Era of the customer
Years before entrepreneurs and venture capitalists discovered the deflationary effect of technology leading to discontinuities and disruptions, a 1991 Nobel Prize-winning Economist Roland Coase had found that the implication of dramatically altering costs by introducing innovative technology leads to substantial alterations in firms and market structures. Coase’s work effectively clarified the link between the theories of firms and markets.
In the recently launched Clayton Christensen book titled “Prosperity Paradox,” Coase was quoted as saying – “Markets don’t just appear or happen, markets have to be created.” I believe that when new markets get created with innovation, they also have the effect of changing the structure and nature of existing firms in adjacent markets. Deflation or reduced transaction costs have far-reaching aggregate consequences.
Payment Service Banks
Many years ago in Nigeria, interacting with local banks was a painful experience because physical branches were the only customer interface. Operations were manual and painfully slow, and this created an opportunity for new entrants who differentiated themselves by improving processes considerably with technology, and new electronic banking channels.
The impact on the existing banks by these innovative entrants was severe as the newer banks became existential threats. The old banks had no choice but also to adopt technology to serve the customers better, and the overall market changed.
There is still a considerable population of non-consumers of banking services as the entire industry fails to meet everyone’s needs. For the “non-banked,” transaction costs are still not at an acceptable threshold. These people are an entirely different market with requirements that need to be met by firms structured differently from traditional banks.
The Central Bank of Nigeria recently restructured the licensing of financial services providers and created a game-changing new category known as “Payment Service Banks” (PSBs). According to the requirements of the license the PSBs are meant to be 50% rural to meet the needs of the non-banked. The most important characteristic of this license is that it does not exclude telecommunications companies; this is significant and long awaited. The expectation is that with telco involvement, PSBs are not just going to create new markets by meeting the needs of the “non-banked,” they will also change the nature of existing banks as Coase had suggested.
Bracing for impact
Commercial banks have become very inefficient as they are overwhelmed. Retail services are sub-par and retail customers are often dissatisfied with the quality of banking services. While Telcos will focus on the non-banked and open up new markets, the entire market for Telcos, in the long run, includes existing retail customers of banks.
There is also the argument that Telcos are similarly overwhelmed with the same deteriorating quality of service and would not be able to provide top-notch retail services to challenge commercial banks. The reality is that the most significant and meaningful products serving the retail banking customer in recent times have only happened as a result of collaboration between banks and Telcos using Telco based USSD technology. If banking changed because of cooperation with telco, what will happen when Telcos are allowed to provide retail banking services or at least own a subsidiary that provides those services?
The other interesting thing most people don’t realize is that telcos are usually interested in providing financial services to reduce existing customer churn and increase operational efficiency, not necessarily to make money. If revenue is not the objective, they can provide services at significantly lower transaction costs and alter the entire retail banking landscape. There is the high likelihood that unsatisfied retail customers of commercial banks would churn and change “store of value” to PSBs.
Financial institutions like GTbank have already acknowledged the potential impact of this game-changing scenario, and they are bracing for impact on their retail customer base. I, however, see this as an opportunity for transformation of the entire sector as there will be wholesale adoption of new technology by banks to reduce costs of retail delivery to remain competitive.
I still believe banks have a fighting chance. The banks have a head start over Telco-backed PSBs as they work to acquire licenses and put their structures in place. Banks currently have customer relationships that have in some instances lasted decades and also have customer inertia as an advantage as customers are less likely to move until there is a superior PSB service. The focus of PSBs also would be initially the non-banked to meet the regulatory requirement of 50% rural presence.
I also don’t think the Telco’s most significant asset which is national infrastructure is going to be the differentiator as Telcos will be obliged by regulation to provide access to everyone. I believe the differentiator is going to be understanding retail customer and providing “SERVICE.” Telcos have the edge in delivering service at scale with lower transaction costs enabled by technology; this would put further pressure on the banks to optimize retail operations.
The customer wins
The customer definitely will benefit from this overall change in focus. The retail banking customer is finally going to become a “person” and not just an account number that provides cheap bank deposits. A lot more data about customers will need to be captured to meet them at their point of need and technology will be core to providing a better experience. The era of the customer has just begun; the age of lazy banking is over.