The financial services sector is in the midst of a digital revolution. For Africa and other emerging markets, this presents a golden opportunity to re-invent their approach to banking.
Whether it’s increasing pressure from regulators or the emergence of fintechs displacing traditional branch banking, the financial sector faces many challenges. To meet them, a growing number of institutions are turning to digital solutions.
Established markets, like the US and the UK, face an uphill battle to adapt. With decades of tradition behind them and legacy technology infrastructure to contend with, evolution is slow and expensive. Emerging markets don’t have this problem. For them, the path to business transformation in banking and enhanced banking performance looks very different.
The Current State of Play
Africa is one of the key emerging markets and is home to seven rapidly-growing megacities:
- Accra (Ghana)
- Cairo (Egypt)
- Johannesburg-Pretoria (South Africa)
- Khartum (Sudan)
- Kinshasa-Brazzaville (The Democratic Republic of the Congo and Republic of the Congo)
- Lagos (Nigeria)
- Nairobi (Kenya)
Sub-Saharan Africa has a high youth population that continues to fuel rapid urbanisation across the continent. They’re keen to move away from traditional rural communities in search of the opportunities, improved quality of life, and excitement afforded by the continent’s growing cities.
Despite the impact of COVID-19, economic indicators remain positive. Recent research reveals that the virus’ impact on banks was less severe than originally expected. Unlike developed markets which saw Return on Equity (RoE) dip below 1.5% in the wake of the pandemic, RoE has remained above 7% in Africa and is expected to reach pre-pandemic levels within three years. The latest projections also suggest that economic growth will be distributed more evenly in the years ahead and will no longer be dominated by the “big 5” African nations: Algeria, Egypt, Morocco, Nigeria, and South Africa.
What are the Key Drivers of Business Transformation in African Banking?
1. The Emergence of Fintechs
Fintechs and neobanks pose a significant threat to the financial sustainability of traditional banking models. Platform-based services allow them to be more agile and responsive to customer needs and market demands. For example, they can offer peer-to-peer lending and digital payments that enable customers to manage their finances directly from their mobile devices.
The convenience of this approach has put banks under greater pressure to create new products, improve their services, identify alternative revenue streams, and adapt their business models.
2. Evolving Regulations
Prudential regulatory reporting is already a time-consuming and resource-intensive process—particularly if you continue to do it manually. But as global regulations evolve, central banks demand more frequent and complex records, and this has put financial institutions under even greater pressure.
To maintain healthy margins and avoid the financial penalties of non-compliance, banks have begun to re-evaluate their approach and consider how automation can help them fulfil their obligations.
3. Overbanked and Underbranched
Small, regional banks make up the majority of the African financial community. For every multinational of Standard Bank’s stature, there are two or three small-medium-sized operations like Equity Bank, KCB, and Sidian Bank. Kenya alone has 44 licensed banks and this is only expected to increase as foreign institutions expand their presence across the continent. Despite this, only 48% of the African population will have access to banking services by 2022, due to the lack of accessible branches.
With fewer resources, smaller institutions must embrace more flexible options to serve their customers or risk becoming absorbed into larger entities.
Digital Lies at the Heart of Transformation
Overhauling processes is all the more challenging when you can't see the road ahead. When we talk about business transformation in banking, internal and external visibility is essential for the sustainability and long-term growth of the sector.
To refine your internal processes, you must first identify the biggest pain points. Does your finance team spend too long on regulatory reporting? Do customers have access to reliable support? For a more holistic view, it’s important to understand the wider industry trends and macroeconomic factors that affect the region in which you operate. This helps you identify and mitigate threats, as well as capture emerging opportunities.
Democratise Your Tech
Technology shouldn’t be confined to your IT department. By giving businesspeople access to the right tools, you empower them to become more strategic and productive.
For example, a business intelligence platform enhances financial performance in your institution. It allows your finance team to start extracting meaningful insights from your data, so they can contribute directly to future business decisions.
Collaboration with other financial institutions allows you to pool resources and reverse a common trend in emerging markets: that the poorest often pay the most for financial services.
This could be through the establishment of shared branches that turn low traffic branches into dedicated service centres (something we’ve already seen in South Africa) or enhanced agent networks. These and similar measures help to enhance service levels in rural communities that don’t have access to the same level of financial services as their urban counterparts.
Adapt to Changing Customer Expectations
Africa has one of the most exciting financial sectors in the world. People across the continent have fully embraced the concept of mobile money and the market is dominated by Mobile Network Operators that act as de facto financial institutions. As such, African customers have different expectations from those in Europe or the US.
They expect financial service to be simple, accessible, and convenient. They’re not tied to traditional banking models and know they can get many of the lending and savings services they need from fintechs and neobanks. To stay competitive, you need to rethink the products and services you offer, as well as your delivery methods.
Innovation Starts at the Top
Policymakers and central banks have a crucial role to play in the business transformation of the banking sector. They must become agents of change, promoting innovation around banking infrastructure to help financial institutions adapt to changing customer expectations.
We know from experience that a strong financial sector is essential to encourage economic growth. And with the right tools, you can provide these crucial services and remain competitive in an evolving marketplace.