The digital revolution sweeping through the banking sector is set to wipe out about 35 percent of earnings on some financial products by 2025 as new technology companies (fintechs) drive down prices and erode traditional lenders’ profit margins.
This is one of the main submissions of Akinsope Roberts, lead, digital and robotics practice, Ernst &Young, Nigeria, at the maiden business a.m./GTI Finance and Investment Dialogue held on Thursday in the Marina Central Business District of Nigeria’s financial capital city of Lagos.
He said the significant chunk of profits and revenues would be lost from deposits (18%), payments processing (6%), small and medium-sized enterprise lending (5%), and asset and wealth management/mortgages businesses (6%).
The losses according to him would come from banks’ slow uptake of technology to know and understand their customers and deliver products they need and simple enough for them to understand.
Roberts said that with about 31 million banked Nigerians, there is room for technology start-ups to bring
more of the over 150 million Nigerians to access financial services
It is obvious that the traditional financial service providers are lagging behind in bringing the more than 150
million unbanked Nigerians into the financial system, which creates the opportunity for fintech to erode their market share, according to Roberts.
He noted that apart from technology, customer behaviour influenced by demographics is fast becoming a major disruptive driver.
“Nigeria’s population is young and young people want service on the go without being physically present at the providers’ offices and digital technology is providing the convergence for companies who can offer different services to meet their needs.
“Retail is the future for any commercial bank hence there is the need for banks to grow their technology so they
can meet up with the new entrants and also know their customers more as fintechs now understand customers
more than the banks, through monitoring of their data usage and, are able to reach the people with services that they want,” he said.
He said trust, which used to be the dominant issue in the banking sector some years ago was no longer the issue as
research carried out by Ernst &Young indicates that 70 percent of respondents were of the opinion that trust was
no longer an issue and they would rather prefer providers who understood them.
He said that in as much as technology is the preferred platform to meet, understand and serve customers, there is the need for caution in adoption and deployment as it might be suicidal if financial service providers rush into launching any service without recourse to whether it is the right solution to their
problems.
To survive in the disruptive economy, institutions need to put their customers first as their new products must
be tailored to not only meet their needs but such products should be understood by the
customers.
They must also ask themselves if their disruptive tendencies will lead to growth and if all the disruptive trends are important and relevant to them.
What are other like minds financial service providers doing? Is it going to enhance revenue? Is it empowering employees or is there an agreement between management and employees on how the products work?” he pointed out.
Roberts position is in line with the main predictions by the consultancy McKinsey in its global banking annual re-
view published in September 2015, portraying banks as facing “a high-stakes struggle” to defend their business model against digital disruption.
McKinsey said technological competition would reduce profits from non-mortgage retail lending, such as credit
cards and car loans, by 60 percent and revenues by 40 percent over the next decade.
Philipp Härle, the co-author of the report, said: “The most significant impact we see in price erosion, as technology
companies allow delivery of financial services at a fraction of the cost, and this will mostly be transferred to the
customer in lower prices.”
He said most technology companies were focused on picking off the most lucrative parts of banks’ relationships
with their customers, leaving them as ‘dumb’ providers of balance sheet capacity.
“Most of the attackers do not want to become a bank,” said Härle. “They want to squeeze themselves in between the customer and the bank and skim the cream off.”
McKinsey said banks last year made $1.75 trillion of revenues from origination and sales activities, on which they earned a 22 per cent return on equity, while they made $2.1 trillion of revenue from balance-sheet provision at a return on equity of only 6 percent.
The consultancy said the industry had two choices. “Either banks fight for the customer relationship, or they learn to live without it and become a lean provider of white-labeled balance sheet
capacity,” it said.
While predicting upheaval in the future, McKinsey said there was no evidence that digital disruption had started to eat into banks’ market share yet. Banks’ share of global credit provision has been constant over the past
15 years.
Härle said one factor that could slow down the erosion of banks’ market share was if regulators decided to clamp
down on the disrupters by imposing similar capital and compliance rules as those faced by banks.
McKinsey calculated that profits from all banks reached a record of $1tn last year, helped by rapid growth in Asia and particularly in China and as US lenders rebounded from the financial crisis. The average return on equity was stable at 9.5 per cent, as cost cutting offset falling margins in the low interest rate cli-
mate.
Almost two-thirds of developed market banks and a third of those in emerging markets earned a return on equity below their cost of equity and were valued below their book value.
“Many in the industry are waiting for an interest rate rise or some other structural lift to profits, but even if rates
rise, that will be insufficient to fundamentally improve economics,” McKinsey said. “We expect margins to continue to fall through 2020, and the rate of decline may even accelerate.
