Moody’s: Investments in Digital Platform to Enhance Banks’ Product Expansion

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Obinna Chima

Moody’s Investors Services has stated that the widespread use of e-channels in Nigeria will allow banks in the country to expand their products beyond the current transactional products and increase client transaction volume.

Nigerian banks are investing in their information technology (IT) infrastructure, strengthening e-platform security to reduce risks such as cloning and identity theft as well as enhance the customer experience.

According to a report by the rating agency, IT enhancements will weigh on already-high cost-to-income ratios for most Nigerian banks, adding that “as more clients migrate to e-platforms, bank revenue from e-business will grow a credit positive.”

It noted that: “As banks’ e-platforms replace more traditional transactions, banks will be able to save on branch expansion costs, reduce the square footage of their branches and engage cheaper branch models such as agency banking.”

The report showed that in the first half of 2017, IT-related costs for Access Bank Plc, United Bank for Africa Plc and Zenith Bank Plc increased by an average of 39.8 per cent from a year earlier.

On the other hand, IT-related expenses as a proportion of total expenses excluding staff costs increased to an average of 8.1 per cent, from 7.6per cent over the same time period.

The National Bureau of Statistics (NBS) recentlyreleased select banking sector data that indicatedNigerians’ rising use of electronic payment platforms (e-platforms) at the expense of cheques and ATM transactions.

The NBS report had indicated that the volume of cheques declined 16.2 per cent in 2017, while e-payment channels such as point of sales rose 89.6per cent, internet payments rose 82.2 per cent and NIBSS Instant Payment, an online real-time bank account number based interbank credit transfer system, rose 102%.

Also, the value of cheque payments declined by 22.5 per cent, while the value of mobile payments increased by 42.9 per cent. Cheques’ transacted values show a downward trend, contributing 4.1per cent of total transacted value in December 2017, versus 7.9 per cent in December 2016 and 10.9 per cent at the beginning of 2016.

“Although Nigerian banks will charge lower fees on their e-platforms than they charge on cheques, client migration to these platforms will positively affect fee and commission income as volumes grow, supporting banks’ revenue.

“Nigeria’s five largest banks’ revenue from e-business grew strongly between 2014 and 2016 and the e-business contribution to total fee and commission income increased to 30.9 per cent in 2016 from 23.1 per cent in 2015.

“Widespread use of e-channels will allow Nigerian banks to expand their products beyond the current transactional products and increase client transaction volume. This will counteract low e-platforms fees and the risk that charges on e-platforms likely will fall because of competition and regulation.

‘Although disclosure for e-business income for the six months that ended June 2017 varied across banks, e-business income was strained, partly because of reduced use of naira debit cards outside Nigeria.

“Likely revenue improvements and lower branch-network-related costs ultimately will improve Nigerian banks’ cost-to-income ratios over the next 18 months. We expect Nigerian banks also to develop underwriting capabilities on their e-platforms, and offer loan products, particularly to households and small and midsize enterprises, widening their revenue sources,” the report added.