Two Questions For A new Bank CEO
My friend Wally has just informed me that he is taking up a role as the new CEO of a new Bank. Amid all the congratulations, I was interested in how he plans to take on the FUGAZ ( the five big banks controlling more than 70% of the market ) and how he plans to take on the impending influx of PSBs like MTN? The FUGAZ’s 70% market share has not been because they are the best by any stretch of the imagination. Nigeria Twitter is filled with complaints and lamentations on the poor and arbitrary services and non-services of these banks.
Their size however make them immune to losing one customer here or there. As this HBR article claims, there is profit in bad service. The FUGAZ are probably proof of that conjecture.
The banks are therefore targets for an array of FinTech companies majority of whom are micro-specialising in payments or investments or loans. They all depend on you having a bank account but desegregate the services provided by the banks. In effect, it is from left pocket to right pocket — the banks do not appear to be losing anything. The PSBs are a different proposition though. In theory these are essentially mobile money operators with restrictions around what they can invest in and restrictions around access to depositor funds by the parent telcos. While the landscape is confusing enough with rapidly changing regulations and, increasing investments in Fintechs, PSBs are likely to have a few things that will make them formidable competitors. First they will be backed by the significantly deeper pockets of the telcos. This will count in the inevitable marketing wars. Secondly they will benefit from the brand image of their parent telcos. Thirdly they will benefit from the already robust distribution system of the parent telcos. And not the least, they will benefit from familiarity with the process of interacting with airtime wallets. All in all, even if the FUGAZ are not worried about the PSBs, any new licensed bank has reason to be.
So when Wally asked me for strategic advise, I demurred. I only agreed that we should do a Socrates kind of enquiry by exploring two questions. My hope is that our discussions will provide him with a stepping stone to formulating a winning strategy against the FUGAZ and the PSBs and even the swirling hordes of FinTechs.
My first question to my friend was What does it cost you to provide service?. This is a pretty high level question because we don’t even know what service to provide, to whom, from where. But just by looking at the published performance of the FUGAZ, it is clear that keeping the cost to income ratio down is a major predictor of profitable performance. UBA and Zenith can have bigger revenue than GT but post lower profits because their cost to income ratio is significantly higher. So your challenge as the new kid on the block is to get your cost to income ratio below that of GT. How come GT’s cost to income ratio at 37% is so low compared to peers? ( UBA — 64%, Zenith — 49% ) . There are many possible answers — she generates a lot of non-interest fee income from electronic transactions, she has expanded customer volume without expanding the physical customer touch points, she employs fewer staff per customer than others or her staff are just more productive. Whatever the secret, the rest of the FUGAZ are still trying to catch up on her. But she sets the bar for any new entrant.
Determining how much your service delivery costs requires fine grained process modelling and activity based cost modelling to understand where you are. What are the direct costs and what are the indirect costs. What are the fixed costs and what are the variable costs. What do you consider cost and what do you consider investment? With that knowledge in your pocket, you can hone your strategy — what products, what services, what channels, what perks, what compensations. But since you are just starting my friend, you have to set your cost to income target and then build a data driven culture where data is collected about these activities and costs as they happen and you can deal with the leading indicators before your results are announced. We will meet after six months and look at those numbers. How do you deliver a cost to income ratio of less than 37%?
The other question that we considered was -When should Mr Agada be offered a car loan?. Yes, that Mr Agada that is yet to become your customer. This question asks many other subsidiary questions. Who is Mr Agada? Why should he become your customer? Why does he need a car loan? How do we know he needs a car loan? Will he appreciate having a car loan? If you don’t know who Mr Agada is, then you already have a big problem. It means you will be sending your sales people out to cold call people that are already banking with FUGAZ and then you are going to convince them to bank with you for the same service they are receiving already. It means you do not have a database of people that you can directly market to and that you have not been able to do segmentation of your prospective customer base. The easy excuse is that you don’t have the data. Of course you don’t, so go and get it. Not just data of who Mr Agada is but also what assets does he have? Where does he live? What is the age of his car if he has any? Who does he get services from? Who does he buy things from? When does he typically make those expenses? What of his network — friends, siblings, family, co-workers, co-investors? Where does he work? In essence you have to launch a large scale data collection and analysis project before you even open your doors. You need to know your prospects better than they know themselves before you proposition them. It may well be that Mr Agada has no interest in opening an account with you but is happy to buy a new G-Wagon at a ridiculously low price from a dealer that only you know about. And you end up with two accounts, Mr Agada’s and the dealers and possibly a profitable car finance deal to boot. Being data driven is a culture that you will have to instil in your bank from day one. Ensuring that people not only appreciate data but appreciate the need to collect, analyse, predict and deliver profitable returns using data.
In the end, Wally and I concluded that the road to winning against the FUGAZ and PSB is to be obsessively customer and data driven. Using data to reduce our own cost to income ratio and using data to identify who to serve, how to serve and what to serve them with. We can win by having more data and better algorithms for exploiting the data. We must become data literate in an aggressive way. We have to make significant investment in data engineering and data science. We can’t win by trying to be just baby FUGAZ.
