The Case for Financial Inclusion

BY SONNY ARAGBA-AKPORE

The 2023 general election comes against the backdrop of a national economy in near comatose. If recent projections in respected international publications are any guide, it is safe to conclude that Nigeria is currently in dire strait. But we do not even need all these reports to understand the state of our nation. The reality of existence for most Nigerians is atrocious. Yet, when you expect our politicians to tell us what they would do to dig us out of the pit in which we now find ourselves, they are busy throwing around ill-gotten money to buy votes. The primaries of both the ruling All Progressives Congress (APC) and that of the main opposition Peoples Democratic Party (PDP) were mere bazaars. But now that they have chosen their candidates, we must begin to engage them on issues. One of the areas where we must put focus is the telecoms sector and the urgent need for financial inclusion.   

As things stand, Nigeria’s traditional banking system is exclusionary, leaving millions out of the financial mainstream. A September 2020 report by the global consulting firm, McKinsey & Co, noted that while banking in Nigeria remained an attractive sector, with over $9 billion in value pools, most consumers are underserved. “Lack of access to services,” the report said, “especially in rural areas, issues of affordability, and poor user experience all contribute to the frustration consumers experience right across the customer spectrum.”

It is troubling that financial inclusion in Nigeria is among the lowest in sub-Saharan Africa, lagging countries with lower income. Within the country, financial exclusion is highest in the northeast and northwest regions at 34 percent and 27 percent, respectively. But ignorance may also be a factor. A significant proportion of the Nigerian population (about 90%), noted a 2019 USAID funded Power Africa report, has little or no knowledge of alternative means of accessing financial services, including the use of mobile money despite having good mobile network coverage in some parts of the country and high mobile penetration. And low mobile money awareness has led to low mobile money uptake in Nigeria, as compared with other countries in sub-Saharan Africa.

The 2020 EFInA Access to financial services in the country survey revealed that 51 percent of adult Nigerians were using formal financial services, such as banks, microfinance banks, mobile money, insurance, or pension accounts, up from 49 percent in 2018. But this was largely driven by growth in banking, with 45 percent of Nigerians banked in 2020, up from 40 percent in 2018, and the country still fell short of the National Financial Inclusion Strategy targets for 2020. The goal had been to reach 70 percent of Nigerians with formal financial services by 2020.

There has been a long-standing and broad-based consensus by the government and Central Bank of Nigeria (CBN) about the importance of boosting the provision and uptake of digital financial services (DFS). This forms part of a broader strategy to scale-up financial inclusion.

Nigeria has a relatively well-developed banking sector by regional standards, with a regionally high level of banking penetration in West Africa and robust use of advanced financial instruments in the local economy. The country is also well connected to international financial markets. S&P Global in its 2021 Global Banking Outlook report notes that Nigerian banks face struggles on many fronts and projected the country’s banks will grow slower in 2021 on the back of a subdued economy, despite the Central Bank of Nigeria’s introduction of a minimum ratio of loans to deposits in 2019. “We forecast subdued credit growth to the private sector of about 4-6 percent in 2020 and 2021, after a strong 13.9 percent rebound in 2019, as the foreign exchange market and consumer demand stabilises. Banks will likely focus on blue chips operating across the manufacturing, trade, and telecoms sectors,” the ratings firm projected.

The International Monetary Fund (IMF) in its latest Financial Access Survey disclosed that the number of borrowers from commercial banks decreased to 29.61 per 1,000 adults in 2020 from 25.42 per 1,000 adults in 2019, despite the outstanding deposits with commercial banks per percentage of gross domestic product (GDP) rising to 20.50 in 2020 against 16.31 in 2019. Nigerian banks during this period closed 234 branches and 649 Automated Teller Machines (ATMs) between 2019 and 2020.

The report also showed a sharp decline in the number of registered mobile money agent outlets in Nigeria to 129,154 in 2020 from 145,800 in 2019, representing an 11 percent decline. Several market forces are set to contest the market space with established commercial banks and could swing the balance of power in favour of these challenger banks for selective banking services. MTN and Airtel, in separate statements, revealed that the Central Bank of Nigeria (CBN) had granted them approval in principle to operate payment service banks (PSBs).

This was in furtherance of the apex bank’s efforts to leverage technology to promote financial inclusion and enhance access to financial services for the unbanked and underserved segments of the population. According to a financial analyst, Nosa Igbinadolor while several barriers exist to leveraging digital payments for scale, Telcos’ participation in mobile money payments will likely raise mobile money uptake, increase financial inclusion, and simplify payment collection. According to him, payments are fundamental to how banks interact with customers. They support most propositions and touch customers more than any other part of a bank. It is, says KPMG Nigeria, “the key battleground for the customer’s primary relationship”.

The new PSBs are likely to challenge the incumbents primarily on higher customer engagement, coupled with smooth transaction capabilities and volume-driven metrics. The basic premise for the introduction of payments banks is to escalate penetration in the unbanked and underbanked population. “As such, their offerings are niche and they are not allowed to provide the entire gamut of banking services, such as asset products and fixed deposits. Thus, the situation still provides traditional banks with significant headroom for growth and also an opportunity to partner with payments banks to offer their products to an unexplored customer segment.”

Yet, the new PSBs have the potential to be swifter and dexterous, and hence more responsive to changing market trends. With a large captive customer base, few or no legacy constraints and greater responsiveness to customer needs, and with no pressure to offer full-service banking solutions, they are likely to attract a large pool of well-served, underserved as well as unserved customers” the report explained.

The business of PSBs such as those promoted by MTN and Airtel, centres on providing last mile connectivity and payment facility through either physical points or through other digital interfaces, including mobile or internet-enabled platforms. Besides offering basic deposits and remittance services, the PSBs are likely to introduce smooth, real time, secure, on-the-go approaches for facilitating retail payments. In addition, they will be entering the market with clear advantages, and are expected to operate on an asset-light premise compared to the traditional branch-based and asset-heavy model, prevalent with traditional banks in Nigeria.

A KPMG–UBS study indicated that the cost of effecting a transaction from a branch is 43 times, call-centre and ATM is 13 times, and internet banking is twice greater when compared to mobile transactions. Therefore, the PSBs would no doubt promote the adoption and usage of mobile and digital channels to all customer segments. Evidence from the yearly KPMG report in Nigeria’s banking industry customer satisfaction survey (BICSS) suggests that this will be a viable strategy for PSBs. The findings from the research show that adoption rates for retail banking customers for app-based mobile banking and USSD channels rose significantly from 48 percent and 41 percent in 2017 to 55 percent and 59 percent in 2018, respectively.

While the new PSBs would leverage existing assets and capabilities within their parent network, they would also leverage capabilities such as distribution footprint: physical footprints, established route-to-market (RTM) capabilities, mobile app platform for e-Wallets.In addition, they would be igniting their business operations with a large captive customer base, existing ecosystem for sales and service: agents and distributors, and regulation and compliance skills/know-how.

Unlike the syncretic approach of digital/branch-based banking operations of traditional banks, the new PSBs with their digital background and experience are likely to engender positive customer experience and loyalty by facilitating digital interactions throughout the entirety of the banking value chain. Activities such as customer acquisition and onboarding, back-office operations, transaction processing, customer service, management reporting, employee engagement, would also be digitally enabled. Therefore, the PSBs can offer a distinct digital experience to customers those traditional banks have been unable to.

In addition, the PSBs understand the value of the data they get access to and the insights these generate on the preferences of both individual customers and specific segments. These insights can be used to refine sales and marketing of existing products and to spur the creation of entirely new ones. These types of VASES can be powerful accelerators of digital payments by attracting customers to the platform and generating revenue outside of transaction fees.

With a combined subscriber base of some 126 million active users, both MTN and Airtel PSBs have a strong customer base to create easy onboarding for customers. To encourage wide uptake and drive volume, both PSBs would likely take a relatively light approach to transaction fees, to not create the type of pricing or behavioural barriers that can otherwise be a significant challenge. This is a challenge to traditional banks that have made a culture out of the widely unpopular transaction fees and have been unresponsive to customers’ complaints.

Since both former Vice President Atiku Abubakar who will fly the flag of the main opposition PDP and Asiwaju Bola Tinubu, the nominated candidate of the ruling APC are experienced business men, I hope that they would come with ideas on how to change the narrative in this important sector.

SONNY ARAGBA-AKPORE  With cognate practice in the media spanning more than three decades, Aragba-Akpore was an Assistant General Manager/Head, Corporate Communications at the Nigerian Communications Satellite (NIGCOMSAT) Ltd. In November 2014, he became the the Nigerian Communications Commission (NCC) Assistant Director/Head, Media & Public Relations, a position he held until retirement in July 2020. He attended the University of Lagos and holds B.A and M.A. in English. He is also a member of Nigerian Institute of Public Relations (NIPR).