South Africa’s banking sector is undergoing a process of unprecedented change brought about by the disruptive impact of fintech challengers and the emerging technologies powering their business models.
By Andy Wilson, intelligent digital lead at PwC Africa
Before this specific challenge, traditional banks were contending with the impact of the 2008 global financial crisis, and sluggish domestic growth, which put severe pressure on profitability and led to an extreme focus on costs. This challenge is not unique to South Africa as PwC’s 2019 report, The productivity agenda: moving beyond cost reduction in financial services, explores in more detail.
Survival: The name of the game
The fierce competition from the sophisticated fintech challengers, who innovate in highly specific service areas that traditional banks’ legacy infrastructure and siloed systems struggle to keep pace with, is making the landscape even more challenging for banks.
Banks have largely undergone a process of cost-reduction by means of automation, offshoring and investment into new technologies. Some South African banks have started branch-closing programmes – thereby starting to deliver the business case for decades of investment in digital channels. US and UK banks are much further down this road.
The focus has recently turned to increasing productivity and bringing performance in line with investor expectations by building internal capacity and acquiring the skills and tools needed to boost productivity.
Among the strategies adopted by traditional banks for survival must be closer cooperation with the fintech players. While bank-fintech collaboration has often been stymied by a cultural disconnect between the tie-adorned banking execs and the trainer-wearing whizz-kids driving fintech firms, this is changing fast. Today banks are far more open and able to collaborate with a broad spectrum of fintechs that solve real problems, or capitalise on great opportunities, within the banking value chain.
South Africa’s thriving fintech sector is putting pressure on a broad range of traditional banking revenue streams, either by increasing the convenience and improving the experience of using the service – often through the use of a mobile app – or by completely disrupting the business model.
Fintechs are not going head-to-head with banks at a large scale – instead, they’re applying agile use of technology to rapidly innovate in highly specific value-adding aspects of a service area, steadily eroding the incumbent banks’ dominance through more efficient, customer-centric and personalised services.
Banking execs are seeing the impact of these fintech unicorns on their income statements, and there is greater urgency to modernise traditional banking operating models to better integrate fintech innovations in their service offerings.
PwC’s 2018 report on digital disruption in the local banking sector, A marketplace without boundaries 2.0: Digital disruption in the South African banking sector, notes that fintechs and new digital banks are finding the new regulatory environment established by the South African Reserve Bank (SARB) more business friendly.
In 2018, the SARB worked with the banking sector in a discovery process for the application of distributed ledger technology, blockchain, as well as the modernisation of the payments ecosystem as part of the real-time gross settlements renewal project.
There are further encouraging signs that the SARB may create a ‘regulatory sandbox’ to enable innovative business models and solutions to be tested in a controlled regulatory environment. This could hasten fintech innovations that can completely replace incumbent products and services.
If banks are to modernise their business models to better serve their customers and meet their high expectations for convenience and value – their operating models must change.
Product management needs to replace project management. To date, innovation has been pushed to specific departments or channels within the bank. But leading global banks have shown what can be done when their operating models are modernised to drive agility.
Changes in regulation are also levelling the playing field. Now, with open banking, and (Payment Services Directive) PSD2 regulation (which forces banks to share customer data with third parties under their consent) there is an arms race to see who will leverage this fundamental change in landscape.
One of the advantages banks have over the fintech challengers is massive and highly invested customer bases. South African traditional banks have spent years building strong and trusted brands. Can the banks leverage this trust and reach while integrating innovative fintech solutions into their value chain, giving them the scale they strive for while delivering immediate convenience to customers?
Banks have an opportunity to build platform businesses, and not only from a business perspective. They should develop a commercial model that taps into the API-type economy made popular by start-up and global technology companies, enabling the easy integration of best-of-breed solutions from fintech partners. Banks should also prioritise the use of customer data insights as a driver of a broader platform play.
While traditional banks make the bulk of their money by charging a fee for banking services, the new breed of digital banks uses the insights from processing customer banking transactions to develop highly accurate and individualised customer insights that can inform the development of a broader ecosystem of products and services, which is a fundamentally different business model.
There needs to be a cultural shift within the traditional banking sector to ease the integration of fintech innovations, which will also enable the banks to develop and introduce new products and services.
It is not only banks’ operating models that are not adequately suited to modern demands. The management culture is still all too often focused on preserving traditional revenue streams instead of driving the digital transformation needed to succeed in the digital economy. It is difficult to implement anything like this when each department operates in a silo that only looks after its own revenue targets, with some cases requiring revenue targets to be adjusted to zero to deliver a ‘big picture’ new offering. This prevents great value propositions from becoming embedded in the organisation, with innovation getting stifled or halted entirely regardless of whether it was developed in-house or by a fintech.
Banks should therefore seek partners that can help them evaluate different operating models, understand the correct leadership style for that business, break down internal silos and develop an integrated blueprint on how to engage with fintechs.
By modernising their approach to product development and becoming more agile and embracing the platform economy, banks can create ecosystems in which customers seamlessly interact with a broad range of value-adding conveniences developed by themselves and fintechs alike.
Banking will never be the same again
While traditional banks will not be going anywhere, anytime soon, the fintech revolution is likely to continue. One of the areas where the digital entrants will be able to establish an almost unassailable advantage over traditional banks is in their ability to launch new solutions much quicker than their traditional counterparts, in periods of three to six months at most.
Unconstrained by legacy systems and often built around off-the-shelf, easy-to-customise platforms, digital banks should be able to launch new product features, price plans and channels through a limited number of design, development and testing sprints.
The future of the fintech industry is bright. There is a need for its agile and convenient services as the financial services sector expands and evolves. We are likely to see increased participation by non-traditional providers from across industries, as players with sizeable customer bases look for different avenues to grow their share of customers’ wallets through competitive banking offerings.
To stay relevant and engage with consumers in the digital age, traditional banks must fundamentally change their culture and operating model, accelerate transformation by incubating outside the legacy organisation, leverage fintech partners and deploy new ways of working. This will result in inspired and empowered employees delivering a continuum of digital transformation into the future – thereby continuously improving the business.