Digital entrants are game-changers in SA's banking industry
SA's banking sector is increasingly moving towards a 'marketplace without boundaries', shaped by the fast-approaching entry of new digital players challenging the status quo in the market, and driving unprecedented levels of innovation.
In response, the 'four universal banks' (Absa, FirstRand, Nedbank and Standard Bank) have continued to pursue large-scale transformation programmes aimed at improving customer experience, digital transformation, and new ways of working and enterprise-wide cost reduction.
These are some of the key highlights from an analysis issued today by PwC's Strategy& on the future of banking in South Africa.
Jorge Camarate, Strategy& Partner in PwC's financial services division, says: "Unlike their challengers, the four universal banks have the principal advantage of being able to serve a sizable share of South Africa's retail and corporate banking customers. To maintain this advantage, and meet the challenge posed by fast-paced entrants, the four universal banks will need to develop clear innovation strategies and operating models. Further, they will need to embed a culture that supports agility and measured risk-taking."
Trends in the South African banking sector
In 2017, we identified three trends developing in the market that could impact the local banking sector:
1. The emergence of digital solutions with lower-cost models launched by adjacent financial services players.
2. The emergence of sector and industry-specific banks, closely integrated with broader supply chains, launched by non-financial services players; and
3. Ongoing transformation of the four universal banks to address changing customer, regulatory and technology needs.
The past year has confirmed PwC's view on the changing nature of the banking sector, although the pace of change has in some instances slowed down. A number of new digital players are also being encouraged by the friendly regulatory environment promoted by the local banking regulator, the South African Reserve Bank (SARB). These local developments are in line with trends already at play in other countries, and are likely to result in more participants entering the local banking market.
What should digital entrants do to succeed in the South African market?
In this report, PwC focuses on the potential impact of digital banks in the South African banking market, highlighting four imperatives they will need to address to realise their full potential.
1. Be clear on customer segmentation and differentiation
Almost every financial institution conducts some level of customer segmentation and can describe its target market. PwC's experience suggests digital entrants will need to develop effective customer segmentation frameworks. With an effective segmentation approach in place, digital entrants can start focusing on what will differentiate their services from those of existing legacy players. Ultimately, the new entrants will need to have a compelling answer to customers asking why they should move bank accounts, particularly considering the high levels of customer apathy when it comes to switching.
The analysis identifies three potential dimensions for differentiation from a customer perspective: product; customer engagement; and value-added services.
2. Be agile: quickly launch minimum viable product (MVP), test and adapt
One of the areas where the digital entrants will be able to establish an advantage over the universal banks is in their ability to launch new solutions in time periods of three to six months. In order to achieve such quick innovation cycles, entrants must be agile and focus on understanding the minimum viable product (MVP) required to test customer adoption of a new feature or solution.
3. Capture customer data insights from the outset to enable broader platform play
Successful digital entrants have differentiated themselves from established banks not only in how they deploy innovation, but also in their business and monetisation models. The ultimate goal of leading digital banks is often to use the knowledge garnered by processing customers' banking transactions to develop unrivalled customer insights, and subsequently use these insights to market a broader ecosystem of products and services, and to further differentiate their offering from the traditional banking experience.
4. Creatively build hype around product while minimising above-the-line marketing spend
One area where digital entrants can be at a disadvantage against more established players is marketing budgets. For instance, each of the universal banks in South Africa typically spends more than R1 billion a year on marketing alone. New entrants with limited budgets cannot afford to compete head-on.
Successful digital banks have overcome this challenge. These new entrants have focused on building a community of enthusiastic early adopters, often digitally savvy millennials looking for a banking provider with a 'fresh' identity and clearly differentiated features. As the product matures and more features are added, this community of early adopters quickly expands through word of mouth until the new entrant reaches scale and prominence at a national level.
Takeaways for the four universal banks
The report puts forward a number of proposals for consideration by universal banks in order to compete with new digital entrants. "We believe that the four universal banks can and will rise to the challenge posed by new digital entrants, by learning and employing the same tactics that have made digital banks a real threat to their traditional counterparts," says Chantal Maritiz, Strategy& Partner in PwC's financial services division.
The first step for the universal banks to compete on an equal footing with fast-paced digital entrants is to develop a clear, enterprise-wide innovation strategy and operating model. PwC's experience suggests the most effective organisations employ a hybrid model, using a variety of innovation vehicles in a structured manner to pursue core, adjacent and disruptive innovation concurrently. An enterprise-wide innovation strategy also needs to be underpinned by a supportive culture to achieve its desired effect.
Maritz comments: "The future of banking in South Africa is dynamic and exciting. Agile new entrants with a differentiated value proposition and a business model focused on the monetisation of customer insights will compete head-on with universal banks reinvigorated by new innovation strategies." Not all banks will succeed in this new environment, but those quickest to adapt will benefit and capture a disproportionate share of the future banking market.