but disrupted the game of economic development and financial inclusion. The future holds challenges. Digital-only banks will lead the next financial revolution, propelling Nigeria towards a technology-driven inclusive banking system.