What is the Future of Agency Banking in Nigeria?

Some weeks back, a former coursemate of mine reached out via Whatsapp to ask a very important question – between OPay and PalmPay, which would I recommend? According to him, his bank was showing him “premium wickedness” and he was in desperate need of an alternative. It was a funny question – some years back conversations like that wouldn’t exist. Today they are the norm.

The cash crunch of recent weeks has created significant discomfort for Nigerians and opportunities for well-positioned players. Two of such players have been OPay and PalmPay.

Over the past couple of weeks, OPay and PalmPay have trended on Twitter for various reasons. While OPay has been in the news for its preference and relative stability compared to more conventional banks, PalmPay agents have been in the news for chasing debtors on bikes, seizing their generators, and all sorts of meme-worthy activities that may or may not be true but have made me laugh a great deal this period.

While I don’t have any data to back this up, I believe OPay has probably gained more customers in the first quarter of 2023 than they did in any individual quarter since their business began.

I have seen people who ordinarily do not even transact via digital channels not only onboard on OPay, but even request debit cards. The Central Bank of Nigeria’s tiered KYC system that allows customers onboard and access financial services at Tier 1 (without any serious documentation albeit with a maximum single deposit of N20,000 (US$43) and a maximum cumulative balance of N200,000 (US$430.6) which in most cases is just sufficient to get these financially excluded people going) has also greatly contributed to this.

I have an OPay account (among the many other fintech apps I download for market intelligence purposes, and rarely ever use) and I have personally tried to decipher how OPay was able to guarantee efficient transaction processing even when banks were down. Two thoughts come to mind:

·        Modern Core Banking Platform: if the issue conventional banks had during this period was based on core banking failures (due to massive transaction volumes), then fintechs like OPay, Kuda, and even Tier 3 Deposit Money Banks running on more modern software stacks would probably have no issues (I am told that Zenith Banks issue during this period was more of a core banking challenge – they recently announced a revamp of their software stack, I have sha removed any serious money from them, it is not me they will use to wash plate).

·        Vostro Setups: If this was an NIP issue, in which case the NIBSS rail that powers real-time payments for the majority of banking players was down, then OPay should also have suffered downtimes, unless they were either running on alternative payment rails like RITS (Remita Interbank Transfer Service), or they had Vostro Setups with the banks (Vostro setups indicating they keep settlement positions with certain DMBs for faster transaction processing – this basically means that when their customers make funds transfers or merchant payments to beneficiaries with accounts in these DMBs, they are able to secure debits from their customers and settle those beneficiaries from their settlement positions at those banks which would basically be internal ledger updates at the bank.

These transactions will not run on NIP and will in all likelihood be faster, howbeit at a cost to the fintech (they would need to tie down money in a bank’s position and replenish that position on a recurring basis).

Some days back, I saw “OPay to OPay” trend on Twitter. This clearly indicates that OPay wants to leverage the growth it enjoyed this period to promote more intra-wallet transactions that guarantee faster payment processing for their customers and cheaper fees for them.

However, this article is not to praise OPay. Some weeks back, I was at my “cash plug” (The POS guy that Jesus raised to provide cash for me during the cash crunch, the same way he raised ravens to feed Elijah during the famine in Samaria lol), when I heard a guy sharing that while he had an OPay account, he was not going to provide the information required on the app to upgrade his OPay wallet from a Tier 1 wallet (transaction limit of 20,000 per single deposit) to a Tier 3 wallet (No transaction limit).

The major reason he gave? OPay didn’t have a bank branch he was aware of, so he didn’t trust them.

SOLVING THE TRUST ISSUE

A founder friend of mine who runs a fintech in the financial inclusion space shared some interesting insights with me a while back. Of the many things he shared, trust was a key reason these so-called “financially excluded” people didn’t use banking services actively. The same way I prefer to have a conversation with a human being at the bank’s end when I am debited for a failed transaction and not a bot is the same way these people want to have real human beings they can talk to and hold accountable when their financial transactions fail. They don’t want to “send an email” or “call customer care”, they want a human being to engage and share their issues with.

The same way the Ajoo agent they make contributions to is a real human being they know (and can trace to his house and beat if they are sensing Mago-Mago (Nigerian slang for foul-play). They also want their core financial service provider to be a real human being they can hold and beat (this is supposed to be a joke btw, nobody is beating anybody o, but you get the drift?).

The key summary rehashes what certain pundits in the financial services space have been saying from the onset – a core digital strategy will not solve the financial Inclusion problem in Nigeria, players must adopt a hybrid approach. This hybrid approach means that someway and somehow agency Banking must evolve from being an in-glorious human ATM withdrawal arrangement to becoming a true extension of banking services.

REGULATORY STANCE

Some days back, The Central Bank of Nigeria released an exposure draft on the Agency Banking Business detailing certain new modifications to the business arrangement. The lack of control over POS agents during this period may have contributed to the development of this document as their constant pleas and eventual threats to agents to stop charging exorbitant withdrawal rates (essentially selling the Naira to Nigerians) fell on deaf ears.

The problem? agency banking in Nigeria is a multiple-provider business. Most companies who count agents under their networks are really “double counting”. An agent can acquire for multiple providers at the same time while each provider registers them on their network as “their” agents. I remember meeting an agent at the popular Oshodi bus terminal in Lagos, Nigeria a while back who was acquiring transactions for MoniePoint, OPay, and MTN and shuffled customers between those three terminals depending on various factors (MoniePoint for transaction efficiency, MTN for pricing, can’t remember why she used OPay). Even my “Cash Plug” acquires for two providers – a fintech company and a Tier 3 DMB (and I personally don’t care, he can acquire for JP Morgan for all I care, as long as I get cash when I need it, I’m good).

CBNs exposure draft details a new arrangement that mandates agents to work with a single principal, disallowing multiple acquirer arrangements. I imagine a central database will be constituted to enforce this and prevent agents from jumping ship sporadically or in better words being on two ships. While this arrangement has its pros and cons, I do believe it creates a new opportunity to expand and morph agency banking going into the future and to properly serve the financially excluded.

THE FUTURE OF AGENCY BANKING

The future of agency banking will involve agents morphing from being just withdrawal and deposit agents to being a true extension of banking services to the unbanked. This could potentially change the dynamics of the business, because agents, therefore, become first responders to customer complaints and are given priority access within banks for speedier customer complaint resolutions.

So when a bank, fintech, or any other financial institution develops a location-based customer acquisition strategy to capture customers in a certain geographical area, part of their support strategy will be to place an agent at a certain customer-per-agent ratio to service customers in those areas. This agent would not only provide core banking (cash in/ cash out) services to those customers, they will also provide speedy complaint resolution services.

This also changes the relationship between FIs and their agents. While today this relationship is a basic agent relationship, FIs may want to create incentives that not only draw but keep agents within their fold.

Some fintechs for instance are considering opening up services like micro-pensions and health insurance via their agents to extend to customers. These services could also become available to agents (paid by their principals) to consume themselves, conditional on meeting certain transaction bands after a period of time. In other words, FIs will begin to extend services like health insurance and micro-pensions as incentives for agents to remain on their networks.

The competition dynamics will also change, today agency banking is basically a proximity play – I use the agent closest to my location, in this arrangement, branding, and product differentiation will play a huge role.

Financial Institutions with dominant brands and more product offerings (and even service reliability) will stand out, displace and “snatch” agents from other service providers with smaller, less dominant, and poor-quality service.

There may also be regional competition dynamics, where certain agent networks will have significant dominance in the northern regions, a weaker presence in the southern regions, and vice versa.

This will also curb agent-backed fraud as agents supporting fraudulent entities will not only be easily identified but barred and blacklisted from participating in any agent network at all (due to the existence of a single database to verify agent data).

This agent database may morph into becoming some kind of leaderboard of sorts for qualifying the value of agents and pushing FIs to create more incentives for their agents who don’t just process transactions, but open accounts for customers and manage them at the grassroot level.

This essentially solves the trust issue as customers know who to reach out to when transactions fail, and banks prioritize agent requests. It also weeds out weak players, as nobody wants to be an agent for an FI with persistent network downtime (make them no come beat am for house lol).

In other words, the agency banking business will end up evolving to become a true extension of banking services, creating real and trustworthy value for the financially excluded, and ultimately promoting financial inclusion.

CONCLUSION

Events of recent weeks have shown the need for more robust financial services and solutions especially those targeted at the financially excluded who have been greatly affected by the cash crunch.

A properly executed agency banking play has the potential to not only onboard the hitherto financially excluded, but break the trust layer that prevents these players from embracing financial services and solutions.

Inspired By The Holy Spirit