Digital d isruption of banking has only just begun

UNTIL fairly recently, retail banks in South Africa had it easy. They had a captured market and they became bloated and sluggish and resistant to change.

But we’re now well into the digital era, which is forcing major disruption of the industry, and while they certainly have the resources at their disposal to undertake the necessary changes, I sometimes wonder whether some of the large banks have it within their culture to adapt to what is a more fluid, more customer-centric and far more competitive environment. Bankers in the traditional sense are not the most entrepreneurial thinkers on the planet – after all, starting a business or steering a business in a new direction involves risk, and bankers are highly risk-averse.

Not that many years ago, South African consumers essentially had a choice of four banks: Absa, First National Bank, Nedbank and Standard Bank. Many smaller banks and what were known as building societies had been gobbled up or had fallen by the wayside. If you remember the United and Allied building societies (where as a child I had my first savings account), you must be at least as old as I am.

Then along came Capitec in the 2000s, run not by bankers, but by businessmen who had their roots in the liquor trade. These guys jolted the traditional banks out of their “we'vealways-done-things-that-way” malaise, grabbing existing market share at a breathtaking rate and doing far more than the “Big Four” to reach the previously unbanked, through simple, easy-to-understand products and a user-friendly platform.

Now, some 15 years later, after finally beginning to catch up to Capitec, the Big Four are faced with more competition and disruption from the new digital banks. And it’s not only from new banks, but online aggregation platforms, diverse digital payment methods and cryptocurrencies. It’s enough to make any Gringott's goblin run screaming down Diagon Alley tearing out his remaining strands of hair.

Digital banking study

At the end of last year, the Financial Sector Conduct Authority (FSCA), which is now in charge of the market conduct of banks, released a report, the Digital Banking Research Document 2021, by Kagiso Mothibi and Awelani Rahulani.

Mothibi and Rahulani pinpoint various technologies that are powering digital banking, including big data and artificial intelligence, cloud computing, intelligent automation and robotics processes, application programming interfaces, and biometrics for verifying identity.

Assessing the global landscape before delving into the local banking scene, the authors identify five different types of banking entities, some of which have not yet arrived in South Africa: new “challenger” digital banks (for example, Tyme Bank and Bank Zero); neobanks (digital platforms that partner with traditional banks to offer bank–licensed services); beta banks (digital subsidiaries of established banks); non-banks (platforms that operate without a banking licence, offering financial services by other means); and digitised incumbents (established banks “pursuing total digital transformation”).

Some of the global statistics are fascinating.

The authors quote a 2021 McKinsey report, which found that nearly nine in 10 consumers across the emerging and developed markets “are using digital banking actively and most of them are open to purchasing more banking services through digital channels”. China and the Far East have seen the widest adoption of online banking services: the region has 41% of the global market of about two billion active users, against Europe’s 19%, the

US's 12%, and sub-Saharan Africa's 3%.

Zooming in to South Africa, and quoting a 2019 Finscope survey, 23% of the banked population used cellphone banking in 2019, up from 19% in 2018.

And more people were using an app for banking than a bank’s website: 12% of bank customers used their bank’s app (up from 8% in 2018), and 9% used internet banking (up from 7% in 2018). Judging by the increase year on year, these percentages are probably a fair amount higher by now.

The report also details findings from a survey of banks carried out last year by the FSCA.

Mothibi and Rahulani say: “Our findings show that the digital-banking market in South Africa is growing. This is because of the benefits these digital banks are offering to customers. Digital banking introduced by incumbents provides easy access to services, while digital banking offered by challengers has more innovative features that traditional institutions do not normally offer.

“Despite many South African banks making significant strides in providing a great digital experience, the digital banking landscape still has major room for improvement. For example, studies indicate that digital-only customers continue to report the lowest levels of satisfaction in the banking sector in South Africa.

“There is a concern among South Africans over the security of their online banking activities and a lack of digital literacy and absence of infrastructure in some communities to support digital banking.”

Key considerations for banks were:

The move to digital banking requires commensurate literacy and consumer education.

Increased reliance on data requires enhanced data-privacy and dataprotection practices.

A commensurate increase in cyber-fraud risks requires enhanced cybersecurity.

The intensified use of big data to serve customers’ needs must be underpinned by an ethical framework that ensures customers are treated fairly.

Dependency on third-party service providers and fintech partners requires a framework that mitigates inherent risks.

Digital banking comes with technical operational risks such as system failure, which require back-up solutions.