There is so much confusion out there about what digital banks are. Bring a thousand self-proclaimed experts and you will probably get two thousand different definitions.
I am confused too, but for today, let’s pretend that I know what I want to say.
A digital bank, sometimes called a direct bank or online-only bank, is a type of bank where there are no branches and interactions with customers are through the internet, and of recent, mobile apps.
There is a distinction between mobile money and digital banks. Mobile money is usually a wallet accessible from mobile phones using SIM Tool Kits (M-Pesa by Safaricom in Kenya) or USSD (M-Pesa by Vodacom in Tanzania). Mobile money is primarily driven towards financial inclusion and the most successful examples are mobile telco led.
Mobile money is limited in features, have less than required interoperability with existing financial payment systems and for these reasons have failed in countries with a sizable chunk of middle-class population. MTN and Vodacom just shuttered their mobile money services in South Africa.
Digital banking is also different from mobile banking in the sense that mobile banking is banking on the mobile phone for accounts which are already opened in a traditional bank. So if you decide to smash your phone in the latest craze of clapping while taking a selfie, you can visit your nearest bank branch to wink at the new teller while taking cash over the counter.
Is Nigeria ready for a digital bank? Let’s analyze this from a simple point of view – what would it take to have a digital bank in Nigeria.
Regulation
Forget about the story of enabling technologies and a shift in demographics: Banking is a highly regulated business which the government has 150% interest in. There is a financial and documentary barrier to having a bank. N25B anyone? That aside, the Central Bank of Nigeria has different classes of banking licenses for which a digital bank type is conspicuously absent. Not to be deterred, some brave individuals are bootstrapping digital with minimal microfinance bank licenses. But having MFB as part of your brand is so meh.
Prospective Customers
Digital banking isn’t financial inclusion. One is driven by capitalism and the other by altruism. Digital banking is narrowly focused on middle-class customers who are tech savvy or comfortable enough to do their transactions away from the banking halls. Trust me, I’m one of them and our Nigerian local association is large enough.
Going to a bank branch in Nigeria is an exercise in self-flagellation. Sending someone else to a branch on your behalf is worse than water boarding. You endure endless traffic, you could get robbed coming back, the tellers don’t smile anymore (they were never smiling), you could age literarily standing in the queues for hours and when you get to the front of the queue, the system is down.
While mobile banking hasn’t been successful in Nigeria, it has been more of the poor back-end of the different banks. In fact, banks have been more inclined to open new branches and chase around for deposits than providing an awesome mobile or web experience.
Trust me, many of us would not miss going to a bank branch!
Trust
At no time in my life has my salary been good enough, so I don’t play with it at all. To hand over my hard-earned money to a digital bank without a branch where I can go make a scene or head-office where I can join others to picket is asking for too much.
I’m not so sure if the average Nigerian trusts an average Nigerian. Trust comes from ubiquity and longevity; a digital bank would need to be in the face of Nigerians for a while before it can be trusted. That would cost a lot of money in marketing – radio jingles, TV adverts, billboards, social media, tie-ins, etc.
During this love session, the digital bank must never ever, ever, ever, ever, make any mistake, if not the trust will deflate like a pricked balloon.
Customer Support
Things would go wrong, not once, not twice but as many times as it could go wrong. When this happens who will provide support? The contact centers of Nigerian companies are notorious for adding to problems and not solving them. Complaining about an emergency is an exercise in futility and even floor managers are impotent and wouldn’t help you.
A digital bank must build customer service into its core. It would be difficult but not impossible. Floor managers must also be able to make decisions.
Cost of transactions
Banking in Nigeria is very regulated much more than a C Compiler (if you get the joke). As Nigeria is still a cash-based economy, a digital bank with no debit card offering is DOD (Dead on Departure). However, giving cards would also be a DOA (Dead on Arrival) as the Central Bank mandates that the first 3 transactions are free for the customers (not the banks). A digital bank can probably never have its own ATM network. How would it fund it when it would cost at least N20M per ATM gallery?
I’m not a pessimist but I can’t figure out how it could be done at this time. Maybe an alliance with large banks? I don’t know any philanthropic bank in Nigeria who is ready for free ATM withdrawals for customers of digital banks.
Technology
Traditional banks are a mishmash of disparate systems held together by badly implemented integrations: Nothing works. Data are held in silos and never talk to each other. It’s a technological hell-fire where badly behaved bits and bytes are sent by the god of science.
These technologies are also insanely expensive and with USD beyond the reach of everyone, building a digital bank on available technologies is a business suicide.
The good news is that digital banks are mostly building their own technology stack (Atom, Starling, Simple, Monzo, Fidor, N26, etc.) and Nigerians have the intellectual chops to build better platforms than even these guys.
Established networks, especially MasterCard, are also lending their weight behind these initiatives to allow digital banks enter into mainstream interoperability.
Features
Traditional Nigerian banks offer everything and probably nothing. However, the average Joe like you and me just want a simple current or savings account, a debit card to go with it. You can throw us some overdraft or personal loan when we go broke. Let’s be able to send and receive money to/from other banks. Let’s be able to take cash from the ATM and when the dollar is available, let’s use our cards abroad.
We want an awesome mobile app. USSD banking is a must else don’t even bother talking to us. The internet app must be great and we don’t want to click until our fingers break just to do anything.
SMS and email alerts are compulsory and should get to us instantly. Don’t also lose our money to fraudsters. When we have transactions to dispute, don’t try to mock our intelligence or stretch our patience beyond limits. Let someone answer our calls and proffer intelligent analysis/solutions to our issues when we dial the Contact Center number.
These are not too much to ask for and I believe any digital bank worth its salt should be able to deliver them.
Conclusion
It has been a rambling long post but barring cost of transactions and technologies, digital banks can dip their toes into the storming river of Nigerian banking.
I think the country is ready now – there would be many casualties at first but over time, these digital natives could become behemoths, and you never know, appear in the top 10 of largest Nigeria banks.