[Column] Reda Helal: African banks embrace digitalization, the region’s unbanked in their sights
As Africa’s mobile money revolution continues apace, the continent’s banks are keen to expedite the digitalisation of their services as they seek to become key players in the rapidly evolving, internet-based financial services market.
With about half of Africans unbanked, the shift towards online provision of payment systems could allow traditional financial institutions to significantly increase the scope of their operations and, in the process, do much to promote financial inclusion in the region, especially in rural areas where access to banking is particularly low.
Before Covid-19 struck Africa, local banks had made progress in digitalising services. The pandemic sped up the transition amid lockdowns, the temporary closure of many branches and a shift away from the use of cash, seen as contributing to the spread of the virus.
The online financial services space also became more attractive for customers as the market and authorities adjusted to the new normal. Mobile money providers waived or reduced transaction fees and governments encouraged digital payments as a strategy to wean off person-to-person contact, according to Global Finance.
While the health crisis has accelerated brick-and-mortar financial institutions’ shift towards digitalisation, there has also been a strong financial argument for the transition. Digital accounts can cut the cost of transactions by as much as 90 per cent – which seems certain to resonate with banks’ personal and business customers hit hard by the pandemic.
A recent survey of over 100 banks in the region by African Banker in conjunction with financial technology company Backbase underlined the importance attached to digital transformation. About 60 per cent of respondents said it was the single most important factor for the future of African banking and just over a third noted that it was among their top three priorities.
Moreover, banks are committing significant sums to digital transformation. The survey revealed that almost 40 per cent ringfenced at least $3 million a year for both the transition and innovation, with just over 20 per cent allocating $1-3 million. When asked what motivated them to make these investments, nearly 40 per cent said customer demand and satisfaction.
Indeed, the technological innovations that are fuelling digital transactions across the continent have even seen the emergence of digital banks, or neobanks, which provide all their services online, enabling them to drive down costs and boost financial inclusion. According to global research firm IBS Intelligence, these new market entrants “are shaking up the traditional branch-based banking systems and pushing the industry to become more agile and competitive”.
While their number remains small and concentrated in Nigeria and South Africa, they offer incumbent banks a glimpse of what they can achieve by pressing ahead with digitalisation, in particular the potential to increase their customer base. One of the fastest growing digital banks, South Africa’s Tymebank, has attracted 5 million customers since its launch in early 2019.
In order to help facilitate technological change, traditional lenders are looking to partner with Africa’s flourishing fintech sector. The African Banker survey found that the number of African banks relying on third-party developers and platforms, including to build their in-house capacities, more than trebled since 2020, when the last survey was conducted.
Collaboration with fintech companies, says Business Insider Africa, is enabling banks to expand their services and reach more customers. Banks, it adds, no longer see fintechs as disruptors but partners – more often as a key part of their business with a shared responsibility for delivering to customers.
The tie-ups between banks and fintechs have seen the former outsourcing payment processing to the latter. It can be a daunting undertaking, but the financial rationale for it is compelling. The overhaul or replacement of banks’ legacy systems to achieve digital payments transformation goals requires substantial investment – and the total costs involved are often underestimated.
For while price tags of software licences and hardware for a dedicated payments platform may be clear and predictable, there are other multiple costs (related to people, processes and time involved to integrate these systems) that only become apparent once the transformation project is under way.
Though there may be understandable scepticism about outsourcing to third parties offering payment as a service (PaaS), credible providers of the latter can reduce the risks involved in implementing digital transformations, deliver overall savings, simplify banks’ internal systems, and enable them to leverage the expertise of their specialist partner to gain competitive advantage.
As much as digitalisation is a priority for banks in the post-Covid world, there are a number of other challenges that have to be addressed for payments transformation to achieve its full potential in Africa. These include issues such as patchy internet penetration in rural areas, the still-high cost of data, the fact that so many Africans lack personal identity documentation (critical to them being able to acquire digital accounts) as well as concerns over cybersecurity and low levels of digital literacy.
These barriers, however, will be lowered with time as the mobile money revolution gains momentum and digital infrastructure becomes more heavily embedded across the continent. For banks, arguably the most immediate concern is being able to work within a regulatory environment that facilities their digitalisation ambitions.
Optimal conditions are still some way off, with regulators seemingly hesitant about expediting banks’ digital transformation, perhaps concerned that if they move too quickly, they might destabilise the banking sector. Critically, there seems to be a reluctance to implement a key reform, the so-called ‘open banking,’ which allows banks to share data with third-party payment platforms, enabling them to provide services on their behalf.
A recent article in Africa Law and Business on fintechs and open banking in Africa notes that in sub-Saharan Africa, the regulatory frameworks that are essential for the future operation of open banking, most notably data protection laws, have largely yet to materialise.
There has, however, been some notable progress. According to African tech publication Techcabal, there are six countries in Africa where open banking has either been regulated or is being studied, and business title Quartz Africa reports that its potential to deepen financial inclusion in rural areas is actually being tapped more widely.
It points out that the region’s huge informal economy remains a prime space for open banking innovation, given the potential to offer secure financial services to scores of millions of unbanked consumers. Bringing them on board will be a challenging goal. But with the rapid development of mobile money across Africa, it looks increasingly like a very realistic one.