Business Case for Issuing License to Challenger Banks in Nigeria



The Central Bank of Nigeria (CBN) have recently confirmed the issuance of banking licenses to three new players, bringing the number of the banks operating in the country to 23.

According to a circular hosted on the apex bank’s website, the new operators are Titan Trust Bank Limited, TAJ Bank Limited and Globus Bank Limited.

While two of the newly licensed banks will operate as commercial lenders, the third, TAJ Bank, would operate as a non-interest bank.

The newly licensed TAJ Bank has joined Jaiz Bank as the only two operating as non-interest banks in the country.

With the latest development, the number of commercial banks with national authorization now stands at 11. The banks with national authorisation are banks with a capital base of N25 billion and are allowed to operate in all states of the federation but are barred from having offshore operations.

 The number of commercial banks with regional authorization (having a capital base of N10 billion and restricted to operate within a geographical scope of a minimum of five and a maximum of 10 contiguous states) now stands at three.

As retail banks in Nigeria  face enormous cost for maintenance of bank branches, employees, maintenance of ATM’s and kiosks and service outlets to service their customers, the rational for the issuance of similar banking licenses by the regulators really borders me. I don’t know what the new entrant would do differently to overcome these challenges.

Why is the CBN not considering the option of licensing Challenger Banks?

Who are the Challenger Banks?

Challenger Banks are small retail banks which are operational in the United Kingdom. These banks provide banking services through Omni-channel platform to customers.

The major advantages of the Challenger Banks include lack of physical bank branches, which drastically reduces the cost of operation and increases profitability, as customers are serviced only through Omni-channel platform (mobile, tablet and internet banking.

The other advantages are the ability to attract large customer base with the help of mobile technology and servicing through digital banking platform as well as the ability to integrate with major card companies like Visa, MasterCard for the banking payment needs of customers.

The Challenger Banks can also offer better product and services with the help of artificial intelligence [AI] and machine learning [ML] based on the needs of the customers with the help of API’s to external financial eco system.

The Challenger Banks will be offer banking solution majorly in the area of digital wallets, virtual cards and payments, investment products and services.  Some of the leading Challenger Banks in UK and Europe markets are MONZO, N26, REVOLT, Finn and Starling Bank.

Lesson from South Africa

Three Challenger Banks, Discovery Bank, TymeBank and Bank Zero, are already making waves in South Africa. Armed with low-cost operating models, these South African digital banks are betting on aggressive pricing and data analytics to attract tech-savvy, price-conscious consumers when they launch next year in a rare challenge to the old guard.

“We are here to shake up the status quo. Much the same as Uber did in the taxi industry,” Sandile Shabalala, chief executive of TymeBank, a financial technology company controlled by tycoon Patrice Motsepe, said in a media report.

While the newcomers’ focus is South Africa, Bank Zero, for one, said it may look at the other emerging markets in due course, and investors said because all three have strong IT platforms and use digitalisation, it should be easier to expand.

While all three have declined to put a figure on their expected cost-to-income ratios, four industry executives who do not names printed to the media that they had worked out efficiency ratios of 25 percent to 30 percent. That compares with nearly 60 percent for the incumbents.

“I have been dumbfounded at how low the cost can be,” said Bank Zero’s co-founder Michael Jordaan, best known for turning FirstRand’s retail banking operation into the most profitable in South Africa. “Our technology cost is 1 per cent of 1 per cent of the annual tech budget at one of the big banks.”

Which way Nigeria?

It is difficult to second guess the risk-averse of Nigeria’s financial regulator. You never know what the CBN can do. One would have expected that the CBN would have opened up the space for the licensing of digital or Challenger Banks after it permitted Wema Bank to operate Alat.

Alat was the first fully digital banking operation in Nigeria.

However, the regulator’s support for the operations of Alat was more of a reflection of the latitude incumbent lenders enjoy from the apex bank rather than its quest to enable innovations to drive the financial services industry.

Several Fintech firms that are interested in running digital banks today are taking the painful route of acquiring or registering MFBs in order to become deposit taking banks.

Until more of the established banks are ready to own Challenger Banks, it is doubtful if the CBN would ever consider issuing Challenger Bank licenses.