By Kathy Gibson – South African banks are in danger of becoming less profitable — and less relevant — unless they find new and innovative ways of serving their retail customers that compete with new, mostly digital entrants.
This is the top-level finding from a new study from PwC Strategy, “The Future of Banking: A South African Perspective”, that examines how banks can contribute to shaping the future, consider and rethink their business models and processes, and re-invent the organisation.
The “big four” local banks are facing increasing competition from new players that are employing digital technologies to change the state of the financial services industry.
Digital innovation is just one of the drivers behind banking industry evolution: regulatory changes, economic pressures and technological advances are all playing a part in raising customer expectations.
“The evolution of technology and increased customer expectations combines with the emergence of disruptive competitors, is placing significant pressure on the banking industry to implement new strategies to remain relevant in the future,” says Jorge Camarate, partner at PwC South Africa.
In fact, two new entrants have been granted full banking licences in South Africa just this year, demonstrating the level of competition that the existing banks can expect in the near future.
Non-financial players are also making their mark in the industry; and new entrants are able to deliver low-cost services without making major financial outlays. Some of these are industry-specific players leveraging their customer bases to add banking and other financial services.
Meanwhile, the traditional big four banks are making moves to transform themselves to address changing customer, regulatory and technology needs.
“If nothing changes, the banking sector will end up more fragmented,” Camarate explains. “You will find new entrants capturing parts of the market from the big four.
“However, we recognise that the universal banks are in a position to counteract and continue growing.”
PwC believes the incumbent banks have a major advantage in that they are able to serve a big chunk of the retail and corporate banking customers.
In retail banking, PwC thins incumbents should accelerate transformation to incubate solutions outside the legacy organisation; adopt new ways to work and start-up accelerators; and leverage data and analytics to strengthen insights into high-value customers.
Camarate points out that the banks are trying to leverage these solutions, with different levels of success. However, most of the big banks have fragmented systems that need to be integrated. “It’s difficult to have a single view of the customer if the systems are fragmented.
“Do the banks understand that they need to change? Yes. Our view is that they need to accelerate the pace of change – especially in the retail banking space.”
In business and corporate banking, PwC advises the banks to integrate solutions to service clients’ entire set of needs. These would include cross-border banking, debt financing and transaction processing at scale; and develop big data analytics capability to empower relationship managers and provide value-added solution to client.
The big challenge, Camarate adds, is for incumbent banks to lower their cost-to-income ratio.
“Our view is that the banks should be pretty ruthless in identifying the costs and infrastructure that are not adding value, in order to reduce costs and achieve the required value.
“It’s not cheap to create the infrastructure and capabilities to succeed,” he adds. “But there are many things that can be potentially eliminated or downsized to create the headwind to make those investments.”
PwC believes banks need to look at their business ability and capability choices through process rationalisation and zero-basing capabilities. The universals banks can do this by changing their business operating models, outsourcing and footprint optimisation. This can be achieved by process excellence, spans and layers, digitalisation, and strategic supply management.
Banks don’t have to focus on defensive strategies, however, and could look at growing into other business areas.
“Insurers and others are making a move into banking,” Camarate says. “But two can play at that game. The same way an insurer can move into banking, the banks could expand into adjacent financial services, with the benefit that they have customer data, a good understanding of the customer and the ability to offer simpler products in a convenient way.
“If you bank with me and I am good mining your data, I will have a pretty good understanding of your risk profile. Having that understanding would allow me to offer risk-based products that are pre-underwritten. These offerings could be short-term, life, investment management and more.
“In our experience, most universal banks are looking at that. If they accelerate transformation and mine customer data, there is no reason why they wouldn’t be successful.”
A hot topic at the moment is cryptocurrencies, and what their role will be in banking, if any.
Camarate believes that the jury is still out on the long-term effect of the cryptocurrencies themselves, but the blockchain technology underpinning them could be very relevant.
There has been speculation that blockchain might disintermediate the banks, but he thinks it is more likely to help them improve their day-to-day activities. “I am of the view that the banks will learn to use blockchain in their businesses,” he says.
Examples of business processes enabled by blockchain include cross-border transactions and share trading where the blockchain ledger will enable transactions to be traded an clared instantaneously.
The cryptocurrencies themselves are probably experiencing something of a bubble, Camarate adds, although he won’t offer an opinion on where that bubble is, or what the possible ourcome might be.
Blockchain could be one of the digital technologies that will enable digital banking, Camarate says.
However, he doesn’t believe we will see full-scale digital banking for some time. “There will be a segment of the population that will move to digital banking services, but I don’t think it wil be the majority.”
Having said that, he points out that either the universal banks or new entrants can achieve good profits by serving a small percentage of customers.
“Digital is a not a separate model, but a way to service customers in a different way,” he adds. “There will still be a need for branches. But the banks can use digital to help with inefficiencies, simplifying processes and focusing on what is really valuable.”