The Changing Face of Banking

African banking is at the cusp of change internally and externally, both in form and function, with changes being initiated by competition, accelerated by technology shifts and an evolving demographic.

As the global consumer banking industry begins to recover from a widespread slow down, all eyes are on Africa, which is accelerating at a much faster pace than others. According to the 2018 McKinsey report, Roaring to life: Growth and innovation in African retail banking, Africa's consumer banking industry was the world’s second-fastest growing and second-most profitable last year. The key statistic here is return on equity (a sure-fire measure of success), which is nearly 15 percent for African banks, more than double that of banks in developed markets across Asia, Europe and the US. If that's not enough to salute the underdog, Africa’s retail banking market is predicted to grow at an annual rate of 8.5 percent over the next five years, compared to 4.5 percent for banks in developed countries.

Africa's banking industry is among the most exciting in the world. The retail banking sector in particular is a locus of new business models, emerging in response to weak spots and challenges. Heavy use of cash, low levels of banking penetration, sparse credit bureau coverage and limited branch and ATM networks, result in a shift in numbers, and ultimately forge a new worldwide trend. Amid new technologies that have changed the way consumers manage their money and pay for things, the traditional bank in the US has, until last year, been in decline. In fact, branches have been closing at a rapid pace, with 1,771 closing in 2017 alone. Africa, in contrast, is in the midst of a historic acceleration that's creating an emerging consumer class while propelling economic growth. And the figures speak for themselves; the number of people becoming banked has grown from 170 million in 2012 to 300 million in 2017. There’s no doubt that Africa is doing something right.

In this fast-growing, complex market, there are vast differences in performance between leading and lagging banks. The drivers of these differences can broadly be classified in five themes:

1. Draw the right map
2. Offer customers right segments and compelling offers
3. Leaner, simpler banking
4. Follow a digital first strategy
5. Innovate on risk

What drives the stark differences in performance between the top and bottom quintile banks? Leading banks in Africa display one or more of five winning practices, and these practices are direct responses to specific challenges that all African banks face:

1. Fragmented market
2. Large low-income population
3. High-cost models
4. Low branch penetration
5. Low credit bureau coverage

In Kenya, international banks were the leading players in the market for a long time. They used an international lens to simultaneously look at local and economic dynamics, therefore missing crucial opportunities. Yet, in the last 15 years, local banks have made a comeback. They better understand the behavior of local people, are quick to embrace mobile money technology (an area in which Africa is a global leader) and are never short of clever solutions that fit the market. Commercial Bank of Africa (CBA), one of the country’s top performing banks in recent years, knows where business opportunities lie. By joining forces with the Nairobi-based telecom giant Safaricom, it was able to roll out M-Shwari: a low-cost mobile phone service for micro loans and savings. Made possible by Safaricom’s ubiquitous mobile money service M-Pesa, customers can borrow US$1 at a flat rate of 7.5 percent. CBA offers better interest rates and higher credits to customers who exhibit good savings and loan repayment behaviors, and keep track of this through nifty telecommunication data. In response, other banks are launching mobile money solutions in cooperation with mobile network operators, such as KCB Mobi loan from Kenya Commercial Bank (KCB), Eazzy Loans from Equity Bank, Y’ello from Nigeria's Diamond Bank, MoMo Kash from Bridge Bank in Cote D’Ivoire, and Pan-African banking leader Ecobank, which offers mobile banking in many African countries through an arrangement with French telecom Orange. Thanks to the sharp rise of mobile financial services, millions of low-income, previously unbanked Africans are suddenly able to access affordable banking products, and are starting to appreciate the essence of acting in the financial market.

Africa is re-inventing the future of banking. There are currently 100 million active mobile money accounts in Africa and the volume of cashless transactions grew by 13 percent per year between 2014 and 2016. The revenue from consumer banking in Africa is worth approximately US$86 billion today and is expected to reach US$129 billion by 2022. By then, 450 million Africans are expected to be banked, close to the entire African population.

A number of the continent’s leading banks have been making progress through end-to-end digital transformation, sales productivity and back-office optimization. A few others have even launched fully digital banks, such as ALAT bank in Nigeria, which targets younger customers, an underserved segment of Africa’s largest economy, where more than half the population is under 30. With fierce competition from non-bank lenders like Okash in Kenya, there is no doubt that banks still have work to do.

This is good news for African consumers who are finally getting access to a wide range of affordable and easily accessible mobile and digital financial products, not only in payments and deposits, but across the full spectrum of financial services.