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AfriCAN insight

Banking on innovation and business transformation

No other industry has faced greater disruption across Africa than banking and finance. With the help of network partners such as Liquid Telecom, however, banks and financial service providers are exploring new business models that will help shape the continent's digital future.

Businesses of all sizes across Africa are on a digital journey, exploring new ways to tap into technology and innovation.

But the digital journey of banks and financial service providers in Africa has taken an altogether different turn.

Some five years ago, mobile banking exploded across parts of Africa in a way previously unseen by the world.

The service won over the hearts and minds of millions of people who had been neglected by formal banking services, becoming the de facto standard to bank the unbanked. In some African nations like Kenya, mobile money is even becoming the central pillar of an economy.

But banks have largely been bystanders to the remarkable rise of mobile money in Africa. In fact, it has brought serious disruption to their market and is challenging them to reinvent their business models.

All businesses should be watching what happens next to the banking and finance sector in Africa – as not only is it likely to be a compelling lesson in business transformation, but because many of the technologies emerging from the sector have powerful crossover with the wider business community.


Scale and reach

Take the agriculture sector as an example of how dramatically mobile money can change businesses across Africa.

Imagine there is a sugar manufacturer in rural Uganda. The majority of its workers are farmers who have limited or no access to traditional banking services and are paid cash-in-hand. The firm has an agreement with a local bank, which provides a security team and a vehicle to deliver cash to the workers, often travelling large distances in the process.

Then mobile money comes along: all that risk, cost and inefficiency disappears – and the farmers instead receive their monthly salary directly to their mobile money account. Talk about a dramatic improvement in cash management for the business as well.

Mobile money has exposed several shortcomings with traditional business models.

First of all, it demonstrates the importance for businesses to think differently about how to add reach and scale.

Banks were unable to find an effective way to deliver commercially viable banking services in areas where the cost of deployment is high and the population density is low. As a result, access to commercial bank branches and ATMs across Africa remains proportionally far lower than global averages.

At the same time, smartphone and internet penetration has risen substantially over the last five years. Is it any wonder therefore that the most successful mobile money system to date, M-PESA, was launched not by a bank but by a mobile network operator?

Connectivity has been the foundation on which mobile money has flourished, and in the process has aligned network operators such as Liquid Telecom more fully as partners to banks and the wider business community.

“Mobile money has grown in tandem with the telecoms industry and banks are keen to benefit from this,” says Pat Thakur, Editorial Director, Middle East & Africa at the Economist Intelligence Unit.

Connectivity today has a profound impact on customer experience. ATMs are only as reliable as the network coverage serving them, while fixed-line banking support can be costly and also unreliable across parts of Africa.

Choosing a single connectivity partner with extensive reach across the continent is a must. The absence of critical ICT infrastructure in rural areas can have costly implications for regional banking institutions.

Satellite has emerged as a cost effective and versatile solution for banks, enabling them to establish reliable links for ATMs and point-of-sell devices. Kenya Commercial Bank (KCB), for example, has one of the largest banking networks across East Africa, and, thanks to Liquid Telcom Kenya, was able to successfully connect 24 of its branches in South Sudan using VSAT technology – allowing for faster and more efficient banking services for its South Sudanese customers.

The emphasis on customer experience means businesses in Africa are increasingly looking for a network partner that can provide and manage connectivity on their behalf.

Businesses and their network partners are together trying to explore ways to enhance customer experience.


New models for risk and innovation

The advent of greater connectivity across Africa is becoming both an opportunity and a threat to banks.

Start-ups from outside of the traditional banking ecosystem are arriving on the market with products that are easier, cheaper and faster to use than those currently being offered by banks.

Banks and other highly-regulated industries are having to face up to institutional change. This is an industry vertical accustomed to operating on its own terms – but is now beginning to recognise that legacy in-house systems are not always compatible with innovation.

In fact, they make the innovation process slow and expensive. Banks by their very nature are risk adverse, which has meant many technological opportunities have passed them by in recent years.

Banks now face new threats to their business every day. A very contemporary example would be cross-border remittance.

Many African nations have huge migratory populations which are reliant on money transfer services to send money home.

For example, there are estimated to be between two to three million Zimbabweans living in South Africa. This should present a major opportunity to the country's banks, particularly as the country has low levels of mobile money adoption: “In some instances, the regulatory environment hasn't been right to unlock mobile banking. We all know about is success in East Africa, but it has been hampered in South Africa,” says Richard Hurst, a Senior Analyst for Ovum's Enterprise Team.

But on one hand, South African banks are already facing competition from mobile operators. Last October, Econet Wireless was able to bring its mobile money remittances service, EcoCash, to the South African Market. The service enables anyone with an active Econet SIM card in South Africa to send money to an EcoCash wallet in Zimbabwe. “The Econet Wireless development is very interesting. Businesses are clearly now looking at telcos to drive innovation across the continent,” adds Hurst.

On the other hand, banks area also losing potential business to innovative online money transfer services.

Take the rise of TransferWise in Europe, which is offering transfers that are up to 89% cheaper than banks by using a peer-to-peer system that finds someone who wants to transfer money in the opposite direction. The system automatically matches the currency flows at the real mid-market exchange rate and then pays out from a local account, meaning the money never actually moves across borders.

This year the company raised $58 million in venture capital funding and is estimated to be worth over $1 billion.

Or take BitPesa in Africa, a Kenyan start-up that offers money transfer services over a Bitcoin network. Raising $2.7 million in funding to date, the company has already expanded its network to Nigeria, Tanzania and Uganda, attracting some 6000 users and over 17,000 transactions.

These services are a direct hit on the banks' bottom line. And what's more is they are mobilising fast – both TransferWise and BetPesa are not just going after consumers, they're now targeting businesses looking for money transfer services too.


Stemming the tide

Opportunities are slipping away from banks. Peer-to-peer lending platforms are also cutting them out – using algorithms to match individuals or businesses to lenders.

So what can banks do to stem the tide?

Finding ways to collaborate and work with rather than against market disrupters is key to a successful future. New partnership models between startups and fintech companies are helping banks to reestablish themselves in the digital world.

In particular, banks with an open API model can enable trusted partners to build new customer interface layers in order to innovate new and exciting products and services on top of a financial service provider platform. In fact, as well as promoting innovation, open APIs also encourage financial transparency and have been to linked to reducing corruption.

Staying ahead with the latest emerging technologies will also be crucial. Bitcoin for examples operates using a technology called Blockchain, which could also prove to be a huge source of innovation for banks, helping to improve the security of financial transactions, decentralise services and improve speed to market for new products.

There is no shortage of use-cases and applications for blockchain currently being explored by the finance community. It can be used to securely store client identities or handle cross-border payments. It could even lead to ‘smart contracts' that complete trades and deals automatically.

Or it could be about tapping into big data and analytics, which will enable banks to construct an incredibly detailed picture of their customers and be able to tailor their services and products accordingly.

Equally the development of Artificial Intelligence (AI) holds vast potential for improving customer experience. Robo advisors are already on the market that can handle virtually every aspect of investing. From organising a customer's debt, tax affairs and financial planning to tailoring investment portfolios, robo advisors are making finance management easier and more accessible.

Crucially, Robo advisors can cater to a gap in the market – traditionally, expert financial advice has only been made available to the wealthy. Robo advisors can help small investors without the steep cost of face-to-face advice.


True entrepreneurial spirit

Further business transformation is required for banks to remain relevant in a world where more and more financial transactions are taking place online or via mobile. Banking institutions now firmly share their market with tech companies, and must continue to explore ways to compete and collaborate with the start-up community.

That transformation is starting to take place across Africa. A good example is South Africa's First National Bank (FNB), which has adopted a highly structured approach to encouraging innovation across its entire business.

In July, the company's Head of Innovation, Yolande Steyn, explained at a Liquid Telecom customer event in Johannesburg how innovation is fundamental to the way the organisation thinks.

From its popular money transfer service, eWallet, through to FNB Connect; a new mobile service that was awarded the Most Innovative MVNO at the 2016 MVNO Congress, FNB has been able to deliver results from a multi-faceted innovation strategy. “Innovation is just good for business,” says Steyn.

If the rise of mobile money has proven anything it is that Africa has true entrepreneurial spirit. New partnerships models, supported by network operators such as Liquid Telecom, will help banks and other businesses across Africa be a part of that exciting digital journey.


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