SOUTH Africa’s banking industry is rapidly evolving in response to regulatory changes, economic pressures, technological advances and innovation in digital banking.
The evolution of technology and increased customer expectations combined with the emergence of disruptive competitors, is placing significant pressure on the banking industry to implement new strategies to remain relevant in the future. The growth of unexpected players emerging in the financial services industry has created what has been called a “marketplace without boundaries”. Non-traditional players are increasingly exploring new opportunities, enabling them to challenge incumbents and continually change the state of financial services in SA.
In an analysis by PwC, The Future of Banking: A South African Perspective, we look at how South African banks can contribute to shaping the future, consider and rethink their business models and processes and reinvent. Digital solutions, low-cost operating models and supply-chain integration have moved to the top of the business agenda, with non-traditional players pursuing various aspects of these trends.
In response to the growing threat in the retail banking industry, the “four universal banks” (Barclays Africa, Standard Bank, Nedbank and FirstRand) are progressively finding new ways to enable them to stay relevant in the market. The four have the advantage of being able to serve a sizeable share of SA’s retail business and corporate banking customers.
They will need to develop strong data analytics capabilities, develop new solutions and find efficiencies in their legacy businesses to fund the large-scale transformation effort required. According to PwC Strategy’s analysis, there are three trends developing in the market that could impact the banking landscape, as well as the profitability of these banks:
•The emergence of digital solutions with lower-cost models launched by adjacent financial services players;
•The emergence of sector and industry-specific bans, closely integrated with broader supply chains, launched by nonfinancial services players and
•Ongoing transformation of the four banks to address changing customer, regulatory and technology needs.
In recent years, the market has seen other players in the financial services industry diversifying their services offerings by introducing digitally enabled banking solutions to provide better customer experience at a lower cost.
Non-financial services providers, such as retail and commercial companies, have identified gaps in the financial services market driven by the need for more personalised and affordable offerings than those offered by incumbents. There are a number of examples and cases of a growing wave of non-traditional players realising the advantage of integrating banking as part of their industry supply chain.
For instance, discussions between various taxi associations have begun around the potential development of a solution that can address growing concerns over high interest rates charged to their member taxi owners.This could lead to substantial disruption in the banking industry.
Transformation of four banks
The four universal banks in South Africa are responding to advancing digital disruption by making significant investments in digital transformation. This forms part of their strategies to improve risk management.
Despite large investments in transformation, cost-to-income ratios have remained in the 54%-56% range since 2012. This trend may not change significantly in the next 3-5 years as specialist resources are employed to assist the banks with transformation.
In addition, the ability of new digital to easily and quickly launch new offerings into the market strengthens the need for established banks to review the speed in which they launch new products or projects in order to remain competitive. The changing competitive landscape in the financial services sector could have an impact on the profitability and returns of the four universal banks.
According to PwC Strategy&’s analysis, if they want to sustain their profitability levels, they will have to take swift action in both the retail and corporate banking segments. To engage with customers in the digital age, traditional banks can accelerate transformation by incubating outside the legacy organisation, leveraging fintech companies or partners and embark on new ways of working. Changing technology has also resulted in far more open, modular and capable information systems. For the four universal banks this presents the opportunity to leverage their large customer bases and to build thought into funding habits and patterns through data and analytics.
Business and corporate banking
One of the main advantages that the four universal banks have over challengers is their ability to meet clients’ full set of business and corporate bank ing needs. However, to maintain this advantage banks will need to develop integrated solutions that meet the changing, complex needs of existing and future customers.
For example, the integration of crossborder networks, debt financing ability, and transaction processing capabilities can present themselves as an all-in-one solution to local businesses that rely on export markets. Increased collaboration between banks to offer more comprehensive products to varied markets is another example of integration aimed at delivering customer value.
Across the enterprise
As the four banks focus on growing capabilities within retail, business and corporate banking to stay abreast of the changing environment, they also need to focus on improving efficiencies of their core legacy systems by funding business and organisational restructuring and building on differentiating capabilities.
In other words, they need to become “fit for growth”. Fit for Growth organisations connect strategy and investment in capabilities with organisation and cultural evolution.
Furthermore, these players should reorganise for growth by implementing an organisational model, processes and systems that unlock the potential and agility for growth.
Jorge Camarate is a partner in PwC’s financial services division