Even before the Covid-19 pandemic hit, African banks desired to digitise as much of their operations and services as possible. “African banks’ focus on digitisation started well before the pandemic, reflecting its need to deepen financial inclusion and reach the unbanked,” Constantinos Kypreos, senior vice president and banking analyst at Moody’s tells African Banker.
In a business environment where physical structures, paper trails and cold cash are highly valued, digital banking adoption rates across the continent are mixed.
Visits to bank branches still tend to be the norm. But these are increasingly reserved for transactions that could not be done otherwise. Customers increasingly find the use of ATMs more than suffices – barring limitations on cash withdrawals and deposits and the occasional technical mishap.
Paper-based documentation has been hard to shake off, however. Almost every activity by a bank customer inside a bank branch across the continent still requires a paper trigger. This is despite the fact that almost all the activities in a bank branch could easily be done on a mobile phone app. Even the acquisition and renewal of debit and credit cards might not require much ado if banks were determined to automate the process.
Less cash, less paper, less branches
Much of the hesitation about bolder digitisation by banks hitherto can be traced to cultural and regulatory factors. In other words, African digital banking has evolved to the extent that has been optimal or feasible within subsisting cultural and regulatory constraints.
With the Covid-19 pandemic, however, the push towards greater digitisation has come from regulators, staff and customers themselves. That is, what were hitherto sources of constraints have become digitisation enablers.
Central banks have been urging more cashless transactions to prevent the transmission of the coronavirus. Restrictions on movement by authorities through lockdowns have also made the idea of banking from the comfort of homes more attractive.
Necessity has similarly forced paper-based activities that hitherto formed barriers to digitisation owing to cultural and regulatory proclivities, to be similarly streamlined.
Kenya leads the way
The experience varies across the continent. In Kenya, mobile money was mainstream before the pandemic, making the transition to Covid-19 related protocols almost seamless. That is, Kenyans did not need to change their behaviour materially.
According to Adesoji Solanke, director, frontier/SSA banks equity research, at Renaissance Capital in London, “Kenya is the best case in point where the adoption of mobile and agency banking that took off in the early part of the preceding decade led to reductions in the growth of branches and employees over the next decade but gave the banks new revenue pools as they explored new channels to serve the customer.”
Nigerians, on the other hand, besieged bank branches at the earliest opportunity they got. Probably owing to the caution of the authorities and obvious exigencies, Nigerian banks adapted quite swiftly, moving more of their services online.
GCR Ratings senior analyst Funmilayo Abdulrahman in Lagos tells African Banker that “banks had no choice but to service their customers remotely through digital platforms”, with “volume of transactions across digital platforms jumping significantly by an average of about 40% within Q2.”
The Central Bank of Nigeria was also an enabler. With more people making payments using debit cards or bank transfers, there is increasingly, less need for cash deposits at bank branches.
Foreign currency transactions that required a visit to bank branches and offices of FX dealers have also been made less tasking. In this regard, the CBN announced regulations to force almost all FX transactions to be done via bank transfers.
In the past, a customer would typically withdraw hard currency at a bank branch in cash for onward exchange for the local currency and vice versa at a bureau de change. Now, bank customers can no longer withdraw hard currency in cash for that purpose. Instead, the entire exchange is done online via transfers.
In South Africa, it is in the supposedly face-to-face loans process that digital progress is reportedly being made. The pandemic has forced the process to go online, from applying for a loan to disbursement. While it would be no surprise if there is a temptation to revert to the paper-based process post-pandemic, bank executives increasingly say this is unlikely to be the case.
The attractions of cash, paper and branches remain. Still, the obvious cost inefficiencies that have been writ large by the forced efficiencies owing to the pandemic probably have many bank chiefs wondering if they had not been derelict in their duties. In Nigeria, for instance, banks chose to rationalise their branches, opening a set one week, a different set in another.
Renaissance Capital’s Solanke tells African Banker “there has been some cost optimisation – less staff-related but more from cutting unnecessary costs from the stack. Additionally, there are some costs that naturally fell away as many people worked from home but that also led to additional costs in some instances, such as IT expenditure, software licences etc. There were indeed some layoffs or reductions in bonuses, but not in the magnitude you might have expected.”
Considering banks have been able to deliver their services relatively efficiently with less resources, some executives must clearly now wonder about the redundancies in their operations.
Some complain they had little or no choice. Regulators insist on many measures that still require physical, face-face, and pen-to-paper activities. As the same regulators are the ones insisting on more digital approaches, the boats may have really sailed this time around. Customers do not need to speak to anyone for what are already known typical issues. Answers to frequently asked questions can be automated. Biometrics and an increasing trend towards digital IDs suggest there might not be a need for currently tasking onboarding processes in the near future.
No free pass for fintechs
Mobile money does not require much work in any case. More African banks have started to make their digital banking offerings similarly convenient to forestall attrition from fintech firms and agile and nimble digital-only counterparts. Solanke analyses the competitive landscape for African Banker as follows.
“The competitive landscape is evolving rapidly, often aided by regulatory action and inaction,” he says. “Fintechs are finding different verticals to wrap a new business model around but we find that the banks are not necessarily sitting idle as all this happens.”
However, “partnership more than direct, outright competition seems to be the winning response from the banks”, says Solanke, confirming what many bank CEOs have told African Banker when asked the question.
In fact, he adds: “Increasingly, banks are opening up their infrastructure to partner with fintechs via APIs, setting up internal accelerator platforms, investment funds, etc.”
That is not to say banks are giving fintechs a free pass. “Because even as partnerships are more likely in new market or low-end areas,” Solanke believes, “when the fintechs are going directly for the banks’ core customer base, the innovators risk getting acquired, out-competed, or eventual death.”
Making loans still requires human contact for some aspects and should continue to be the case, to establish bona fides, due diligence and so on.
Mundane tasks like customer queries, cash withdrawals and deposits and others do not. And yes, customers would still like to know that their banks exist on the ground, that there is a branch they can go to, that their virtual cash can become physical cash, and that a paper process can be made available if they choose.
Digitisation is here to stay
Still, the evidence suggests they are less likely to want the inconvenience. Solanke believes the increased adoption levels of digital solutions of the banks will be sustained. This is because “the pandemic has lasted long enough for some stickiness to be expected.”
Some banking activities like trade finance remain stubbornly paper-based. But even in this regard, some progress towards digitisation is being recorded. According to the International Chamber of Commerce, “some banks have already streamlined internal processes to promote electronic processing of trade finance transactions”. However, “they also note that these measures will have limited impact without appropriate national and global regulatory support.”
For instance, only Nigeria, Cameroon, Egypt and South Africa currently “allow e-signature and electronic authentication of official documents”, according to the AfDB. Amish Shunker, head of the trade and working capital solutions structuring group at Standard Bank in Johannesburg confirms to African Banker that “some governments are beginning to allow the usage of electronic documentation (e-Bills of Lading, and the like) to support trade transactions”.
More African countries may follow suit. According to Moody’s Kypreos, “the success of M-Pesa has encouraged other countries to allow fintechs (and banks) to deploy similar technologies.”
Besides, “with the possible exception of South Africa, the focus is not on cutting costs, but on reaching the unbanked”, he adds. “For those that achieve this feat, the benefits can be substantial as they will be tapping into a new revenue stream with little impact on their existing revenue sources”.