SEYMOUR SLOANIDEAS THAT MATTER

SOUTH AFRICA: A DIGITAL INNOVATION HUB FOR FINANCIAL SERVICES

NOVEL CHALLENGES CALL FOR NOVEL SOLUTIONS

Something significant has been stirring in South African banking. With its combined challenges of a highly rural and geographically dispersed population, financial institutions are rolling out a broad array of initiatives that place digital technologies, at the heart of their strategic transformation agenda.

Many banks have launched apps for smartphones and digital tablets, making it easier for custom-ers to conduct a wide range of banking activities, despite being many kilometres from a branch. However, forward thinking banks are moving beyond this, delivering payments and account solu-tions that are drawing the unbanked population into the formal framework.

South Africa has fast become one of the innovation centres in global financial services. Significant investment is going into addressing the challenges of banking in a country with a small branch footprint, vast geographical dipersion, and a large informal economy. The prize for those that suc-ceed is access to the three quarters of the population that do not currently have bank accounts. In a market where growth has been lukewarm for over five years, the growth opportunity available in South Africa is vast.

Through applying first-world solutions to third-world challenges, South African banks are focused on tackling the issue of the unbanked and through that; building a platform on which the can broaden the financial services footprint beyond account management and payment. In addition, adopting a leading position will allow South African providers to scale their platforms across the continent, adapting to the needs of the changing African banking customer.

SOUTH AFRICA’S NEw BANkING CONSUMER

Consumers’ embrace of mobile technologies and social media has transformed the face of bank-ing in South Africa. Improving technologies coupled with greater ties to the African diaspora are helping create banking customers better integrated in the global economy as well as being better informed and educated customers. Banks are realising these changes and adapting their proposi-tions around these changing requirements.

Adopting technology for the sake of simple adoption has proved a costly distraction. Instead, lead-ing South African banks are using technology to tackle Africa’s main barriers to trade. The main areas of focus in South Africa are:

• Account opening and management• Electronic payments and real-time money transfers and• Additional account sales and servicing

One of the key challenges facing African economies has traditionally been liquidity. Rather than a lack of wealth, it is the liquidity challenges that slow the velocity of cash within African economies, limiting growth potential. Solving the digital conundrum will be a powerful accelerant for African development and will see a rapid increase in initiatives such as, micro-finance and peer-to-peer lending.

In tackling these, South Africa has been bold and stolen a march on many countries. Through a concerted innovation push, they are fast introducing solutions that are engaging increasing num-bers of customers in the formal financial services framework.

FIRST wORLD SOLUTIONS TO THIRD wORLD CHALLENGES

Leading banks in South Africa are capturing both, the new technologies’ potential cost savings and growth opportunities, by reshaping their networks in ways that profitably meet—and exceed—cus-tomers’ expectations.

In South Africa, First National Bank (FNB) launched Geo Payments, a payment solution that uses the GPS units built in modern mobile devices to determine how close people are to each other and the app itself as authentication before facilitating the payment. Its main advantage is that it needs no additional hardware outside of a mobile handset to facilitate payments. The device acts as a store of wealth.

In addition, FNB launched their cashless branches, ‘dotFNB’. Customers can, not only apply for, and interact with, digital services such as Geo Payments, FNB Connect and the FNB Mobile App, but they can browse smartphones, tablets and other devices (and purchase them on various tar-iffs), all within the store. It is a concerted attempt at migrating customers onto digital platforms.

Absa has followed suit, launching the ‘Features Store’, essentially an interactive platform that allows customers to turn their account into a bespoke packaged account. Customers can apply online for a flexi, gold, platinum or private banking account with immediate confirmation of accept-ance. A process that once took hours and even days, but now takes a matter of minutes.The new platform gives Absa customers the opportunity to add a variety of products and services to their accounts. These include: the ability to buy the latest cellular technology, redeem travel of-fers, take up promotions and select from pre-packaged health, security, legal and lifestyle services.

Innovation is at the heart of current thinking in South African banking. Nedbank have implemented their Innovation Hub and have a long history with mobile technology having once owned their own network, Nedtel. As such, embracing the power of mobile communications lies at the heart of their long-term strategy. Innovation is a vital tool for banks that wish to counter the disruptive threat of intermediaries, particularly in the payments arena. Their challenge is to remain relevant to their customers in changing times.

A prime example of potential disruption is the collaboration between telecommunications provid-er MTN and retailer Pick n Pay. They plan to offer customers, particularly those in lower income bands, access to free banking. MTN customers that take up the offer do not pay service fees or transaction charges, only R29 as a one-off cost if they opt for a Visa-branded debit card to shop at outlets other than Pick n Pay. They are able to transfer money without third-party fees being lev-ied. Customers are not required to maintain a minimum balance.Shoppers that shop at a Pick n Pay point of sale dial a specific code on their phones and provide a unique number that is displayed to the cashier, giving them discounts or additional airtime. They can also withdraw or deposit cash at till points, buy prepaid electricity or pay for municipal servic-es.Effectively, the collaboration provides customers with a bank without dealing with a bank. At no point is a branch visit required.

Mobile provider, Vodacom has also entered the market, launching M-Pesa – their mobile wallet. To load the M-Pesa wallet, consumers either buy vouchers or top up their accounts using Internet banking. Internet transfers take a full day to reflect on users’ M-Pesa accounts. Employers can de-posit wages directly into employees’ M-Pesa wallets, making them more akin to full-service bank accounts. There are no charges if the customer doesn’t use the service. There is, however, no interest paid on positive balances. There are no fees to deposit money. Transfers to other M-Pesa customers cost R1 (R4 to non-registered customers and to users on other networks) and cash-out costs R2.50 plus R1 for every R100 at retail and R5 plus R1 for every R100 at an ATM.

In the wholesale market, Investec has its transactional banking app. It is available for Apple’s iPad tablet only, offers mobile banking and trading tools to their customers. The app is available in the South African version of the App Store. It provides a ‘consolidated account dashboard’ where clients can view all the relevant information for their Investec Private Banking and global Wealth & Investment accounts”, the company says.

Clients with Investec Private Bank accounts located in South Africa are able to use the app to view their balances and transactions, and make payments. In addition, Wealth & Investment clients can view their global portfolios, browse market data, and buy and sell shares of companies listed on the Johannesburg Stock Exchange

Mxit, a South African mobile social network, already has Mxit Money as its mobile finance proposi-tion. Users are able to deposit and withdraw cash, buy Mxit’s digital currency, ‘Moola’, as well as, airtime and electricity. The system uses Standard Bank’s Instant Money service and for the first time allows users to take money out of the Mxit ecosystem. Instant Money is an electronic curren-cy developed by Standard Bank used mainly for person-to-person money payments. The product is aimed at the unbanked and is also used to facilitate online payments without customers needing a credit card or bank account.

What we are seeing in South Africa, unlike in other developing markets, is an intense digital arms race. Battle is waged on two fronts; for existing banking customers and for the mass of unbanked South Africans that still require a proxy for cash to facilitate payments. The above examples are strong evidence that at all levels of the value chain, innovation has taken hold and has the poten-tial to broaden the South African economic footprint..

The interesting development has been the tension between, social media platforms, telecoms service providers and traditional banking providers. In particular, the telecoms providers and so-cial networks – it is likely that Facebook with include itself among them eventually, are making a concerted attempt to acquire millions of the unbanked South Africans recognising their need to engage in the digital economy.

It is likely that, in this sector, the winning combination will require the support of the banks in con-junction with a mass distribution platform, be it a social network or telecoms provider. Banks pro-vide the security and assurance required to build confidence in what is still a relatively new sys-tem. Existing customers are likely to remain the preserve of existing banking operators, continuing existing relationships and remaining with trusted providers. More importantly, driving the culture shift required to embed digital solutions is a communication and education exercised best provided via social media and mobile, for reasons of cost and access.

It will be fascinating to observe how the market matures over time, with the South African example serving as powerful inspiration for other African countries determined to embrace digital banking. Once digital takes off, the potential it has to connect and mobilise the wider African economy is incredible.

A BRIGHT FUTURE FOR AFRICA’S BANkS

The great strides made by the South African banks should serve as an example, not only regard-ing proof of concept, but also in challenging the boundaries of the possible. All African banks face the twin challenges of providing first-rate products and services as well as, delivering low-cost financial solutions to the unbanked African population. In the leading African economies we are seeing the initial phase of digital development happening now.

Etisalat Nigeria offer easywallet, its secure m-commerce offering with user-friendly SIM function-ality for mobile money payments and transfers, in partnership with leading Nigerian banks includ-ing First Bank, GT Bank and Zenith Bank. The interface was developed in Nigerian basic native languages, Hausa, Igbo and Yoruba as well as English and is accessible on any type of mobile phone, even the most basic types. The application allow users to pay bills and pay for goods and services, receive and send money to friends and family, withdraw cash, top up their own airtime account or for someone else and also have access to manage their bank accounts.The focus is to use technology to create a stable platform on which to migrate the unbanked and the formal economy to something more robust and secure. Kenya is tackling a similar challenge as it witnesses an upswing in the success of its banking sector.

In Kenya, CfC Stanbic Bank have introduced interactive branches to focus on enhancing how Kenyans interact with their bank. It is also encouraging other organisations to examine approach-es to customer payments. As an example, Mombasa County (a local administrative authority) is fast-tracking automated bill payments by residents. The driver was moving cashiers away from low-value transactional work towards greater sales and customer engagement.

They are working with residents in Mombasa to implement electronic payments for council servic-es, cutting down queuing times involved in manual payment. In addition, through cashless trans-actions, the bank is facilitating KRA (tax) payments, council collections, online share trading, ATM cash deposits and internet banking via free in-branch Wi-Fi. In addition, the Kenyan market also has MobiKash, which like all other mobile money transfer platforms, allows users to manage and perform a number of financial transactions from their mo-bile phone but unlike the others, it is an independent mobile commerce and payment platform. MobiKash works on all mobile handsets and is connected to a number of financial institutions and bill providers.To use the service, you need a Mobile Money Account, which enables you to handle transactions of up to KES 50,000. Getting a Mobile Money Account requires visiting the nearest Mobikash agent. The Mobile Money Account allows you to; manage transactions, send money between mo-bile phones, send money to connected bank accounts and cash-out at any MobiKash agent.

Airtel Tanzania and Tigo Tanzania have combined to deliver a cross-network money transfer ser-vice making it possible for customers from both networks to exchange funds between their mobile wallets. The partnership with Tigo allows customers to transact via their mobile wallets, at a re-duced transaction cost. As with the examples above, the aim is to integrate the unbanked popula-tion into the national financial services market.

Barclays have used embraced digital innovation in Egypt, introducing cardless ATM deposits. In a country where payments are often made via messengers, sharing PIN and card details is risky. As such, Barclays were able to move customers out of branches to the ATMs, freeing up staff to de-liver higher value services. Instead of a card number, customers enter a reference number, which could be the account number or asset number, then deposit the money. It means deposits can be made 24 hours a day, increasing customer convenience.

In assessing the progress within Africa, it is worth remembering the size of the task. Current esti-mates put the proportion of unbanked Africans at 80%. While this is a significant challenge, it also represents a massive opportunity for providers to scale rapidly and to increase revenues in a time where financial services globally are struggling for growth.

In Africa, and South Africa in particular, the focus of this initial wave has been to include the un-banked within the formal financial services framework, seeking to increase customer numbers and payment volumes as well as velocity. This is a different challenge to hat faced in Europe where the financial services market is more mature and the challenge is about optimising the cost/profit balance. As such, the digital revolution in Europe is in favour of customer experience as well as increased sales opportunities.

We expect these elements to become core elements of African strategies too over time, but will be expressed differently, offering different products. What we do not feel will change is the zeal with which South African banks approach innovation. It gives us confidence that South Africa will be one of the leading examples when looking at delivering innovative digital transformation.

© SEYMOUR SLOAN 2014

HOw SOUTH AFRICA HAS GOT IT RIGHT

As one of the leading African economies, and arguable the most advanced, South Africa had many advantages that allowed it to become a leading digital innovator in Africa. However, there were key elements that accelerated the rate of progress including:

Leadership from the top – the theme that is apparent in the South African market has been the desire of C-suite executives to address the issue of the unbanked and understanding the benefits, both customer and corporate, this brings. Resources have been allocated and the movement of senior executives between the main providers demonstrates the desire to build the right teams.

Accurate customer targeting – in most discussions with senior executives the overriding factor we have heard has been the migration of the unbanked into the formal financial services landscape. It was the largest problem and was treated as such. It is why significant strides have been made in reducing levels of the unbanked, with the leading innovators seeing the benefits in their growth figures.

Clear problem definition – having identified their target market, South African banking execu-tives worked to identify the key challenges both facing the unbanked and also, barriers to gener-al economic activity. These included issues such as identification documents and branch ac-cess. The result was the creation of a number of solutions, for example, where no ID is required the payment volumes that can be transferred are capped, which is the same where there is no linked bank account. This reduces risks associated with money laundering and fraud.

Clear competency alignment – with clear problems identified, it was easier to then assign the correct skills and resources to tackle it. Some banks created in-house innovation teams, while others brought in outside expertise. What unified both approaches was the clarity of the problem they had to solve. Within that, they were often free to build the solution they felt delivered the greatest impact.

Being objective-led over solution-led – with the scale of the challenge, it was unlikely that any packaged solution would exist. As such, development was led by the desired objective. As markets mature it can be tempting to incorporate solutions in order to remain current, with there being little performance benefit. Remaining objective-led will be a prerequisite for South Africa to remain a market leader.

Being unafraid to fail – Plotting a course through the unknown is risky, particularly with the scale of investment required. However, leading South African providers entered the market accepting the risk of failure. The South African roll-out of M-Pesa was a clear example of this. Its success in Kenya was not initially replicated upon its launch in South Africa. However, quick recognition of failure and improvements in: distribution, registration, functionality and loyalty saw improved performance upon its relaunch. Being able to assess success and failure quickly, with a means of rectification is essential in the digital world.

These factors ensured that the journey from innovation to customer solution was compressed, but that the solution was what was needed in addressing the problem. The same framework will likely power all innovation as South African banks look further up the value chain, and in some cases, more lucrative foreign markets.

IDEAS THAT MATTER

SEYMOUR SLOAN