Demographics, new technology and central bank support are fuelling a rush by banks towards digital transformation across the two regions, writes Jean-Paul Mergeai
People power is forcing a fundamental change across Africa and the Middle East in one of the most conservative industries – banking.
Historically, banks across the two regions may have been slow to react to new consumer demands and technological changes. But market forces are changing all that, increasingly pushing them to modernise their core technology and become digital-first.
Tech savvy, younger populations are flocking to new banking service providers that allow them to make and receive payments, take out loans and or buy insurance policies faster and with greater convenience.
These services are often supplied by companies other than traditional banks – telecoms operators, platform companies such as Apple, Alipay and payment players such as Square, as well as new challenger banks all using digital technology. Rather than let these challengers eat their lunch, banks are changing their business models and embracing digitisation to allow them to compete.
This trend is clearly seen in the latest survey of retail bankers undertaken by Temenos with the Economist Intelligence Unit: Whose customer are you? The reality of digital banking in the Middle East and Africa.
Perhaps most striking is that 68 per cent of respondents say the biggest influence on their business models will be the need to adapt to the new demands of customers. This is significantly higher than the global average of 58 per cent and indicative of just how seriously banks are taking the threat posed by emerging players and the changing demands of their customers.
Digital front to back
Dig a little deeper into the report and it's clear banks see full digitisation as the key. Where before a new front end – what customers see – or a mobile app might have been deemed sufficient, today banks realise that only a full transformation resulting in a front-to-back digital core will allow them to deliver what they need in terms of product agility, affordability, efficiency and scalability now and into the future. Indeed, just over half (51 per cent) are focusing investment on digitising their core systems.
What's really interesting here is that evidence for this isn't limited to our research. Banks such as Afriland First Bank, Bank Muscat, Commercial Bank of Africa, Sandah, CIB Egypt, Bank Al Bilad and Alinma Bank have all adopted a full digital core and are reaping the benefits.
Bank Muscat, for example, which implemented a Temenos core banking platform in 2007, helping it improve revenues, profitability and speed to market, is still going from strength to strength. Just last month it was named Oman's Most Trusted Brand in the banking sector for the third year in a row, in recognition of its excellent customer service and innovation.
The importance of ecosystems
But banks also realise that a secure future is also about being open and collaborating with partners to offer better services. Fifty-seven per cent of respondents said they wanted to develop digital ecosystems to help them provide the kinds of products and services customers want.
The benefits are clear – a digital ecosystem uses APIs to quickly and cost effectively integrate third-party solutions into a digital core, helping banks round out their capabilities and enhance their customer experience.
Kenya Commercial Bank's collaboration with telecoms operator Safaricom is a beacon of how to work successfully with partners to create a digital ecosystem. Seen as a model of financial inclusion, the two companies launched M-Pesa in 2007, which is now the most successful mobile payment service of its kind.
Powerful customer proposition
Running a different model, Commercial Bank of Africa, also working with Safaricom, set up mobile payment service M-Shwari in 2012. Today it has more than 21m customers. The reason behind its success? Its ease of use. Armed with no more than a mobile phone, you can open a bank account, apply for a loan and receive the money in less than a minute – this in a region where on average there are just 5.3 bank branches per 100,000 adults.
Such services are having a real impact. A recent Ugandan study showed that customers using mobile phones spent nearly 60m fewer hours dealing with their banks over a three-month period. Research also indicates that digital services are helping improve gender equality, giving women greater financial control and access to micro-finance. No wonder similar services are being launched elsewhere, including Ethiopia, and that central banks are encouraging collaborations between banks, fintechs, telecoms companies and other non-fintech players to improve financial inclusion.
With such strong real and potential demand, the ability to scale is essential. This is where cloud computing comes in. Microsoft is set to open regional data centres f in Dubai, Abu Dhabi and South Africa next year to deliver cloud services. These will meet regulations regarding local data storage and allow banks to access powerful computing power without having to own the infrastructure, making it more affordable. According to the EIU research, many banks in the region (57 per cent) are saying the cloud would help improve performance and scalability.
The changes in demographics, technology and regulations are all undeniably pushing banking across Africa and the Middle East further and faster than ever towards digitisation. Those that have already started down this route are reaping significant rewards; many others are looking at how to follow suit. It really won't be long before the two regions are fully digital-first.
Jean-Paul Mergeai is Managing Director, Middle-East & Africa