MATTHIJS EIJPE: Old school banks needn’t fear — mobile money needs them

Last year, a survey came out which showed that 96% of African banks saw digital transformation as “one of the most important factors in their bank’s growth strategy”. 

Clearly, they understand the need for digitisation. But the process has proven painfully slow for the continent’s traditional banking institutions, who often still require their customers to submit paper documents for most banking activities. 

It illustrates how competition from telecoms and fintech companies, as well as Covid, has brought African banks to a digital crossroads.

Over the last two decades, established sectors like print media, travel agents, booksellers, hotels and taxi services were all deeply affected by competition from digital companies like Travelocity, Amazon, Airbnb or Uber. Most of these sectors could have avoided disaster by implementing a more digital-friendly and client-first approach to their business. While untold numbers of newspapers around the world shut down as sales plummeted, the most savvy publications quickly pivoted to online publishing, where they continue to thrive.

In Africa, where 57% of the population does not use traditional bank services, there is a huge opportunity for growth, particularly as more Africans are starting small businesses.

One of the more profound financial services innovations on the continent has been the rise and rise of mobile money — electronic wallets linked to a phone number. With over 300-million mobile money accounts across the continent, Africa is leading the world in the adoption of this technology. In 2020 alone, almost $500bn was transferred in Africa through mobile money — which also put a large chunk of financial transactions into the hands of telecommunication companies.

But mobile money, while easy to use, is not a long-term solution for the unbanked. 

Unlike traditional banking systems, mobile money does not enjoy the trust of regulators and has no systems in place to avoid fraud or money laundering. Research shows that unbanked customers who begin using mobile money will want more complex banking services later on, seeking stronger customer protection. Banks should use this to their advantage, offering traditional services like savings accounts to mobile money clients, while offering the sort of convenience that those clients have become accustomed to.

The last few years have also seen a surge in neobanks, digital-only fintech companies that are challenging traditional banks. In SA, we’ve seen this with TymeBank, Bank Zero and Discovery Bank, and there are upstarts too in Uganda, Nigeria and Egypt. 

It makes sense: with the rapid increase in smartphone ownership and internet coverage, the ease with which one can open a digital bank account makes this option appealing, particularly for those in remote regions. Ten years ago, this would have been impossible; ten years from now, it may have become indispensable.

The Covid factor

As we all know by now, Covid proved a shot in the arm for digitisation. Across the world, billions of people found themselves unable to leave their home for weeks, and had to adjust to using the internet for doing things they’d have preferred to have done physically, like shopping. By some metrics, up to seven years-worth of digitalisation efforts were compacted into the first half of 2020.

Banking was no different, as demand for digital banking services is now at an all-time high. In Nigeria, where banks were quicker to digitise than in other places on the continent, the volume of digital transactions jumped by 40% in the second quarter of 2020. Kenya, where the use of mobile money was wide-spread before the pandemic, also had an easier time adapting to digital banking.

While some African countries had antiquated and bureaucratic banking regulations, Covid shifted perceptions of which of these rules are really necessary.

Experts agree that digitisation will continue in a post-pandemic world. Rather than being a peak, 2020 will be seen as a turning point, the moment when online services became unambiguously mainstream.

For African banks, already having to compete with easy-to-use and client-centric services like mobile money, they’ll need to do some introspection, and ask what made those services so population in the first place.

The good news for them is that traditional banking is not going anywhere; no technology can uproot the entire sector. But those institutions that can’t embrace what this new wave means risk being swept away. The next few years will determine who will sink and who will swim. 

*Eijpe is the regional vice-president at Backbase, a Dutch technology company that consults to the banking sector.