Historically banks, and other institutions but for the purpose of this article mostly banks, have tried to perform these essential roles in society but at significant cost. Take for example the role of providing services for people who produce more than they consume and want to save the surplus in assets. Excluding all the regulatory requirements, the bank typically had to rent or construct a building maybe with a safe, hire some staff who would count cash and do book-keeping, and maybe spend on security to make sure they did not get robbed. But collecting people’s savings was only half the story. Remember that those assets needed to be income generating. So, they had to hire loan officers and find businesses or individuals worth giving loans to, and spend time following up on all that.
Banks are of course businesses with a mandate to make profit. Therefore, all those costs have had to be passed on to the consumer one way or the other. Either in the form of the bank taking a cut of interest paid by individuals and businesses who took loans, or by charging fees for deposits, withdrawals, and other transactions, or even by charging a fee for just being a customer of the bank. Sometimes these costs are hidden and sometimes they are transparent. Regardless, bank customers have long complained about the “cost of banking” and about how some of these banks rip of consumers.
Another side effect though, was that many have just not been able to afford financial services because of these costs. The unbanked as they are commonly called. It has simply made no sense for a traditional bank to invest in all the infrastructure and personnel required to offer its services in random town X where there is not enough economic activity to justify the investment. It had simply made no sense to offer loans to some microenterprises who could only utilize very small amounts because the interest paid on those loans could not justify the investment. The old banking structure, due to its costs model had left a lot of people isolated from the financial system or at least not feeling like they were getting value for money.
Over the years some big changes have however occurred in society. The first of these is the mobile revolution. The rapid rise of mobile telecommunications has put a mobile phone in almost every hand in society. At least almost every adult hand. To demonstrate the rapid rise in mobile access, in 2000 there were only about 30,000 mobile phone users in Nigeria. By the end of 2019 there were over 184 million active lines. In just two decades telecommunications services had essentially reached every nook and cranny in the country. As part of the expansion in telecommunications services, the costs of accessing those services had also dropped significantly. To demonstrate, in 2005 the average tariff for calls was about N50 per minute (roughly $0.40). Right now, calls on most major networks are as low as N7 per minute (roughly $0.02). A 95 percent drop in costs in US dollars before inflation.
The second major shift that has occurred in the past few decades is the explosion in data. Over the past two decades the number of people who take advantage of services that produce data on their behaviors and habits has exploded exponentially. Data on this is very scarce but the number of Nigerians who had email accounts or who actively used data generating social media services was probably miniscule twenty years ago. Fast forward to today and the vast majority of Nigerians are using all sorts of services which provide information on their behavior, and as far as the financial industry is concerned, on their propensity to be good financial clients.
These two major developments have altered society and the banking landscape completely. Of, course the old and traditional banks are not blind to these changes. But for the most part they are restricted by legacy systems and protocols that continue to result in costs that continue to have to be passed on to consumers.
But within all that turbulence and chaos a new generation of banks is emerging. Banks that do not suffer from the legacy cost structure and processes of traditional banks. Banks that allow consumers take advantage of modern technologies to access financial services. Banks that trade off the bank branches for mobile apps. Banks that trade off the loan officers for big data. All the while passing the costs savings to consumers, and reducing the costs of financial services.
One of such banks is the new V by VFD. All digital, no paperwork, no queues, none of any of the things that annoyed people who had to go to bank branches to get even the most mundane things done. Want a loan? None of those paper applications and face to face meetings with loan officers followed by weeks waiting for a decision. Instant decisions backed by data and analytics. But these new generation of banks are not just looking to replicate old banking services for cheap. Some are actually creating brand new products using data to help their customers better understand their financial lives. Whichever way you spin it the new banks are here to “change the game” as the cool kids say. And you know what? That is a win for consumers too.
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