THE RISE OF FINANCIAL TECHNOLOGY (FINTECH) AND ITS EFFECT ON

BANKING SECTOR IN NIGERIA

BY

OYEDEJI VICTOR TOLUWANIMI

FPA/BF/22/3-0047

BEING A PROJECT SUBMITTED TO THE DEPARTMENT OF BANKING AND

FINANCE, SCHOOL OF BUSINESS STUDIES, THE FEDERAL POLYTECHNIC,
ADO EKITI, EKITI STATE. IN PARTIAL FULFILMENT OF THE
REQUIREMENT FOR THE AWARD OF HIGHER NATIONAL DIPLOMA (HND)
IN BANKING AND FINANCE

SUPERVISED BY

DR. A. OWOLABI

MAY, 2024.
 CHAPTER ONE
INTRODUCTION
1.1. Background to the Study

The financial industry is experiencing rapid evolution and innovation, with financial

technology (fintech) emerging as a significant player. This growth is driven by factors such

as the sharing economy (e.g., peer-to-peer platforms and online marketplaces), favorable

regulations (e.g., consumer protection measures), and advancements in information

technology (e.g., cloud computing and artificial intelligence) (Lee & Shin, 2018). Nigeria, a

West African country, is actively transforming into a dynamic ecosystem that provides a

platform for fintech start-ups to thrive and potentially become multimillion-dollar businesses.

As one of Africa's major fintech investment destinations, Nigeria has witnessed a surge in

deal activities in recent years. In 2010, only two deals were reported, but by September 2016,

the number had increased to 14 deals. Based on activities in the first three quarters of 2022,

Nigeria's fintech deal activity is projected to reach 86 deals in 2022, representing a 1 per cent

increase from the previous year (Popoola et al., 2023). The increasing availability and

adoption of innovative fintech solutions, such as mobile money and digital banking, has

promoted growth in these fintech deals. Despite being predominantly cash-driven, the

Nigerian economy has responded well to fintech opportunities, as evidenced by the

exponential growth of mobile money operations from an average monthly transaction value

of US$5 million in 2011 to US$142.8 million in 2016 (KPMG, 2017) and a funding value of

US$537 million in 2021 (Atoyebi, 2022). By 2022, three Nigerian fintech companies

received some of the largest equity investments in Africa. Flutterwave raised US$250

million, Interswitch raised US$110 million, and TeamApt raised US$50 million in equity

investments in 2022 (Ironsi, 2023). The increasing penetration of fintech can be attributed to

a surge in e-commerce and smartphone usage. The emergence of fintech in Nigeria was

facilitated by the introduction of universal banking in 2001, which allowed banks to offer a

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wide range of financial services beyond traditional deposit-taking and lending activities.

Furthermore, the cashless policy implemented in 2011 by the Central Bank of Nigeria (CBN)

in collaboration with the Bankers Committee aimed to provide mobile payment services to

break down traditional barriers hindering financial inclusion, such as cost, distance, or

documentation requirements. This policy also ensured secure and convenient financial

services in urban, semi-urban, and rural areas across the country (Itah & Emmanuel, 2014).

This policy shift towards retail banking and the use of e-banking channels have significantly

improved financial inclusion. For example, the percentage of Nigerian adults with access to

payment services increased from 21.6 per cent in 2010 to 70 per cent in 2020, access to

savings increased from 24.0 per cent to 60 per cent, and access to credit increased from 2 per

cent to 40 per cent (CBN, n.d.). Electronic banking, as a form of fintech solution, both as a

delivery medium for banking services and as a strategic tool for business development, has

gained widespread acceptance internationally and is rapidly gaining traction in Nigeria.

Financial technology, also called FinTech, is the “marriage” between technology and finance.

When combining both technology and finance, they create a multiplier effect, which is more

substantial than the different use of the two. Zetzsche et al. (2017) point out that the current

FinTech stands out from two significant trends. The first trend is the pace of change driven

by Big Data, machine learning, commoditization of technology and Artificial Intelligence

(AI). The second trend is the fact that more new non-financial firms have entered and

invested in financial services businesses. Fintech is a key area in the development of Industry,

since it requires the use and integration of different technologies, such as AI and Data

Science, and it also provides a platform as a service and software as a service for Industry

(Dhanabalan, & Sathish, 2018; Mashelkar, 2018).

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1.2 Statement to the problem

The emergence of financial technology (FinTech) has been a welcome change to financial

services especially banking transactions. Financial technology has made it possible and easy

for customers to pay bills, invest, save money, access loan and other financial products with

little or no additional cost. One of the problems of financial technology (fintech) is that the

transaction is prone to cyber fraud and the system seems to have been consistently attacked.

From the CBN report 2015, it was observed that Nigerian financial institutions lost

approximately N159, 000, 000, 000. 00 (One Hundred and Fifty-Nine Billion Naira) to cyber

fraud between 2000 and 2013.

Dagne (2019) says that some banks might find it difficult to move in the same level, because

banks don’t have same level of commitment and financial capacity to adopt the new

technology. Another is the regulatory and operating environment seems not to support the

positive impact of fintech as the regulatory authorities have unclear regulation of the

platform; as they permit the non-bank led fintech operators to integrate with other financial

solution providers as customers to onboard merchants or use their respective platforms to

process payment without being licensed by the CBN. Additionally, the banks attempt to save

costs and avoid utilizing their resources on perilous innovations that might lead to

unpredictable outcomes. Therefore, it is on this background this study examines the rise of

FinTech and its effect on banking sector in Nigeria.

1.3. Research Questions

To achieve the objectives of the study, the following research questions will be addressed:

i. To what extent does point of sales utilization impact banking sector in Nigeria?

ii. To what extent does automated teller machine impact the development of banks in

Nigeria?

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 iii. To what extent does a mobile phone transaction improve the financial technology of

banks in Nigeria?

1.4. Objectives of the Study

The broad objective of the study is to examine the rise of financial technology (Fintech) and

its effect on the banking sector in Nigeria. The specific objectives are as follows;

i. To examine the impact of Point of Sales utilization on banking sector in Nigeria.

ii. To evaluate the effect of automated teller machine on development of banks in

Nigeria

iii. To analyse the effect of Mobile Phone Transactions and how it improve financial

technology of banks in Nigeria.

1.5. Research Hypotheses

The research hypotheses are stated in null form only.

i. Ho1: Point of sales utilization has no positive significant effect on banking sector in

Nigeria.

ii. Ho2: Automated teller machine has no positive significant effect on development of

banks in Nigeria.

iii. Ho3: Mobile phone transaction has no positive significant effect on financial

technology of banks in Nigeria.

1.6. Significance of the Study

The study contributes significantly to the body of knowledge by

providing current empirical evidence on the relationship between

financial technology and disruptive performance of banks in Nigeria.

The research will also be useful as a resource for other researchers

who choose to write on the subject. Furthermore, the findings of this

study will assist the government and relevant agencies, particularly

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the Central Bank of Nigeria, in developing regulatory frameworks for

the use of technological innovations so that issues relating to

cybercrime and theft can be alleviated for shady financial

transactions.

The work will help the public to know about the different fin tech garget used by banks and

how to make use of them. On the other hand, the study will make people to know that using

financial technological tools makes financial transactions to be carried out at ease and it is

convenient.

1.7. Scope of the Study

The study focuses on the rise of financial technology (FinTech) and its effect on banking

sector in Nigeria. The study is centred between 2010 till 2022.

1.8 Definition of terms

Digital Banking: Banking services delivered through digital platforms such as mobile apps

and internet banking.

Cryptocurrency: Digital or virtual currencies that use cryptography for security.

Cryptocurrencies like Bitcoin and Ethereum have gained traction in Nigeria, where many

users see them as alternatives to the local currency in response to inflation and currency

depreciation.

Insurtech: The application of technology to improve the insurance industry, making it easier

for people to access, compare, and purchase insurance products. In Nigeria

Digital Lending: The process of offering loans through digital platforms with minimal

physical documentation and faster approval times.

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Automated Teller Machines (ATMs) and POS Systems: While ATMs have been part of

the traditional banking system, the growth of point-of-sale (POS) systems, especially in

underserved rural areas of Nigeria, has expanded the reach of financial services. Fintechs

have facilitated this by making it easier for businesses to adopt POS systems for digital

payments.

Central Bank of Nigeria (CBN): The apex regulatory body that oversees the Nigerian

banking and financial sector. CBN’s regulations, particularly around digital finance and

fintech, have shaped how financial technology operates in the country.

Regtech (Regulatory Technology): The use of technology to help financial institutions

comply with regulations more efficiently.

1.9 Outline of the Study

The project work is divided into five chapters; chapter one is the introductory chapter,

chapter two is the literature review, chapter three is the methodology of the study, chapter

four is the data presentation and results analysis while chapter five consist of the summary,

conclusion and recommendation.

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 CHAPTER TWO
LITERATURE REVIEW
2.1 Conceptual Review
In 2017, the World Economic Forum characterised fintech as a disruptive and revolutionary

force equipped with digital weapons that can dismantle traditional financial institutions and

overcome barriers. Bates (2017) a report commissioned by Consumers International,

describes fintech as the convergence of financial services and technology. Fintech

encompasses financial firms that base their services on robust technological platforms to

create innovative financial products and services that cater to a broader range of customers,

including both corporations and individuals (Mlanga, 2019). The rise in fintech can be

attributed to its adoption by start-up companies seeking to disrupt traditional methods by

leveraging advanced technological channels in areas such as asset management and money

transfer (Truong, 2016). One notable aspect of fintech is its ability to enhance market

efficiency while lowering transaction costs. Banking services include a wide range of

financial activities that banks offer such as deposit accounts, loans, payment processing,

money transfers, and other related services provided to individual and corporate customers.

2.1.1 Financial Technology (FinTech)

FinTech refers to firms that premise their financial services on a sound technology platform

in a bid to invent new financial products and services which can reach a wider variety of

entities, corporate and individual customers alike (Mlanga, 2019).). FinTech has gained

ground by the reason of its use by startup firms gaining entry into the market as they try to

change the traditional method of doing things by leveraging on cutting edge technological

channels in areas of asset management and money transfer (Truong, 2016). One remarkable

feature of FinTech is its ability to ensure efficiency within the market and at same time keep

transaction costs very low. Also, Kim, Park, Choi and Yeon (2015) in Erman (2017)

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described FinTech as a platform which provides for the intersection of technology and

finance. Simply put a combination of information technology and provision of financial

services (Lee & Kim, 2015 in Erman, 2017). FinTech can be viewed as technologically

enabled innovation within the financial system that can lead to the formation of new services,

business models, products, processes and even institutions covering a wide assortment of

financial innovations (IAIS, 2017). These products and services which range from crowd

funding to E-Trading as far as blockchain technology have accounted for the visible change

in the world of finance across the world.

2.1.2 Financial Services

Financial services refer to formal financial services; otherwise, the term informal financial

services are used. The coverage of services includes general financial services such as saving,

credit, payment, investment, insurance and pension services. Thus, the development finance

literature conceptualizes financial services in two ways. Conceptualization of financial

services may exclusively focus on products offered by formal financial institutions and

exclude financial activities of the informal sub-sector. This includes products that enable

individuals to deposit funds, save, withdraw funds, access credit, and carry out insurance and

funds transfer facilities (Allen, Demirgüç-Kunt, Klapper & Pería, 2016). Financial services

may also be conceptualized as all formal and informal activities that enable individuals to

save, access credit, insure themselves and transfer money (Akpandjar, Quartey & Abor, 2013;

Shem, Misati & Njoroge, 2012; Armendàriz & Morduch, 2010). Therefore, the term financial

service/s refers to formal financial services; otherwise, the term informal financial service/s is

used. The coverage of services includes general financial services such as saving, credit,

payment, investment, insurance and pension services.

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2.1.3 Commercial Banks and Performance

According to Sanusi (2021), commercial banks are financial institutions that accept deposits

and make loans to individuals, businesses, and traders in order to profit. Apart from

financing, they also provide their customers and clients with services such as collecting of

bills and cheques, protect valuables, and provide financial advice. Tellers, safe deposit boxes,

vaults, and ATMs are all features of a traditional commercial bank. Commercial banks

perform a wide range of banking services. As a result, in order to provide their clients with

quick and user-friendly services, several financial institutions have switched from a

traditional mode of operation to one based on technology.

Banks typically profit from differences in interest rates and fees paid and charged to

customers who deposit and borrow money from the bank (Sanderson, 2013). However,

interest rates not only determine bank profitability, but they also account for a larger portion

of total revenue (Canaday, 2016). Similarly, banks generate revenue from non-credit

operations commissions, services involving securities or foreign currencies, and other sources

such as penalties (Zaripova and Saubanova, 2016).

Banks' roles have recently evolved as a result of new players entering the market, the

emergence of new business models, and the infusion of innovative start-ups (PwC, 2016). As

a result, banks are at the forefront of digital transformation, competing both internally and

externally with fintech firms, venture capital, and non-financial actors vying for financial

services monopolies. Given this tense environment, Kotarba (2017) observed that

digitalization is a critical indicator for the commercial banking sector's survival. Performance

is a vital element in ensuring an organization's proficiency in pursuing its goals and ensuring

its success in both the short and long term. Thus, in the banking system, among other

variables, the use of modern features, risk management, a comprehensive information system,

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and strategic planning are critical determinants of efficient and profitable performance (Ittner,

& Lacker 1998, Zeman, Lukacs, & Hajos, 2013).

Bank performance measurement is a difficult task. Researchers have used various

perspectives to evaluate the performance of banks in different countries and at distinct

intervals However, some of the most reliable indicators for measuring bank performance in

the past have been return on assets (ROA) and return on equity (ROE) (ROE). In their

assessment of bank performance in Saudi Arabia, Ahmed and Khababa (1999) used three

ratios as performance measures: ROE, ROA, and percentage change in earnings per share.

2.1.4 Risk Associated with FinTech in Nigeria

Despite the benefits and opportunities provided by FinTech, several potential risks have been

identified. According to Rabab et al., (2020), FinTech risks can be divided into two

categories: those related to the technology itself and those related to the nature of the

financial service provided. This implies that dealing with these risks is difficult because of

their variety. Risk-mitigation strategies for banks and FinTech firms must be extremely

cautious. Security risk is a common risk associated with the use of FinTech because, as with

any IT tool, security and data privacy are always a concern, especially given that funds are

involved (Rabab et al., 2020). For example, the Consumer Financial Protection Bureau

(CFPB) took its first data security enforcement action in March 2016 against Dwolla, an

online payment platform that was found to provide misleading cyber-security. The company

was fined $100,000 and ordered to improve its data security practices for the next five years

(Hayashi, 2016). Credit card fraud is another unusual security risk that is raising people's

concerns about using digital financial services.

According to Kyari and Akinwale (2020), one of the risk factors confronting banks in the use

of Fintech innovation is the issue of trust, because most clients do not trust the security

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guarantee of the online platform where transactions are carried out, as these can be

compromised and hacked, resulting in the loss of funds and the privacy of valued customers'

data. This clearly demonstrates that significant sensitization is required to expose customers

to the negative effects of banks' use of Fintech in financial transaction processing. Thus,

Kyari and Akinwale (2020) emphasized the importance of training bank personnel to develop

proficiencies that will allow them to facilitate the effective use of Fintech innovation in order

to avoid these risky outcomes which is capable of damaging the banks image.

Tang Kim Leong and Chong Jia Bao (2020) identified perceived risk, operational risk,

security risk, legal risk, and financial risk as risks associated with FinTech to commercial

banks. Similarly, Saleem (2021) identified four types of risk associated with financial

technology system adoption by institutions in his study: strategic risk, operational risk, cyber

risk, and regulatory uncertainty (legal risk). This varying risk is discussed further below:

Strategic risk

According to Owen and Ryan (2017), strategic risk is the type of risk that endanger the core

strategy of financial institutions, including changes that threaten the disruption of original

strategic terms and conditions of financial institutions. Fintech adoption causes disruption in

commercial banks' financial ecosystems, posing a serious threat to strategic goals

implementation. The research documented the program's pillars of strategic risk management.

1) Effectively integrating risk management into the organization and risk management

strategy.

2) Focus on effective tools and methods for detecting impending threats.

3) Fully aware of the implications of that specific change. The study discussed methods such

as strategic risk review, strategy planning procedure, trend analysis, scenario planning, test

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the assumed observations, war gaming, disrupted pattern understanding, and asset and

revenue management. Philippon, D.W. Arner, and Barberis (2016). Fintech adoption causes

creative destruction by introducing new standards that are diametrically opposed to pre-

existing characteristics (J and Buckley, R.P 2015), Mackenzie (2015), Yong Jae Shin and

Yongrok Choi, 2019). Destructive innovation in financial services eliminates the basis for

competition.

Operational risk

According to Barakat and K. Hussainey (2013), operational risk is defined as potential

failures caused by defective and inadequate internal processes, employment, and technical

systems used in Fintech operations. In their study, Hyun-Sun Ryu (2018) documented that the

presence of operational risks is a significant barrier to customer adoption of Fintech. The

Basel II Committee defined operational risk as the cost of failure caused by inefficient

internal processes, people, and systems, as well as by external environmental events. Internal

fraud, external fraud, poor employment practices and workplace insecurity, dissatisfied

clients, product defects and poor business practices, physical asset damage, disruption of

business processes, and structural failures were identified as operational risks in the adoption

of Fintech by the Basel II Committee.

Deloitte (2018) proposed a framework as a possible solution for reducing operational risk.

The framework was split into four sections:

1) Design: creation of operational risk programs for the identification, measurement, and

mitigation of operational risk;

2) Manage: service management for operational improvement;

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3) Master: detection of emerging risks through updated modes and proposal of risk reduction

strategies that support risk decisions; and

4) Transform: integration of experienced governance, risk, and compliance related

technologies.

Cyber risk

According to Cebula and Young (2010), cyber risk is defined as underlying operational risks

associated with information and technical assets that affect the confidentiality, availability,

orcoherence of information or informative systems. Cyber risks affect commercial banks and

Fintech firms in three ways:

1) Confidentiality issues concern the disclosure of information to a third party or data

breaching.

2) Disruption of organizational processes is addressed by availability issues.

3) Integrity issues are caused by incorrect use of systemic information.

According to Hyun-Sun Ryu (2018), both fraudulent activity and hacker activity are

associated with the risk of fintech. This act of intruding results in monetary loss along with

user’s privacy which is a considerable issue while adopting Fintech. Online banking frauds

are increasing day by day in Nigeria and the world at large.

The Financial Stability Review (2017) survey identified the following key Cyber risks

associated with Fintech: financial losses due to data insecurity, computerized system failure

due to spyware and malware viruses, operational deficiencies in financial services and

automated solutions provided by financial institutions, and a negative impact on financial

institutions' reputation.

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According to Prescott and Larose (2016), cyber security risks and information confidentiality

have a strong association and are possible threats/risks for financial technology utilization.

The report highlighted the case of Dwolla, a small level Fintech startup in the United States

that delivers financial solutions to clients through completely protected financial transactions.

But it was all for naught because they lost valuable customer information due to a cyber-

attack, indicating that the company's cyber-security was out of date in terms of customer

requirements. As a result, the US Consumer Financial Protection Bureau fined the company

$100,000 USD (CFPB). According to the State Bank of Pakistan Financial Stability Review

2017, cyber security risks are among the top ten risks currently confronting the country's

financial system. This clearly shows that the use of Fintech over the years has significantly

increased the cases of cyber-theft.

Regulatory Uncertainty (Legal risk)

Unlike banks, the Central Bank of Nigeria (CBN) has not established clear rules and

regulatory procedures for financial technology service providers on how to conduct their

operations. As a result, the FinTech industry is highly volatile and vulnerable. Hyun-Sun Ryu

(2018), Legal risk is defined as a concealed authorized position with no collectively accepted

Fintech regulations. Stringent and unclear financial protocols in the financial sector,

particularly for non-financial firms, were a key barrier to the growth and adoption of Fintech

in the financial markets of Korea and other emerging economies such as Nigeria. (Zetzsche,

2017) Fintech is revolutionizing financial operations and stimulating its rules and regulations

at an unprecedented rate, putting traditional financial institutions' entire financial space at

risk. Rizvi (2018), Lee and Shin (2018), and others have highlighted the challenges that

Fintech faces, such as regulatory uncertainty, technical concerns, and data security concerns.

Because there were no procedures to follow, governing uncertainty was a barrier for Fintech.

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Anagnostopoulos (2018) investigated how fintech and regulatory technology affect regulators

and banks. This paper describes the process disruptions associated with digital finance and

their significance for the financial industry at a time when technological advancement poses a

challenge to banks and regulatory systems around the world. Meja Pejkovska (2018),

investigated the potential negative effects of financial technology on the global financial

sector that provides financial services. The study demonstrated the effect of Fintech firms on

traditional financial firms due to the unsuitable current state of Fintech regulations in the

territories, which has a negative impact on the global financial services industry, including

cyber security risks, compliance risks, and regulatory risks. In this regard, regulatory

authorities must advance appropriate monitoring policies to reduce the risks accompanying

with the use of e-finance.

Credit Risk

Luy (2010) noted that credit risk is one of the risks associated with fintech in Nigeria. Credit

risk arises when a lender is exposed to loss as a result of a borrower, counterparty, or

obligator failing to honor their debt obligation as agreed (Luy, 2010). This scenario is all too

common in Nigeria, where several people have fled with loans obtained from online loan

servicing companies such as Ease Moni, LCredit, and Fairmoney, among others. This is

possible because users can access loans on the platform in minutes rather than having to go

through the usual processes of providing relevant means of identification, as is common in

commercial banks. Such circumstances put financial service providers (Fintech) at serious

risk of being unable to recover their funds because there is no way of tracing the borrower.

According to Colquit (2007), this loss may result from a deterioration in the counterparty's

credit quality, which results in a loss to the debt's value. Similarly, Crouchy et al., (2009)

observe that when a borrower defaults, it affects the lenders' liquidity positions as well as

cash flows (Fintech firms).

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According to Greuning and Brantanovic (2009), it is the greatest risk and threat associated

with Fintech firms in Nigeria. According to Owojori et al. (2011), available statistics from

liquidated institutions show that the inability to collect loans and advances extended to

customers and creditors was a major cause of the distress of Nigerian liquidated banks. The

CBN revoked a number of banking licenses as a result of this. According to the NDIC (2007),

many banks had performing credit ratios of less than 10% of loan portfolios. This occurrence

poses a significant risk to the operations of Nigerian Fintech firms.

Furthermore, because trust is so important in adopting new technologies, FinTech should

prioritize security as one of its top priorities. They must reconsider their previous methods of

protecting themselves and their customers from cybercriminals. For example, FinTech may

consider using dynamic security solutions such as Moving Target Defense (MTD), which

aids in disrupting attacks by constantly moving the points of attack and depriving hackers of

the static targets they are accustomed to breaching. Financial companies can also overcome

the risk of cyber-attack by means of advances in biometrics, one-time (OTP) and code-

generated passwords which has been proven to be more secure than traditional passwords or

security queries. Following trends in security breaks and ensuring personnel are well trained

to deal with sensitive data can also help guard against cyber-attacks.

2.1.5 Factors mitigating against fintech adoption.

According to Davis' (1989) technology acceptance model, a user's intention to adopt a new

technology is determined by its perceived usefulness and ease of use (TAM). This means that

a company or individual would adopt new technology if it was perceived to improve

performance and require less labor and time to complete a task. The firm's evolutionary

theory emphasizes micro-level technological capability because of in-house technological

competencies and complex interactions among individuals, firms, and organizations within a

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specific socioeconomic and institutional environment (Iammarino et al., 2012; Nelson and

Winter, 1982). This theory defines technological capabilities as the knowledge and skills that

businesses use to acquire, adapt, improve, and create technology in order to achieve long-

term innovative capacity (Akinwale et al., 2018; Cerulli, 2014; Zahra and George, 2002).

Adoption of financial technology necessitates banks viewing it as a viable option for

improving performance and customer relations, as well as an opportunity to develop internal

and external relationship capabilities.

Several factors have been identified as preventing commercial banks in Nigeria from

adopting fintech. The first concern is one of regulation. Banks are concerned about how

Fintech adoption and use will affect regulation and supervision of their businesses. Fintech

risks have been identified and appropriately addressed by regulators and supervisors.

According to KPMG (2019), the regulatory response to Fintech is shifting from high-level

principles to higher-level principles, as regulators rely on existing regulations and rules to

develop more detailed applications of new rules and guidance to specific aspects of Fintech.

Rabab et al. (2020) define adaptability as the ability to adapt to new technological

advancements. Technology and digital innovations are critical impediments to bank adoption

of Fintech. By transforming how financial institutions create value and deliver products and

services, technological innovations can open up new business opportunities. Keeping up with

technological innovations, on the other hand, is a challenge in and of itself. FinTech can

make financial services more accessible while also increasing competition from new players.

Traditional banks will have to react to disruptive technological innovations, face rising

competitive pressure, and adopt new strategies in order to survive.

Furthermore, many FinTech applications are based on new technologies, making it difficult

to integrate FinTech applications with existing systems (Lee & Shin, 2018). Traditional

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banking processes in many areas may become incompatible with new technology without a

solid integration plan and experience. Outdated IT systems are a major source of concern for

global bankers because they can cause blind spots. Blind spots are areas where IT does not

have complete visibility into what is going on the network or how applications are

functioning. Failure to invest in secure active systems can result in significant financial loss

while also increasing the risk of cyber-attack.

2.2 Theoretical Review

The major theories backing the advent of FinTech are the innovation theories. These theories

will be considered in this section of the study.

2.2.1 Innovator’s Solution Theory

Christensen and Taylor (1997) as cited by Kariuki (2010) advanced the theory based on the

analysis of the major reason behind firms failing is the lack of ability to innovate. The major

thrust of the theory is that big firms are not so oriented to tackle the problem of disruptive

innovation as such disruptive ideas may serve as a threat to management, power structure and

corporate culture. As a result, existing forces within markets and firms tend to resist

innovation that may come as a result of FinTech. However, the proponents of this theory

assume that firm managers should establish a wall between the oncoming innovation and the

existing structure and hierarchy. In this case, an independent business unit can be established

to provide a safe environment for innovation (Kariuki, 2010).

2.2.2 Disruptive Innovation Theory

This theory as proposed by Christensen in 1997 assumed that in an ever-changing world,

innovation is the best key to competitive advantage. Although, innovation increases the rate

of uncertainty and market pressure, and as a result, the more radical the type of innovation,

the more difficult it is to easily conclude on its market acceptance, disruptive innovation

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improves the growth of any company and lays down a new trend in the market. These

theories demonstrated how business adopt new technologies for competitive advantage. In

essence, how mobile payment, internet banking and POS transaction is use for effective

financial service.

2.2.3 Modernization theory

Among the commonly applied theory for nation-building is the modernization theory. After

the Second World War, many scholars responded to nation-building and institution-building

with modernization theory (Agbo, 2005). However, when Third World colonies began to

demand political independence, the Western world became interested in modernization. This

interest was primarily for Western politicians to show that the new countries that became

independent could maintain development if they embraced Western strategies (Webster,

1990; Harrison, 1988;). Modernization theory arose in the early 1960s, primarily following

David McClelland's (1961) work who was a social psychologist that attempted to explain

differences in social and technological advancement between societies. However, proponents

of modernization theory argued that society introduces innovations in education, develops

infrastructure, institutions other economic establishments to mobilize capital, widens the

scope of internal and external commerce, and encourages investment and establishment of

highly modernized manufacturing companies (Rostow & Rostow, 1990).

According to modernization theory, information and technology transfer that is simple,

straightforward, context-free, and doesn't upset the social and cultural norms already in place

in poor countries is all that development requires (Herkenrath & Bornschier, 2003). The fact

that much of the knowledge and technology essential to national development and

competitiveness is found in the realm of proprietary knowledge creation also appears to be

overlooked by modernization theory. Based on this assumption, therefore, FinTech is an

essential requirement for national development.

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2.3 Empirical Review

Between 2005 and now, Financial Technology had attracted lots of interest, numerous

research works has been carried out in the advanced and developing countries. Oladejo and

Adereti (2010) observed that the 1990s witness the proliferation and hyper growth of internet

and internet technologies, which together are creating a global and cost-effective platform for

business to communicate and conduct commerce. Despite the enormous investment in IT

during recent years, demonstrating the effect of such on organizational performance has

proven extremely difficult.

Joachim (2017) focused on exploring the determinants of the use of financial services in

Tanzania with respect to the role of household behavioural factors. Both quantitative and

qualitative research methods were employed to achieve the research objective. The empirical

findings revealed that behavioural factors matter for the use of financial services. Firstly, the

examination of household financial experiences on a sample of 30 households through the

application of financial diary methodology revealed a variety of household financial

experiences that highlight the necessity of financial services to households. Secondly, despite

the fact that most households do not use financial services, it is found that households hold

positive beliefs about financial services for saving facilities, security, finance, money

management and improving economic well-being. Thirdly, structural equations models

indicated that attitudes towards financial services, perceived behavioural control and

subjective norms significantly impact the intention to use financial services. Perceived

behavioural control was observed to prominently influence the use of financial services.

Ouma, Odongo and Were (2017) examined whether the pervasive use of mobile telephony to

provide financial services is a boon for savings mobilization in selected countries in sub

Saharan Africa. The findings showed that availability and usage of mobile phones to provide

20
financial services promotes the likelihood of saving at the household level. Not only does

access to mobile financial services boost the likelihood to save, but also has a significant

impact on the amounts saved, perhaps due to the frequency and convenience with which such

transactions can be undertaken using a mobile phone. Both forms of savings, that was, basic

mobile phone savings stored in the phone and bank integrated mobile savings are likely to be

promoted by use of mobile phones.

Theodora (2017) investigated the trends and determinants of household use of financial

services in Ghana. Using the Ghana Living Standards Survey (GLSS) data and the Global

Findex data, the study examined the trends in saving and borrowing by individuals from 1991

to 2014. Furthermore, using the Finscope Ghana 2010 data, the study employed Multinomial

Logit regression in examining the factors that influence individuals’ decision on saving,

borrowing and insuring using formal versus informal institutions. A Heckman Probit

regression model was employed in the analysis. The results showed a relatively stable trend

in the proportion of individuals that saved from 1991 to 2006. However, from 2006 to 2013,

there was a large increase in the proportion that saved. There was an oscillating trend in the

pattern of borrowing from 1991 to 2014. Over the years, there was a general decline in the

proportion of individuals that borrowed from informal institutions, and an increase in the

proportion that borrowed from formal institution.

Godgift, Charles and Obakayode (2018) examined the impact of Financial Technology in the

Operations (Payments/Collections) of SMEs in Nigeria. The study conducted a survey of 120

Small and Medium Scale Enterprises across the four (4) identified geo-political zones in

Lagos state. These SMEs with employment ranging from 2-10 employees in the fashion,

educational, online merchants, pharmaceuticals, automobile, cosmetics, agro-allied, printing,

bakery, eatery, I.T. firms and retail enterprises. This was done in such a way that the four

axes were represented, each axis having thirty (30) SMEs. One hundred (100) Questionnaires

21
were found useful for the purpose of the study representing 83% of the total questionnaire

distributed. The data was analyzed using inferential statistics. The study revealed that

Financial Technology (FinTech) has great impact on the economy, and therefore contributing

positively to national development. It also discussed the benefits and risks of embracing and

investing in FinTech.

Similarly, Simon, Michael and Thomas (2019) used interpretive in-depth case study research

to study how a European financial services provider has formulated and implemented a DTS.

By focusing on the underlying processes and strategizing activities, the study showed that

digital strategy making not only represents a break with the conventions of upfront strategic

information systems (IS) planning, but revealed a new extreme of emergent strategy making.

Specifically, the study concluded that a DTS is continuously in the making, with no

foreseeable end. The study model showed that the crafting of a DTS is a highly dynamic

process involving iterating between learning and doing.

Chang, Baudier, Zhang, Xu, Zhang and Arami (2020) described the impact and revolution of

FinTech and Blockchain in the financial industry and demonstrates the main characteristics of

such technology. The study presented three critical challenges as well as three ethical issues

about using Blockchain technology. In order to have a good understanding of the industry, a

qualitative method was adopted, and sixteen experts were interviewed. It was identified that

knowledge hiding in Blockchain was common and the rationale behind was analyzed using

the TPB (Theory of Planned Behavior) approach. The analysis results revealed that

knowledge hiding was due to affective, behavioral and cognitive evaluations.

22
 CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Research Design
Ex-post facto research design was employed for the study which is based on historical data.

Data for the study was employed from the annual financial statement of the 3 selected banks

which are First Bank Nig. Plc, Access Bank Plc, and Zenith Bank Plc. These banks were

purposively selected because they were in the green book of Central Bank Nigeria Plc

(NDIC, 2014). The selection was made because of the nature of both the dependent and

independent variables of the study. The study used point of sales utilization, automated teller

machine (as a proxy of financial technology) and mobile phone transaction as independent

variables while financial technology as dependent variable. The study use annual time series

data from 2005 to 2024.

3.2 Model Specification

This research set out to examine the rise of financial technology and its effect on banking

sector in Nigeria. The study adopted a model used by Joachim (2017) who did a similar work.

Thus, this study specifies the following multiple regression equation.

FINTECH = f(POS, ATM, MPT) ………………………………………………………. (1)

Mathematically, this functional relationship can be specified in linear form as

FINTECH = β0 + β1POS + β2ATM +β3MPT + ut …………………………………..…...(2)

BSD = f(POS, ATM, MPT)………………………………………………………………(3)

BSD = β0 + β1POS + β2ATM +β3MPT + ut …………………………………..…………(4)

Where

FINTECH = Banking sector development

POS = Point of sales

ATM = Automated teller machine

MPT = Mobile phone transactions

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ut = Error term

β0 = constant coefficients

β1 = coefficient of point of sales

β2 = coefficient of automated teller machine

β3 = coefficient of mobile phone transactions

3.3. A priori Expectation

The study expected the relationship among the variables to follow the following patterns:

β1 >0, β2 <0, β3 >0

3.4. Sources of Data Collection

The data used in this study was collected from secondary sources. The instrument utilized for

the collection of secondary data is documentation. Documentary data was collected via the

Central Bank of Nigeria (CBN) Statistical bulletin. The study utilized the secondary source

because it provided a basis for purposeful research work and also gives a direction for the

research work.

3.5. Techniques of Data Analysis

The parameters of the model will be estimated using auto-regressive distributed lag (ARDL).

24
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