What SA's new banks will mean for the future of financial services

Switch's Brett Terespolsky says new banks are targeting specific market segments - a strategy for success.

It seems 2018 has been the year of new banks in South Africa. With nearly every new month, we’re hearing about a new player in the space that has applied for a banking license. These new banks have various banking licenses from traditional and mutual to co-operative, and include the likes of Discovery Bank, Bank Zero, Tyme Digital, African Bank, Postbank and Young Women in Business Network.
 
Then there are other digital banks, like Bettr, that are entering the market. These aren’t fully-licensed banks, but rather make use of sponsor banks. So, what does all this mean for the future of banking in South Africa?
 
South Africa, like most African countries, faces some very interesting challenges when it comes to banking. A very high portion of our population is unbanked, which has led to various FinTechs and banks developing solutions to cater to this particular market. Most of these solutions come in the form of a digital wallet with front-end (web, USSD, ATM, etc.) attached to it.

For this reason, banks are required to spread their focus across the banked (people looking for new innovations to make their lives easier) and the unbanked (people that are still using lots of cash). But, when you’re spending a fair amount of time developing your new USSD interface and menu structure for transacting, it’s difficult to also focus on new technologies such as blockchain, AI, etc. What is clear is that there needs to be innovations in both sectors, to make banking easier and more secure for all South Africans.

The current big banks in South Africa seem to be splitting their attention between these two very different markets and this may lead to disappointing both. The new entrants all seem to have chosen a market segment to focus on and this gives them the advantage of clarity.

Postbank’s physical presence
There’s a clear divide between the people that want banking to be as machine-driven as possible and those that want the human touch. There are people that have accepted the digital revolution and are happy to bank completely online and using apps. These are the kinds of people that when the bank says “sorry, but for that you need to go into a branch”, they start looking for a new bank. They see no need for branches, and believe it’s much more efficient to bank on their own terms, using a medium of their preference.
 
On the other hand, there is a large sector of the market that doesn’t trust a screen to give them their balance or confirm that a transaction has happened. This method of banking lacks any tangible artefact that builds trust for them in what is happening. Due to this, this group of people prefer speaking to someone in person or on the phone, and hence there’s still the need for branches and telephone banking.
 
Proof of this is how self-help branches haven’t managed to meet the needs of either segment. However, Capitec is opening many branches yearly and they’re growing at a rapid rate. (Part of that success lies in the fact that they’ve also made their branches accessible and non-intimidating to invite anyone from any stretch of life in, to do their most sensitive work).

This lack of trust makes the notion of South Africa going plastic-less soon a pipe dream. The card is tangible and is gaining trust slowly. Moving to NFC and QR code-based payments entirely would exclude a large portion of the population from being able to transact in the short term.

Postbank will have a clear advantage in the “new” banking era as they can and will leverage all the Post Office branches across the country – the number is over 1,500, which is more than double that of Capitec and so they could be a serious contender to Capitec’s growing market share.
 
South Africa is ahead but struggles to implement
South African banking has been ahead or, at the very least, on par with the rest of the world. We have some of the best online banking experiences, and payment methods like Snapscan and Zapper are revolutionary. There are many other great examples of South African banking and transactional innovations. Yet, I feel that it will be difficult for the banks to hang on to their naturally innovative ways, due to two main reasons:

  1. Lack of education on new products and services offered by the banks: A good example of this is tap-and-go type payments. These technologies have been around for some time and most banks have implemented them in their bank cards, but it’s taken ages for vendors to know what tap-and-go is, as well as how to use it. With the introduction of NFC payments from a cellphone or smartwatch, this problem worsened. When FNB launched their smartphone tap and pay, they were incentivising their customers to use this payment method by running competitions to win eBucks and more, but the vendors had no idea. What’s clear here is that banks aren’t doing their bit on the education front.
     
  2. Lack of collaboration between banks and FinTechs: South African banks seem to want to own everything. It’s very uncommon for banks to work with a FinTech company or others to create the best products and services. From Finovate in Dubai, I saw the banks there willing to work with the best and the brightest to delight their customers. If this doesn’t happen here, it will prevent South African banks from staying ahead of the curve.

The new entrants into the banking space may not follow these same bad habits. We’ve already seen Bettr creating an ecosystem, showing that they have no interest in owning everything. Bank Zero being a mutual bank is a very different approach. They’re clearly focusing strongly on creating a culture of savings and being a mutual bank, they can pass cost benefits onto their customers.

What’s the future?
It will be interesting to watch the development of the banking industry over the next couple of years. With the new wave of digital banks coming to South Africa, there’ll be a big increase in new, innovative solutions available. I guess the real question is whether these new banks will listen to their customers and use that insight to create the best experience for them.

I suspect that we’ll start to see more peer-to-peer payment options. Currently FNB offer Geo-payments which work very well, but there are examples from around the world that allow users to send money using their contact list. I also think that with the launch of Discovery Bank, there will be more rewards-based saving and banking, and it will be interesting to see how they implement that. And, on the other end of the spectrum, I think the smart banks will be working on ways to reduce time that customers need to spend in a branch, so branch visits don’t become a full-day event.

Most of the new entrants in the market are avoiding brick and mortar branches to be fully-fledged digital banks. While this is great news and shows the progression in banking technology, this may not be the perfect fit for South Africa. Given Capitec’s model of opening more branches to instill trust in customers across the country, maybe these new banks are missing a trick? Only time will tell, but we’re in exciting times and I am eager to see how the competition changes the landscape of banking in country. The real winners in the industry will be the ones that can get the unbanked to sign up and more importantly, build trust with these customers.