Digital Economy And The Banking Sector

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By Oyetola Muyiwa Atoyebi, SAN.

INTRODUCTION

 

The National Digital Economy Policy and Strategy has been developed to reposition the Nigerian Economy to take advantage of thenumerous opportunities that digital technologies provide. This is in line with the vision of President Muhammadu Buhari (GCFR) to diversify the economy of Nigeria away from dependence on the Oil and Gas Sector. The growth of the Digital Technology Sector over the past few years is a good indication that this sector can serve as a catalyst for the rapid development of the economy. His Excellency, President Muhammadu Buhari (GCFR) approved the re-designation of the Federal Ministry of Communications as the Federal Ministry of Communications and Digital Economy (FMoCDE) on the 17th of October, 2019.

 

This has clearly positioned Nigeria as early adopters of digital technology and it gives us a good opportunity to become major participants in the growing global digital economy.

The world now is going digital and major economic activities are done online. Most buying and selling and other economic activities are now done online. The economy of the world is already undergoing transformations.

In essence, Digital Economy is the economic activity that results from billions of everyday online connections among people, businesses, devices, data, and processes.[1] For example, buying and selling are done by e-commerce, payments are being made by online transfers and online banking and a lot of economic activities are now done online. This research work will examine digital economy alongside digital banking which forms part of the digital economy.

 

DIGITAL ECONOMY AND THE BUSINESS OF BANKING

The digital economy has been defined in many ways by various individuals and institutions. The European Commission defines the digital economy as an economy that “encompasses businesses that sell goods and services via the internet, and digital platforms that connect spare capacity and demand”. The World Economic Forum and the Group of Twenty (G20) defines the digital economy as “a broad range of economic activities comprising all jobs in the digital sector as well as digital occupations in non-digital sectors”.

Digital economy is one that is based on digital technologies. Interestingly, the digital economy is very much intertwined with the traditional economy, and this has impacted all the pillars of economy existent in Nigeria with the inclusion of finance.

Digital economy in the financial world especially banking, seeks to proffer digital networking and communication infrastructure to provide a global platform over which people and organizations can perform financial activities with ease.The financial pillar of digital economy also utilizes a broad range of technological infrastructure and knowledge. This in turn creates benefits and efficiencies and also fuels economic growth.  Nigeria has the potential to explore its digital financial ventures beyond its borders. This is mainly because digitalization has come to play a very crucial role. For instance, digital banking brings a world of opportunities to address pressing issues in access to finance both in relation to retail banks and Financial Technology (fintech) platforms in Nigeria.Many banks in Nigeria have also engaged digital technologies in their activities for the purpose of solving issues in an exciting, modern, and faster way. Digital innovation in banking is one of the solutions to the problems of access to finance in Nigeria.  Several banks have incorporated these innovations via mechanisms such as mobile payments, mobile loans, cashless policies, mobile bank accounts, and so on.

 

NIGERIA’S DIGITAL ECONOMY

Nigeria is developing a digital-led growth strategy for the Nigerian economy: “The Smart Nigeria Digital Economy Project”. The objective of this project is to solve efficiency problems and create leapfrogopportunities in the economy, improve competitiveness and foster technological development and innovations more generally.

Nigerians arehighly innovative people, and a thriving digital economy will create employment opportunities for Nigeria’s teeming population and lift millions of Nigerians out of poverty. Digital economy activities are key for diversification because they are systemic. Software development solves local economic problems, with local content, expanding knowledge and education in the process and deepening integration with the global economy. The relevance of the internet economy is the spin-off benefits for the modernization and diversification of the Nigerian economy and solving efficiency losses.

In Nigeria, the digital economy is a key priority. As a report of the Central Bank of Nigeria notes[2], the country has made some strides to strengthen the country’s digital space. Nigeria’s Economic Recovery and Growth Plan 2017–2020 (ERGP) recognizes the need for a digital-led strategy to make the Nigerian economy more competitive in the 21st century global economy. In 2015, the Nigeria Communications Commission proposed the transition of the economy into a digital economy through investments in digital infrastructure, and more specifically broadband, which is a key driver of digital economy growth. Nigeria’s international connectivity is well developed, and there are new digital platforms available such as the Central Portal for Government Services. Nigeria is also committed to universal education, including providing digital skills training, and it is home to several high-growth digital companies.

The digital economy is a platform for growth for the entire Nigerian economy. Industries old and new are moving online and finding new ways to do business. This is true for tech companies — Nigerian start-ups like Hotels are growing up — but it is equally true for companies working in more traditional industry sectors, too. From health and education, to tourism and manufacturing, to resources and energy, and for businesses large and small, companies who are moving into this space are statistically more successful. A United Kingdom research reported that small businesses who leverage the Internet report sales growth four times greater than those who do not.

The digital economy connects Nigeria to the global movement online, but it is also specifically valuable for Nigeria. It allows Nigeria to confront the challenges of the tyranny of distance by connecting us to the rest of the world in real-time. And it takes advantage of our strengths – particularly our highly skilled, net-savvy, and innovative population – and keeps them at home, rather than shipping them overseas.

Nigeria is uniquely positioned to reap the benefits of the digital economy. Nigeria accounts for 47% of West Africa’s population, and half of the country’s 200 million people are under the age of 30. Nigeria has the largest mobile market in Sub-Saharan Africa, supported by strong mobile broadband infrastructure and improved international connectivity, yet minimal fixed broadband infrastructure and connectivity in rural areas is leaving a significant number of the most marginalized segments of the population without Internet access. This Digital Economy for Africa (DE4A) Diagnostic Report highlights the challenges and opportunities of the digital economy for Nigeria. This diagnostic argues that accelerating access to digital technologies spurs innovation, efficiency, and productivity, and as a result brings about choice and opportunities for greater growth and inclusion.

For countries like Nigeria, the Digital Economy offers opportunities, but also brings risks of being left behind. Improved digital connectivity can only achieve the desired transformational impact on economic opportunity and inclusive growth if combined with improvements in digital skills and literacy, the coverage of digital identity schemes, and access to digital payments and other financial services, as well as digital support to start-ups and existing businesses. With such capabilities, the Nigerian economy can harness digital data and new technologies, generate new content, link individuals with markets and government services, and roll out new and sustainable business models. In 2016, the global digital economy was worth about USD 11.5 trillion, equivalent to 15.5% of the world’s overall GDP. The digital economy is expected to reach 25% in less than a decade, quickly outpacing the growth of the overall economy.

 

E-commerce is an emerging area of global investor confidence in Nigeria. Figures have shown that Nigeria is one of the leading IT markets in Africa, where there has been a rapid surge in the development of e-commerce businesses. According to Euromonitor International Market Research, e-commerce advancements have been most notable in Nigeria because of the surge in telecom investments and smartphone purchases which have fueled growth in internet usage from 20% in 2009 to 41% in 2014. According to Euromonitor International data, Nigeria has the largest online market particularly for apparel and footwear in Africa, which is expected to grow from US$104 million in 2014 to US$1,077 million in 2019, due to the dynamic development of trusted e-tailers, Jumia and Konga.

 

HOW THE BANKING SECTOR HAS SERVED AS A MAJOR KEY PLAYER IN THE GROWTH OF NIGERIA’s DIGITAL ECONOMY?

Research as shown that the shift from cash payments to digital payments will not only increase the number of people who own and use bank accounts, but also improve efficiency by increasing the speed of payments and reducing the cost of disbursing and receiving them. Fintech can be used to enhance the security of payments and increase transparency, and thus reduce associated crime and corruption. The Bank Verification Number was implemented by the Central Bank of Nigeria to increase security and protect bank customers from illegal transactions.

By providing access to a diverse range of financial products and services such as credit facilities for individuals and businesses, financial technology (FinTech) can boost aggregate expenditure, thereby improving gross domestic product (GDP) levels. Provision of financial services using technology also benefits the government by providing a platform to facilitate an increase in aggregate expenditure, which subsequently generates higher tax revenue from an increase in the volume of financial transactions.

Additionally, financial innovation through technology can have long-term positive effects for banking performance. A recent study examining the impact on bank performance of the adoption of SWIFT, a network-based technological infrastructure and set of standards for worldwide interbank telecommunication, showed that it has large effects on long-term profitability, and a significant improvement on banking performance.

Nigeria’s banking ecosystem has moved to retail banking and the use of e-banking channels, which has led to improvements in financial inclusion. According to the 2017 annual report of the Central Bank of Nigeria (CBN), the total value of electronic payment transactions recorded in 2017 rose by 32.5% to NGN83.1 trillion, from NGN62.7 trillion in 2016. Nigerian banks are starting to adopt more dynamic operating approaches and introducing financial products that are in sync with the emerging digital trends. For instance, Zenith Bank launched Scan to Pay, an app that can be used by both customers and non-customers to make online and in-store payments in seconds through quick response (QR) code scanning on any internet-enabled phone. Banks and telecommunications companies have also introduced unstructured supplementary service data (USSD) codes, by which normal banking transactions can be carried out on mobile phones.

Nigeria Inter-Bank Settlement System (NIBSS) is jointly owned by all licensed banks in Nigeria, including the Central Bank. NIBSS operates as a shared service infrastructure for handling inter-bank payments, in order to remove potential bottlenecks. It also operates the Nigeria Automated Clearing System, which facilitates the electronic clearing of cheques and other paper-based instruments, electronic funds transfer, automated direct credits, and automated direct debits. Further, NIBSS has launched the mCASH payment system to facilitate low-value retail payments and grow e-payments by providing accessible electronic channels to a wider range of users, and extending e-payment benefits to payers and merchants at the bottom of the pyramid, where cash payments have been predominant.

Another trend fast becoming a reality in Africa is the use of AI. To increase levels of customer acquisition and retention, AI can be used in delivering intelligence about customer behaviors and preferences that will help in the development of personalized responses, insights, and product types. AI will affect the way banks conduct financial due diligence, especially with respect to fraud detection, risk management and credit allocation. The Union Bank of Nigeria announced, in 2018, the deployment of robotic process automation (RPA) technology in its operations. This uses software tools developed to simplify and improve the efficiency of business process delivery.

 

THE ROLES OF BANKS IN THE NIGERIAN DIGITAL ECONOMY

The Banking Industry in Digital Economy is highly competitive. The new dimension of Banking Industry is characterized by modern and global banking services, by the important roles of banks in the financial stability and the development of banking culture and civilization, Supported by the latest technology andbanks which are working to identify new business niches, to develop customized services, to implement innovative strategies, to capture new market opportunities and to increase profits. The banks, as financial entities, also activate in a global environment. Another dimension of banking industry is the business process outsourcing (BPO). Romanian banking industry has some characteristics which are very important for economic development. The characteristics of Romanian Banking Industry are: globalization, consolidation, deregulation and diversification. An important objective of banking industry is the international cooperation on the banking market.

Historically, structural changes in the financial system has been a consequence of the process of financial innovation in terms of new products or services, new production processes or new organizational forms. Financial innovation has often had its roots in advances in the processing power of IT systems and lower costs for data storage.

In a similar vein, digitalization has the potential to change the competitive advantages of providers of financial services. New market entrants may have superior technologies for the screening of borrowers and thus lower information asymmetries. For example, big tech firms have access to a wide range of customer data, which may be used to improve risk assessments and the screening of borrowers. Additionally, big tech firms might be able to achieve economies of scale through network effects. As a result, the business models of financial institutions that are based on the cross-subsidization of different types of service may come under pressure. Financial innovations and new digital financial services may help to raise productivity in the financial sector.

Digital economy also referred to as the New Economyrefers to an economy in which digital technologies are used in economic activities.Digital banking is part of the broader context for the move to online banking, where banking services are delivered over the internet. The shift from traditional to digital banking has been gradual and remains ongoing and is constituted by differing degrees of banking services digitization. Digital banking involves high levels of process automation and web-based services and may include APIs enabling cross-institutional service composition to deliver banking products and provide transactions. It provides the ability for users to access financial data through desktop, mobile and ATM services.

 

Ensuring Increased Accuracy

Traditional banks rely majorly on paper processing with the possibility of up to 40% error rate which may require reworking. Additionally, the lack of Information Technology IT integration between branch and back office personnel may reduce business efficiency. Digital banking plays the role of using technology which makes it easier to implement IT solutions with business software which lead to more accurate accounting. Financial accuracy is crucial for banks to comply with government regulations.

 

Improved Competitiveness

Digital solutions help manage marketing lists, allowing banks to reach broader markets and build closer relationships with tech savvy consumers. CRM platforms can track customer history and provide quick access to email and other forms of online communication, it is effective for executing customer reward programs that can improve loyalty and satisfaction.

 

Greater Agility

Digital banking helps in speeding up both external and internal process, both of which improve customer satisfaction. For risk management situations, the use of risk management software detects and responds to market changes more quickly than risk management professionals.

 

Enhanced Security

Digital banking guarantees some considerable degree of security to protect data. All businesses, big or small face a growing number of cyber threats that can damage reputations. The use of technology will reduce the rate of cyber threats.

 

HOW DIGITAL TECHNOLOGY IS HELPING NIGERIANS ACCESS BETTER BANKING SOLUTIONS.

Before the Nigerian financial sectorwent through a significant transformation, banks were seen as exclusive spaces for a select portion of the population – places where high-earning individuals were the only ones entitled to world-class banking products and services. This misconception left a large part of the population unbanked and unable to benefit from essential financial services.

Digital technology has proven to be a highly effective tool in changing this narrative, driving a change in operating and business models, improving platforms for innovation and creating immense opportunities for monetization. The technology landscape continues to change through the never-ending rollout of faster, more accessible networks, impacting every component of service delivery – especially in the banking industry.

The Nigerian Communications Commission reported that there were approximately 172 million phone subscribers in the country in 2018, which means that 90 percent of citizens can execute transactions on their phones. There is little excuse, then for Nigeria’s low level of financial inclusion – just three in 10 Nigerian adults have a bank account.

 

A REVIEW ON THE CBN STATISTICS ON THE BANKING SECTOR

The CBN statistic shows that there is a gap in potential and actual activity, banks sit on well of customer data for analysis on appropriate product design marketing, and that there is a rising profile of technology-based retail giants which would provide for more efficiency in the use of technology and disappearing margins for bank. The statistic also shows that the major reason why customer factor contribute to the decrease in the value of banks is because of their failure to efficiently enable them, for example, default account setup and customer education, and that banks are the second most frequent reason for POS transaction failure.

The statistic also gave an insight on the digital platform efficiency by stating that 9.3 million transactions worth 852.2 billion NIP transactions failed and customers were denied value and satisfaction. It also shows that the future of banking will be defined by the battle for data on customer insight. It states that digital revolution will provide for an acceleration of economic activities and change the way we talk, communicate, trade, and do business. It also describes business as a process optimization, big data management and real-time reporting showing.

It also describes that the issue of fraud in the banking industry has been reduced due to the adherence to the measures to be taken on electronic fraud. The CBN statistics data concluded the statistic by showing that mobile banking will attract electronic fraud than others.

 

RECENT DIGITAL BANKS AND THEIR IMPACTS ON THE BANKING SECTORS

Some digital banks in Nigeria are:

  1. WEMA ALAT 2017
  2. Sparkle launch 2020
  3. V by VFD microfinance bank
  4. Rubies digital bank 2019
  5. Kuda bank 2018

 

 

The Impact of Digital Banking on the Banking Sectors in Nigeria

The effects of digital banking on banking sectors in Nigeria, is worth appreciating. With the introduction of digital banking in Nigeria, easy accountability, revenue generation and crowd management are advanced to the banking sectors. Inaccessibility to banking facilities in years has been curtailed. Digital banking can be said to be a subset of E- banking because e- banking entails the use of ATM to perform banking operations in Nigeria. The e- banking and digital banking has enjoyed so much acceptance in the recent years.

The emergence of e-banking in the Nigerian financial system is partly to keep pace with modern technologies applicable to modem banking. More importantly, it is being used as a competitive tool by banks. Conscious of the need to satisfy the sophisticated customers, banks introduced these products to reduce human errors. They also aim at reducing the waiting time of customers as well as reducing human labour and paperwork involved before customers are attended to. So, the immediate impact of ATM is that we should begin to see a substantial reduction in the queues that often develop at the bank counters. Banks would thereby have more time to devote to strategic planning thus increasing the efficiency of the average bank worker. ATM customers now enjoy the benefit of banking, customers now enjoy 24 hours services, in which case weekend banking will be unnecessary as soon as ATM is able to accept deposits and give account balances. Also, as more banks acquire ATMs, we expect to see fewer bank customers holding on to large cash particularly at weekends. This would ultimately reduce the volume of money in circulation.

 

 

CONCLUSION

Digitalization has brought a lot of changes to the world. From all that has been discussed, it is evident that there is massive growth in the Digital economy of Nigeria. The banking sector has alsohad its own contribution to the digital economy. Most banks have digital platforms for payments. This speak volumes of the digital economy. More needs to be done to improve the digital economy of Nigeria as there are great wealth that can be generated from the digital economy.

The Nigerian economy can harness digital data and new technologies, generate new content, link individuals with markets and government services, and roll out new and sustainable business models. There is a great increase in the numbers of commercial bank customers with the adoption of e-banking services. At least the quality of services rendered to customers has improved greatly. Customers are satisfied with some of the e-banking service offered to bank customers; however, a lot needs to be done to improve the customer service in the Country. In building a solid digital economy, Nigeria needs to focus on digital infrastructure, digital literacy and skills, digital financial services, digital platforms, and digital entrepreneurship and innovation.

 

 

 

Paper by Oyetola Muyiwa Atoyebi, SAN.

 

Mr. Oyetola Muyiwa Atoyebi, SAN is one of the most notable professional Nigerian youth, who has distinguished himself in his professional sphere within the country and internationally. He is the youngest in the history of Nigeria to be elevated to the rank of a Senior Advocate of Nigeria. At age 34, he was conferred with the prestigious rank in September, 2019. Mr. O.M. Atoyebi, SAN can be characterized as a diligent, persistent, resourceful, reliable and humble individual who presents a charismatic and structured approach to solving problems and also an unwavering commitment to achieving client’s goals. His hard work and dedication to his client’s objectives sets him apart from his peers. 

As the Managing Partner of O.M. Atoyebi, SAN and Partners, also known as OMAPLEX Law Firm, he is the team leader of the Emerging Areas of Practice of the Firm and one of the leading Senior Advocates of Nigeria in Information Technology, Cyber Security, Fintech, Robotics and Artificial Intelligence (AI). He has a track record of being diligent and he ensures that the same drive and zeal is put into all matters handled by the firm. He is also an avid golfer. 

LinkedIn: https://www.linkedin.com/in/atoyebi-oyetola-muyiwa-san-804226122/

 

 

 

REFERENCES

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[1]https://www2.deloitte.com/mt/en/pages/technology/articles/mt-what-is-digital-economy.html

[2]file:///C:/Users/USER/Downloads/NSACC%20JULY%202020%20WEBINAR%20BY%20CBN%20DG%20OPERATIONS%20ON%20NIGERIA’S%20DIGITAL%20ECONOMY(1).pdf


 

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