The African ‘big five’ animals are getting harder and harder to spot. In the meantime, however, the presence of a lesser known big four is dominating more of the landscape. I’m referring to First National Bank, Standard Bank, ABSA and Nedcor, the four biggest banks in Africa, whose operations now account for roughly 90% of all retail banking activity on the African continent. To European readers, this dominance of a few strong brands might sound familiar. In fact, contrary to popular belief, there are a number of similarities between the banking landscape in Africa and Europe.
For example, although the repercussions of the financial crisis necessitate a certain level of caution, investment in technology is happening on a large scale. There is also a focus on ensuring that customers are provided with the very highest standards of service. However, while similar business drivers and market challenges prevail, the backdrop to these issues is somewhat different to that of the western world.
At its furthest points, Africa is roughly 8,000 kilometres from north to south and 7,400 kilometres from east to west. In total, the continent has an area of over 30 million square kilometres, which makes it three times the size of Europe. This difference in geography, however, is not reflected in population. Despite being three times larger, Africa holds only 17.4% of the world’s population, compared to Europe’s 11% share. This gives an indication of how much more geographically disparate the population is.
Providing such a far-reaching population with access to banking services is clearly challenging in itself, but combine this with the fact that much of the continent’s economy functions on cash, and that a large proportion of the population is unbanked, and you have a different set of challenges. According to research carried out in 2010 by the World Bank’s independent research company, CPAG, only 12% of households in sub-Saharan Africa are banked. The figure was higher for the north of the continent and South Africa, of course, but is far from the 50% figure attributed to Europe.
Reaching the Unbanked
Reaching Africa’s unbanked millions and providing them with access to banking services is currently one of the highest priorities for many African governments, which work collaboratively with regulators and banks in the region to drive forward development. One example of this collaborative approach has been the ‘Mzansi Account’ in South Africa. The Mzansi Account is the result of all major banks working together. It provides fully functioning banking services to those that have previously only operated using cash. Those who open an account are issued with a card and the associated services that come with it. According to research from development organisation, Finscope, the number of banked adults in South Africa rose from six to 20 million between 2004 and 2008, with the Mzansi initiative accounting for two-thirds of those new customers. With 12 million still unbanked, the process is definitely an ongoing one, but the system is undoubtedly working well.
However, the Mzansi Account is no silver bullet, because even with a card and access to the banking system, the huge scale of the country means that for many people, accessing a branch is just not possible. Because of this, the ATM network is of crucial importance.
The ATM network is sophisticated in South Africa, with a healthy level of competition for banks to create revenue through interchange. There is also a significant opportunity to maximise the functionality of the channel, not least because of the fact there are few of the legacy systems that banks in Europe are used to grappling with.
The combination of relatively new banking systems and infrastructure with the need for banks to reach more of the unbanked population means that African banks are leapfrogging the west when it comes to innovative functionality.
For example, with a high percentage of the population having little or no computer access, banking has by-passed the internet channel and the development of mobile banking is much further forward than in the developed world. In the five years up to the end of 2009, sales of mobile phones soared by 550% across Africa. The regional mobile operator, MTN, forecasts that a full 80% of the population in its 15 African markets will own a mobile phone by 2012.
A Relevant Channel
Some in the payments industry question the relevance of the ATM channel in an increasingly electronic banking (e-banking) and mobile banking (m-banking) world, but Africa is a perfect example of exactly why, far from being competitive, the ATM and emerging mobile channel are in fact very complementary. In fact, until someone invents a way for the mobile phone to dispense banknotes, the ATM is pretty safe. An example of the mutually beneficial nature of the mobile and the ATM is the mPesa system that has been very successful in Kenya. This system enables recipients of money transfers instigated over mobile to pick up their cash at the ATM.
However, any added functionality at the ATM means that the environment becomes far more complex. The ATM host system has to handle a wider range of scenarios, and all new functionality must be introduced to the network and work in harmony with existing systems. Because of this increased complexity, there is a higher chance of faults and glitches occurring, and this is bad news for banks and ATM providers. Faults mean ATM downtime and, as the ATM is (in Africa at least) often the only interface between a customer and the bank, poor availability can be disastrous.
Manually testing this complex ATM environment is becoming more and more challenging and the bottom line impact on faulty ATMs is becoming better understood. As a result, many forward-thinking banks are now considering the need to move from a manual to an automated testing procedure.
To take South Africa as an example, a country that is now well on the way to full Europay Mastercard Visa (EMV) (the international chip card standard) migration, EMV-compliant ATMs are about ten times more labour-intensive than traditional ATMs to test. As for the impact of added functionality, collecting an mPesa remittance from an ATM means that testing scenarios increase by another several hundred, when one considers all the combinations and languages that are supported and the many different bill mixes required to service a diverse customer base. In fact, it’s not uncommon for daily test case scenarios at a sophisticated ATM in Africa to exceed 5,000. With one manual test taking from five minutes to more than an hour to conduct, it’s easy to see why automated testing is increasingly being seen as the way forward. This is already the case for many banks in Europe, but it is equally important in Africa, where the ATM channel is so critical. After all, it’s frustrating enough for those of us in the developed world to need cash and then discover our nearest ATM is out of service; imagine you have travelled 20 kilometres to reach it, have no branch within a 100 kilometre radius and then have no access to the cash when the ATM fails.
The unique geographic and demographic characteristics of Africa certainly provide African banks with an interesting set of challenges. However, in many cases, innovation in this region is leapfrogging that of the west. It’s certainly an exciting region to watch, especially in terms of channel development. The ATM channel has undoubtedly been one of the most important tools in helping banks achieve their aim of reaching more of the region’s population. With more to be done to reach the remaining unbanked population, the ATM will continue to be a critical channel that must be robust enough to carry the future strain.
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