Future of retail banking in Africa
The Kenyan government recent move to cap interest rates was seen as an answer to address a perennial problem of high interest rates offered by commercial banks in the country.The law came into effect over two months ago and already there has been a positive market response to the changes.Experts in the region I spoke to recently are predicting similar trends in Africa if Kenya’s move works successfully.This means retail banks in Africa have to reinvent themselves or face extinction. But how are retail banks in Kenya, the incumbents of banking likely to fare in the era of mobile banking?This is an increasingly crucial issue for banks. Mobile banking is a major technological development, and history suggests that incumbents can be reduced to obscurity as new players, or market disruptors, use improved technology to upset the status quo.In the era of mobile banking, Africa retail banks may be next in line to see their relevance diminished. Internet, telecommunications and technological companies, the market disruptors in relation to mobile banking are probably better placed to develop key components of mobile banking than banks. Traditionally, African banks owned the retail banking relationship with customers. They have for ages designed, manufactured and distributed banking products like Barclays has done in Kenya for over 100 years.However, mobile banking emphasises disintermediation and these processes may reduce that advantage for banks because market disruptors can provide some if not all of these steps.Market disruptors are becoming increasingly adept at distributing banking products through payment systems.
New technology is making these processes ever easier. Clearly, African banks need to reform to ride the wave of mobile payments. To compete with these market disruptors, banks need to remain relevant, attractive and create value for customers. Doing so in relation to mobile banking will require a fundamental reappraisal of a bank’s relationship with customers, and it is unclear the extent to which the major clearing banks have come to terms with this need. In a 2014 survey of over 50 African banks, it was reported that almost 67% assigned 5 or less employees to mobile banking, suggesting a lack of investment in this field. For those who do want to compete with the market disruptors, me thinks there are several strategies that could work for them.The first, and perhaps most obvious and fundamental step, involves banks accepting that they will no longer own the customer relationship and that they should collaborate with the market disruptors. This will involve supporting contactless point of sales, and generally either determining mobile payment solutions themselves or partnering with potential market disruptors.Some banks have started like Kenya Commercial Bank, Commercial Bank of Africa and Equity Bank all from Kenya. Others like Barclays are adopting a contactless mobile payments.The second strategy involve banks becoming bigger so that they can afford the technological innovation required to build mobile banking into their operations. Experts have argued that the high cost of technology and the gains it promises may mean that in the era of mobile banking, bigger banks are likely to succeed than smaller ones. This is partly because raising relative compliance costs that may inhibit the capacity of smaller banks to invest sufficiently in the requisite technology.
Larger banks such as South Africa’s Stanbic Bank appear better able to standardise their procedures and systems, and so can replicate their successful practices across the largely unserved but potentially highly lucrative banking markets in other African countries.I also feel that leveraging any face to face contact with customers towards engagement rather than transaction is a great idea. This may enable African banks to stay relevant to customers as a source of financial advice, a capacity that market disruptors will take time to develop.Some banks like ABSA in South Africa are already heading in that direction. African banks can also leverage customer information entrusted to them to provide tailored products that retains a customer’s attention. Banks seem to have worked this out.Currently part of the reason that customers trust African banks over market disruptors is because they are not used to the non face to face aspect of mobile banking. However, as a new generation grows up in which mobile banking is the norm, they may trust the market disruptors, so reducing the trust advantage of banks. In a recent survey, 24% of respondents aged 35 and older said they would be comfortable paying for items via new technologies, but this figure was 78% for those aged 18-34 years old, suggesting that younger people are much more willing to interact with market disruptors than their parents’ and grandparents’ generations.It is unavoidable that African banks will need to embrace the changes that mobile banking is forcing upon them.As our teacher used to tell us, in the information age, the future belongs to those that are quick witted and far sighted enough to embrace it.