I have the unique opportunity to visit numerous countries every year, speaking at events that bring together thousands of financial executives for the purpose of sharing the latest trends on the impact of banking transformation. While many of these events cover global trends, they also provide an opportunity to gain a perspective on the impact of regional trends.
Recently, I participated in an event in Cape Town, South Africa – an area where five major banking organizations have the advantage of serving a sizable share of the country’s retail and corporate banking customers. Standard Bank, FNB, ABSA, Nedbank and Capitec have continued to deliver modest earnings growth despite an economic environment that is far less robust than economies in many other regions of the world. Part of this earnings growth can be attributed to the ability of these major banks to leverage modern technologies to move transaction volume to digital channels.
Making the digital transformation process even more imperative for legacy banks in South Africa is that non-traditional digital players benefit from a friendly regulatory environment promoted by the local banking regulator, the South African Reserve Bank (SARB). During the past two years, the SARB has worked with banking organizations on the application of distributed ledger technology (DLT), created a real-time payments environment. In addition, SARB has been working on the creation of a “regulatory sandbox” to test new business models and solutions in a controlled regulatory environment.
According to PwC, “banks are becoming more strategically focused and technologically advanced to respond to customer expectations, while deploying defensive strategies to protect market share against traditional competitors and new entrants. As such, the importance of product and channel innovation and developing new solutions that take advantage of this progress – in data, advanced analytics, digital and new delivery platforms – has never been more important.”
Some of the trends seen in South Africa in response to economic and competitive pressures include:
- A focus on delivering more personalized experiences driven by use of more granular data and advanced analytics.
- A movement towards regulatory acceptance of open banking, providing consumers greater control over the use of their data.
- Increased levels of innovation by banks and fintech firms, as the expectations of consumers and government drive change.
- A doubling-down on optimizing back-office efficiencies, using automation and modern technologies to simplify core banking operations and reduce operational complexity.
- An increasing commitment to privacy and security as cyber risks continue to escalate faster than solutions to mitigate this risk.
While some may say that the above trends are similar to those seen in other regions, the difference is the level of urgency caused by a weaker economy (where margins are increasingly under pressure) and a population that has a large percentage of unbanked consumers (estimated at around 11 million).
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Increased Pressure from Fintech Firms
Over the last three-to-five years, there has been a large number of digital-only “challenger” banks launched globally, with competition in South African following this trend. New players, such as TymeDigital, Discovery Bank and Bank Zero, have been granted new banking licenses (a mutual banking license in the case of Bank Zero). At the same time, a relatively new entity, Postbank, has been waiting for final governmental approval to compete, leveraging the 1,500+ Post Office branches across South Africa. Postbank would offer saving accounts and deposit capabilities similar to a traditional bank.
For the most part, these new digital organizations differentiate from a customer experience perspective, focusing on leveraging the benefits of consumer insight, product innovation, enhanced engagement and value-added services. For instance, new South African entrant, Discovery Bank, leverages a market-leading rewards program (Vitality) to differentiate its banking proposition to its mass affluent target market.
Another advantage fintech firms have compared to legacy organizations is their agility and ability to create new solutions in a matter of weeks or months as opposed to years. This is possible due to the lack of needing to accommodate legacy systems and the South African’s regulatory body encouragement of adopting agile test-and-learn approaches with innovation “sandboxes.”
Finally, many fintech firms in South Africa are capitalizing on distrust and dissatisfaction with traditional banks, focusing on building large numbers of enthusiastic early digital adopters, who are willing to try a new way of banking. As numbers of users grow, the “social buzz” allows smaller fintech firms to forgo the high cost of marketing until scale can be established.
Of special note is that while fintech start-ups continue to be impressive in South Africa, startup activity in other African countries, such as Uganda, Ghana and Egypt is exploding, benefiting from favorable governmental support and populations that are significantly less served by traditional banks.
Using Innovation to Combat the Fintech Challenge
The large legacy banking organizations in South Africa have the same challenge as traditional banking firms globally – how do we respond to competition that does not have the same challenges of older operating systems or a culture that is more risk adverse than the agile fintech firms? Not unlike the response recommended for legacy banks worldwide, it is imperative to create a much more progressive innovation strategy and business model that is responsive to the digital age. This may include a strategy of collaborating with the same fintech firms that are encroaching on existing business and customers, but there may not be a viable alternative.
According to PwC, “Successful innovators consistently employ a range of formal and informal levers including vision, structure and performance management. They also use positive tone from the top in communications, to embed a culture that promotes agility, measured risk-taking and innovation across the organization.” Legacy South African financial institutions (and traditional banks and credit unions globally) must leverage scale, driving digital transformation through new business models for the benefit of consumers.
The regulatory body in South Africa, as in many regions of the world, provides impetus for change for both new fintech firms and old, established banking organization, by providing a platform for innovation and competition. In addition, South Africa has supported targeted efforts to develop the talent necessary for innovative growth. For instance, the University of Cape Town now offers a Master of Science in Data Science of Financial Technology, designed to develop talent to serve the new and existing financial ecosystem.
Unexpected Response to Digital Transformation
Not everyone is pleased with the move to digital banking. Recently, South Africa’s most prominent financial union planned a national bank strike because of the laying off of employees in recent years due to digitalization. The total shutdown would potentially include between 40 000 – 70 000 finance sector employees who would shut down major components of the banking system, including cash machines, digital banking services and even branches. Will this be a trend elsewhere in the world?