Tech Upgrades: Empowering Commercial Banks to Level Up Against Microfinance Underdogs

By Chinedu Okoye 

Monday October 16, 2023

Summary:

 • Fintech Microfinance Banks have revolutionized banking in Nigeria with innovative products and solutions.

 • Opay, with 30 million customers and a valuation of over $2 billion, has a significant share of the e-wallet market.

 • Online microfinance banks (MFBs) have successfully penetrated the banking sector, particularly among the previously unbanked and younger generation.

 • Banks face the risk of losing market share to MFBs, which could compete for capital and potentially become highly capitalized banks themselves.

 • Commercial banks have advantages such as history, higher capitalization, a larger network, a broader range of products/services, and wider access to credit.

The Fintech Revolution:

Fintech has revolutionized banking worldwide, and Nigeria is no exception. They have achieved this by introducing innovative products that find solutions to the challenges of traditional banking. Their business model combines retail, consumer, and personal banking products and services, which have yielded significant rewards for a select few.

Opay, boasting 30 million customers in just five years, currently holds over 20% of the Nigerian e-wallet market. The company was valued at over $2 billion by SoftBank in 2021 and also raised $570 million in additional capital during the same year, with a revenue of $38 million.

With over 300,000 agents nationwide, Opay and similar services like Moniepoint have successfully penetrated the banking sector by revolutionizing Nigerian banking through innovative technology solutions and a reliable infrastructure, resulting in a remarkable 100% success rate for their transactions, far surpassing that of the larger banks.

The Success of Small and Sound Business Models of Online MFBs:

Compared to commercial banks, the user experience provided by online MFBs, including network reliability, seamless transactions, and tailored banking products, has proven to be highly effective, evident by the extent of their market penetration. However, when compared to major banks such as Zenit, Access, First Bank, GTCO, and UBA (FUGAZ), these MFBs have relatively small valuations, assets, and revenues.

Nevertheless, their business models have proven successful, making them a viable threat within the consumer and retail banking segments, particularly among the previously unbanked population and microbusinesses, such as POS money vendors and other entrepreneurs. They are also popular among the younger generation.

While a single microfinance institution may not pose a significant threat to major banks within the mentioned market segments, the presence of a thousand MFBs presents a greater challenge.

Although most under-40s receive their paychecks in commercial banks, they conduct most of their day-to-day transactions through services like Opay, Kuda, and Moniepoint, with Moniepoint being more popular among businesses.

Risks to Banks:

Banks face the risk of losing the younger generation, small businesses, unbanked prospects, as well as private and institutional borrowers. A further loss of market share within these segments could create problems, as the capital market is attracted to profitable businesses. 

The increased profitability of these MFBs raises the likelihood of competing for capital in the financial markets alongside private and institutional investors.

This scenario could potentially lead to problems, as these institutions, with sufficient backing, could merge and become highly capitalized banks capable of competing in all aspects of banking.

Commercial banks should invest more in IT infrastructure to enhance the user experience, as neglecting this seemingly small population could create an opportunity for future competition and loss of market share.

Evaluating Strengths and Weaknesses:

Presently, commercial banks hold certain advantages over the aforementioned MFBs:

1. History and Trust: Commercial banks have decades of experience, and the average Nigerian feels more comfortable knowing they can walk into any branch and make inquiries or report problems.

2. Higher Capitalization: Commercial banks have superior market capitalization, assets under management, revenue, and profits compared to the entire group of MFBs.

3. Larger Network: These banks also possess a more extensive network, allowing them to facilitate international operations through affiliations with correspondent banks worldwide. They also handle larger transaction volumes.

4. Product Base: Broader Range and Volume of Products/Services than the typical MFB, Consumer, Corporate, Private, Investment Banking, International Operations, etc. They also have a larger share of these market segments. 

5. Access to Credit: Commercial banks have wider access to credit through mediums such as CDs, Interbank lending, and Central Bank lending.

Competing Effectively:

To effectively compete against future threats, Nigerian commercial banks need to enhance their technology infrastructure and create in-demand online banking platforms that improve the user experience and facilitate seamless transactions. This would attract the younger generation, retain their existing customer base, and safeguard their market share. Eliminating operational inefficiencies would also reduce costs. Therefore, it is imperative for Nigerian commercial banks to focus more on strengthening their online banking infrastructure.