Back to back conversations about Meffy

A.k.a why a direct to overhaul banking infrastructure is not the answer

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Back to back conversations about Meffy

We’re back to talking about Meffy! 

This week, Godwin Emefiele’s post-MPC meeting chat was interesting for many reasons. Beyond another decision to raise interest rates in a losing battle against inflation (inflation hit a 17-year high of 21.91% in February), Emefiele talked a bit about the currency redesign policy. More than once, he called it the “cashless” policy, giving credence to a one theory that the cash crunch of the last few months was driven by Emefiele’s desire to execute a cashless policy as his legacy. That theory may have its problems, but consider that the CBN under Emefiele has had many high-profile failures. Its Anchor Borrowers Program (ABP), a loan to farmers, saw high rates of nonpayment, its management of the FX window has been an utter mess, and opacity around the Central Bank has increased. When was the last time we saw the books of the apex bank? 

Anyway, the CBN governor thanked fintechs with “idle” capacity for stepping up in the last three months or so, but he was quiet about the long queues that are still at banks. At one FCMB branch today, I overheard the manager telling a customer, “the CBN has still not given us cash,” and at another bank branch, cash withdrawals were still pegged at N3,000 per person. He also glossed over the failures of the digital channels of many Nigerian banks. With capacity stretched and an unexpected rise in the number of users choosing digital channels, the Nigerian banking experience, often the rare thing Nigerians love to praise, has become frustrating. 

Using your bank’s mobile app is now some version of Russian Roullete. Will your app open, will your bank transfer go through, will the recipient actually receive the money, and will the transaction stop midway and force you into a 2-week-long battle with your bank about a possible reversal? I argued a few weeks ago that the policy winners created a few winners like OPay and Moniepoint, but on the whole, most banks came out of it with eggs on their faces. 

So this week, Nigeria’s House of Representatives directed “directed the Central bank to request that all banks overhaul their online banking systems.” On the face of it, it sounds really great; the idea that we’re two directives away from smoother bank transfers. The House of reps directs the CBN and the CBN gives the banks a swift kick up the butt that improves the entire process. But the problem is a lot more complex than the House of reps semi-intervention suggests, and trying to make sense of it will need us to go beneath the surface a bit. 

Have banks underinvested in their infrastructure for decades?

I had many interesting conversations this week and at the heart of those conversations was the question of if the banks have underinvested in infrastructure for years. One article by Punch shows that ten commercial banks spent N81 billion on communications and IT services in the first half of 2022. And if you believe this report, Nigerian banks spend a conservative $10 billion yearly for cloud services. 

One source told me that the problem is not solely about investments in infrastructure but also know-how and the bank’s incentives. The core of his argument is that because banks make relatively little from digital–Digital Banking contributed 7.8% to GTBank’s revenue in 2020–they have no incentive to move quickly with improving digital services or spending bigger than usual on those channels. They’re also not incentivized to take retail customers, who make up the bulk of the customer base but bring in the smallest share of profits, seriously. This theory makes sense when you consider that, while the banks enjoyed a headstart in digital banking, they’ve not emerged from the “cashless” policy as the big winners. Another side of the argument is that very little could have prepared them for the jump in transaction volumes. 

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According to a report by NIBSS, mobile banking usage surged 230% in January 2023, catching banking infrastructure unawares. The banks, which had largely taken a gradual approach to building infrastructure for the future suddenly found themselves in this unexpected situation. No amount of thinking on the spot could have prevented years of gradualist thinking about moving customers to digital channels. It’s also why the House of reps request for banking infrastructure to be overhauled is a waste of time. The banks have spent billions to get here, and will continue to do so, no policy, however well-intentioned will magically create better infrastructure. 

The best place to end this is with some commentary on OPay, one of the biggest winners from the cashless policy. In conversations this week, I heard different theories on how they’ve managed to be efficient; some people say that their decision to commit to the cloud from the jump has given them the capacity to scale up and down. Some other theories are that because they hold balances in several banks, they’re able to manually settle transactions quicker. One last theory is that the company spent years in the trenches of distribution and was always prepared for a world where it was suddenly flush with customers. Whatever the theories, one thing is clear: for the first time, Nigerians are showing that they’re willing to ditch traditional banks for digital alternatives. Just this week, I ditched FCMB for good for a digital alternative. It’ll be interesting to see if, in a few years, we’ll be debating the infrastructural capacities of today’s digital winners. 

What I’ve been reading: 

Unilever’s decision to quit the skin and home care category is a reminder of Nigeria’s macroeconomic conditions 

This letter from the Dean of Stanford’s law school after an invited speaker was heckled because students disagreed with his views 

This essay on the hard limits of retail digitalisation in Africa 

This hour-long report from the shortseller on Jack Dorsey’s block is pretty fascinating