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Two men inspect a Tyme Bank terminal. Picture: MASI LOSI
Two men inspect a Tyme Bank terminal. Picture: MASI LOSI

SA’s banking sector is dominated by its big five banks. Together they share almost 95% of the assets in this mature market, in which up to 80% of customers are already banked.

As a result, investment in digital service innovation and customer solutions has so far been slow and focused on targeted back-office processes, only recently ramping up more widely in response to low customer satisfaction with banks’ services and accessibility.

Incumbent banks have focused on customer-value propositions and pricing as their main growth drivers in recent years. However, new entrants such as Discovery Bank, Tyme Bank and Bank Zero are set up to challenge the status quo with innovative servicing and lower-priced banking.

Post 2020 the new wave of challengers will come from platform plays, integrating multiple financial and non-financial products and services into one easily accessible ecosystem. The next 12-24 months will be critical for market players to position themselves at the epicentre of these new platforms. Whether banks, insurers, telecom or big techs will lead on the platform build remains to be seen.

SA is seeing its first wave of digital challengers coming into the market, with three new banks launching in 2019, all of them bringing a differentiated value proposition to customers.

While similar to successful European challengers, Tyme Bank’s monthly-fee account, along with attention-grabbing “up-to 10%” savings rate, will put pressure on incumbent margins. However, it is Tyme Coach that signals the bank’s ambition to manage more of its customers’ financial lives.

Discovery Bank has stated its intention to compete as a multiproduct behavioural bank, leveraging its insurance expertise in data-driven insights and rewards. The model encompasses rewards and competitive pricing based on customer behaviour while enabling all banking services to be conducted through a mobile application.

Bank Zero intends to build a niche offering. Its mutual bank business model will aim to appeal to digital communities, tapping into groups of like-minded customers who want to participate in the wider benefits of mutual ownership.

The most likely effect of all three new banks coming into the market this year is three-fold:

  • Increased pressure on fees and rates across liabilities and short-term asset products
  • Deposit acquisition and retention strategies to take centre stage
  • Increased customer scrutiny and expectations with regards to hassle-free customer journeys

Looking further ahead, mobile operators (Orange, MTN) and Big Tech (Facebook, Whatsapp, Amazon, Alibaba, Apple) entering digital banking across Africa are most likely to adopt ecosystem driver strategies given the breadth and diversity of their customer base.

This play will put additional pressure on incumbents in SA and across the continent as the new norm of banking will begin to include a wide range of non-financial products and services.

Several banks are adopting a wait-and-see approach as they develop their digital capabilities. We believe this approach is driven by five primary reasons:

  • The focus on digital remains anchored in filling a short to medium-term capability gap (customer journeys, analytics, process optimisation/automation) vs developing a 5-10 year view of the bank of the future. The current focus translates into the majority of investments and efforts being spent on playing catch-up rather than holistically transforming the bank to thrive in the future.
  • The economics of modular core banking solutions may offer an opportunity for IT change and run-cost avoidance but are not yet fully understood by market players. The coming of age of cloud-based pay-as-you-go core banking solutions is opening a more responsive set of technology options. These new “digital by design” operating models that promise to enable attractive less than 30% cost to income ratios merit deeper evaluation.
  • Data analytics capabilities are still far away from their full potential in the SA banking sector and are slowing banks’ responses to evolving customer needs and expectations, while also affecting higher-level commercial and operational efficiency. Entering the digital era is not possible without analytical capabilities feeding off a strong, accessible, central data set.
  • The banking talent pool is slowly starting to be disconnected from current and future needs. New content and technical capabilities (data analytics, AI, machine learning, bots, ecosystem banking) are not being acquired at the required scale now at the risk of creating a capabilities gap in the short to medium term.
  • The current lack of agility and efficiency in executing change/transformation remains a constraint which is slowing down the pace of innovation and making change more expensive than it should be.

Looking back at digital disruption, we observe those financial institutions that establish a clear future state vision and embrace change materially outperform. We expect that the winners will be those that assess their current digital challenger playbook and establish a proactive response.

The idea of going “greenfield”, at a bank, segment or even product level, is an easy one to dismiss. In the past, banks took years to set up and decades to build up a customer base: but not any more as recent history shows, especially if you are already a bank.

Our recent experience and that of new digital players shows that though launching a digital greenfield would have been difficult just a few years ago, it is now feasible in under 12 months and at a reasonable cost.

While the short and long-term success of challenger banks and their disruptive affect on the SA economy won’t be known for at least 12-18 months, it is safe to say that the new banking models being launched will increase competitive pressures in the banking market.

There is one path forward for incumbents: adapt to and expect customer expectations with regard to convenience, accessibility, relevance, speed and price. We believe a huge change to banking infrastructures is required to achieve such a goal in the short to medium term.

What is certain is that the banking landscape will look very different in SA by 2025. The question is who will be the winners and what will be the new norm in banking?

• Calvey and Romagna are financial services partners at strategy consulting firm Oliver Wyman

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