Partnerships key for digital banking in Africa
(Left to right) Charles Habak, Principal at Booz Allen Hamilton MENA; and Lutfi Zakhour, Senior Vice President at Booz Allen Hamilton MENA.

Partnerships key for digital banking in Africa

Banks have traditionally competed fiercely with each other for deposits and customers. In the past, banks across North Africa and Middle East were kept afloat by government deposits which contributed to their growth, but this has changed in the present day scenario. This has put increased pressure on banks to compete for deposits and rightfully earn those deposits. While there has been much discussion about Omni-Channel experience for new-age banking customers, digital banking is different.

Explains Charles Habak, Principal at Booz Allen Hamilton MENA, “Digital banking brings in a much lower cost play. It provides an opportunity for far simpler and far more automated processes and services and allows you to interact with customers in new ways, all the while lowering the cost base. This means customers who were less appealing to you as a bank in the past, are now suddenly very much interesting, particularly when you start to capture larger portions of those segments.”

So what are the characteristics of digital banking?

  • Digital banking involves identifying new business models and services for existing or new customers, and providing solutions that are integrated with customers’ lifestyles in new markets
  • Services and processes are simplified, shortened, and easy to understand, and leverage a digital customer experience
  • Lower costs are leveraged and these are passed on competitively to customers through lower fees, higher interest rates, and reduced time through simplified processes
  • Customer experience in digital banking leverages digital elements like location, images, and videos

Since the emphasis of digital banking is to integrate into the customer’s existing way of life, finding partners who are already engaging with the target customer segment or target markets is important. “You really have to think about the customer and their everyday routine, and how you can offer solutions that will not greatly disrupt their way of life,” explains Lutfi Zakhour, Senior Vice President at Booz Allen Hamilton MENA.

“You need to take a look at the different partners that already interact and interface with customers today. Each one involved in the partnership knows what value proposition they bring to the customer, and they can offer it on a joint basis without actually having the customer alter his daily routine,” continues Zakhour.

Can digital banking work with the African way of life?

In emerging markets including North Africa and Middle East, a significant amount of payments and remittances are done outside conventional banking channels. These large inflows and outflows of remittances naturally become an important target component of digital banking. However, in these markets, the simplified front ends for customers and the scale of reach to drive down costs, are driven by telecom companies, post office, remittance providers, and other niche technology providers, not incumbent banks.

“From what we are seeing emerging from around the world and increasingly impacting the region – there is no choice but to partner with these Fintech companies. The key is to balance that partnership by leveraging each other’s strengths,” remarks Habak.

Incumbent banks therefore need to offer valued services to their existing and potential customers through transaction partners who already exist in customers’ lives, provided these FinTech partners are effectively integrated with the banks. Banks therefore own the financial relationship and financial aspect of any such service interaction with these customers, while FinTech partners engage with customers at the front end through better scale and experience and provide faster and cheaper services. What banks need to look at closely is where to partner with Fintech companies to provide the best value for their customers, while maintaining and owning the relationship with their customers.

Since the bank is meeting the needs of its customers or providing a service for its potential customers, which partner is engaging with the customer becomes secondary, according to Habak. “It is not who is providing what, it is knowing that the bank at the end of the day will meet their needs and will provide exactly what they require. Whether it means doing it directly or partnering with other firms becomes almost irrelevant to the customer, because the bank becomes the single trusted entity. The bank continues to own and maintain the relationship and to provide the customer what is best suited for their needs.”

Across most of North Africa, banks cannot afford to address large populations of underbanked and unbanked potential customers by continuously expanding the number of branch offices. They have to look at telecom service providers and other Fintech partners as a means of lowering the cost base to address this large untapped population. The biggest competition for banks is the cash transactions that they do not manage from underbanked and unbanked populations, which are completed outside their banking systems. The best way for banks in North Africa to bring those cash transactions from underbanked and unbanked populations into their financial systems is through partnering with those entities that do manage those cash transactions.

How does the digital banking journey unfold?

It is the business managers rather than IT managers who first need to decide on the new business models for digital banking before deploying technology to help, indicates Habak. “We have often witnessed success when technology is deployed as an additional layer on the infrastructure that is already existent. Once a business defines exactly what segments they want to capture and what services they want to offer, technology follows.”

Since partnerships are such an important part of digital banking, IT managers inside banks need to assess the technology models for partnerships as well. However, the most important role of technology remains providing agility and flexibility for the business, while aggregating, simplifying and streamlining the customer experience.

On the regulatory side, central banks and other authorities remain challenged. Services that were once provided by banks are being provided by players outside the realm of banking regulations. While regulators understand the age of digital banking is here and have the right intentions of enabling the market, they have to protect the consumer and protect the financial systems.

“What is really coming to the table is the ability to provide a new framework of regulations that truly enables digital banking and digital payments,” says Habak. One of the challenges for digital banking regulations, is how do you make sure the person who is registering is the person you believe they are, in the absence of physical presence. Another requirement is to regulate the partnerships between Fintech companies and banks.

The stage has been set where digital banking is no longer going to be just nice to have, but a key requisite of being able to compete.


 

Charles Habak, Principal at Booz Allen Hamilton MENA.
Charles Habak, Principal at Booz Allen Hamilton MENA.

 

  • Digital banking brings in a much lower cost play
  • Allows you to interact with customers in ways never been done before
  • Customers who were less appealing to a bank in the past are now suddenly interesting
  • There is no choice but to partner with Fintech companies
  • Key is to balance partnership by leveraging strengths
  • It is not who is providing what, it is knowing the bank at the end will meet their needs
  • Whether it means doing it directly or partnering with other firms becomes almost irrelevant to the customer
  • The bank becomes the single trusted entity
  • The bank continues to own and maintain the relationship
  • Where there is success is where technology is added as additional layer on infrastructure
  • Once business defines exactly what they want to capture, technology follows
  • What is really coming is new framework of regulations that truly enables digital banking

 

Lutfi Zakhour, Senior Vice President at Booz Allen Hamilton MENA.
Lutfi Zakhour, Senior Vice President at Booz Allen Hamilton MENA.

 

  • You really have to think about the customer and their everyday life
  • How can you offer solutions that will not greatly disrupt their way of life
  • You need to look at different partners that already interact and interface with customers
  • Each one involved in the partnership knows what value proposition they bring to the customer
  • They can offer it on a joint basis without having the customer change their way of life

Excerpts from Digital Payments in MENA, A call to action to the banking industry, by Lutfi Zakhour, Charles Habak, Booz Allen Hamilton

MENA countries have the opportunity to double or in some cases triple adoption of digital payments over the coming years. Digital technology is rapidly changing the nature of social interactions and commerce. Digital retailers continue to bridge the divide between physical goods and digital services.

However, despite the evolving consumer landscape, digital payments adoption remains relatively low across North Africa and Middle East, due in large part to the prevalence of outdated retail payments infrastructure and regulations, as well as to the lack of viable digital wallet solutions that effectively incentivise the broad ecosystem to displace cash in favor of digital payments. As a result, MENA countries remain predominantly cash-based despite their advanced information and communications technology infrastructures and digital services adoption. This prevalence of cash creates notable social costs to MENA countries, ranging from 1.5% to 2% of GDP annually.

In addition, it hinders central banks from effectively monitoring transactions and ensuring compliance, and significantly reduces revenue generation for commercial banks from fees, interest, and cross-sell activity as the majority of financial transactions continue to take place outside of their established infrastructures. Cash predominance also impedes the development and growth of financial technology and e-commerce startups and small and medium-sized enterprises, which are confined to small pools of digital transactions, and also decreases their opportunities to partner with banks. This is in stark contrast to western countries, where banks are partnering with startups and SMEs to increase the competitiveness of their end-to-end offerings while limiting their information technology investments.

 Five recommended actions for MENA central banks

#1 Introduce digital payments regulations

Regulators should issue new digital payments regulations and directives to foster innovation and competition in the market, accelerate growth, and offer greater consumer protection while ensuring the right balance between effective market uptake and overall payment stability. Regulations should include key requirements such as licensing and authorisation, capital and safeguarding, governance, limits, and compliance. Regulators should also adopt a more dynamic approach to refreshing and revising their regulations over time as digital payments adoption increase and market dynamics rapidly evolve.

#2 Enhance or carve out retail payments operations

MENA central banks need to consider increasing the speed of innovation and service levels of their retail payments operations through performance-enhancement programs or more concertedly through carve-outs of their payment operations via wholly owned entities or public private partnerships. However, minimum readiness levels must be achieved as a prerequisite to potential carve-outs. Management functions within the central bank with sufficient knowledge and capabilities need to be well established to subsequently monitor the new entity’s service levels and performance.

#3 Collaboratively design and roll out infrastructure

The launch of a new retail payments infrastructure should be carefully designed in collaboration with banks and other key ecosystem stakeholders. Furthermore, the design should be initially owned and incubated by business functions, focusing largely on providing a safe, secure, and convenient service to end users.

#4 Establish ecosystem-engaging governance

Central banks in the MENA region need to set up a governance structure that comprises industry stakeholders—namely banks and other key institutions, such as large corporations. Such governance ensures the development of innovative solutions that directly meet market demand while enabling the rapid identification and onboarding of champion banks and corporations.

#5 Promote pragmatic financial inclusion

Most central banks seek to improve financial inclusion, but in practice financial inclusion is often only achieved if costs are driven sufficiently low. MENA central banks should work closely with commercial banks and other financial institutions to reassess the segments with true potential and volume for digital transactions as a starting point, and help identify suitable and cost-efficient offerings that can effectively cater to their needs. While initiatives such as wage protection systems have rapidly brought the unbanked into the banking system in many MENA countries, large opportunities remain to extend financial services beyond basic payroll and account services.

Five recommended actions for MENA commercial banks

#1 Engage with central banks to roll out modern central infrastructure

Commercial banks need to work proactively with their central banks, or through consortia, to co-design and roll out a modern central infrastructure and digital payments platform. Such engagement will enable them to capitalise on growing technology disruptions rather than to be threatened by disintermediation, and to increase revenue streams with more compelling market offerings.

#2 Establish the right balance between bank cooperation and competition

While competition enables innovation, the creation of siloed solutions that lack interoperability results in limited consumer pools. Commercial banks in the region need to commit to governance structures that strike the difficult balance between collaboration and competition with their peers. Value can only be created through network effects when sufficient cooperation takes place among a critical mass of commercial banks, which must collaborate to launch a single, interoperable solution that is easily adopted and can be used seamlessly.

#3 Develop new products and services

To compete with regional and international technology players, commercial banks need to start designing and rolling out innovative products and services that meet evolving consumer needs. Governance and cooperation are central components of launching these new products and services, but so too are their product development function’s speed, modernisation, and strength of organisational linkages.

 #4 Build healthy consortia

Capabilities of non-bank stakeholders should be leveraged and integrated into niche areas of new bank products and services to increase their competitiveness and market appeal. Core competencies of different stakeholders can be better leveraged if the appropriate value proposition is defined upfront. For instance, technology players can extend infrastructure; telecommunication providers can help strengthen communication security, promotion, and distribution; payment aggregators can provide SMEs with integrated e-commerce and e-payment platforms; and national identity authorities can bolster customer authentication services to enhance the overall value proposition of banks.

 #5 Partner with and incubate FinTech startups

Banks often lack the agility and IT budgets required to effectively innovate to meet market needs. By partnering with or contributing to the incubation of FinTech startups, banks can offer more competitive products and services while incurring less upfront cost. If executed properly, these partnerships can marry the resilience and compliance of bank-based models with the innovation and entrepreneurship of startups, creating compelling offerings that will create the next waves of revenue streams.

Decreasing cash reliance and addressing growing challenges in retail payments should be leading priorities for central and commercial banks in MENA countries if they are to unlock the significant benefits derived from the creation of an inclusive digital economy.

The fate of central and commercial banks in the MENA region lies largely in their own hands. Inaction will entail the continued predominance of cash-based economies, and result in persistent social costs across the economy, limited controls for central banks, and lost revenue for commercial banks and SMEs.

 

 

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