South Africa will get three all-new digital banks in 2019, with the launch of TymeBank, Bank Zero and Discovery Bank imminent.
While these new entrants are sure to disrupt the status quo in a market dominated by traditional banking giants, it’s not an easy path to success – and not every bank is going to make it.
This is according to Forrester analyst on emerging technology, Oliwia Berdak, who says that South Africa has ‘fertile ground’ for disruption in the banking sector, but new entrants will need scale to survive.
“It’s unlikely that all the new digital banks in South Africa will succeed,” Berdak said, highlighting some of the biggest barriers they face:
“Digital banks operate on narrow margins, can’t sustain large marketing campaigns and need scale to achieve profitability. The key to survival is acquiring new customers efficiently.”
Internationally, digital banks have seen some early success, the analyst noted, with WeBank in China acquiring 80 million customers since its launch in 2015. Brazil’s Nubank has 7.5 million customers, and Europe’s Revolut has gained 3.5 million customers.
South Africa’s market is very different, however, with a smaller population, with an even smaller banked population.
Battle of the banks
The country’s big five traditional banks are already sitting with a strong lead, with customer bases between 7 million and 10 million – and smaller, newer players, like Bidvest Bank, African Bank and Old Mutual trailing with far fewer.
South Africa does have a large population of unbanked or underbanked people – estimated to be at around 11 million people – though an analysis by Intellidex said that the new digital banking entrants are unlikely to tap into this market in the short term (until 2020), and will ultimately be competing with the traditional banks for the same slice of the middle-market pie.
For their part, the traditional banks aren’t sitting dormant waiting around to be disrupted, either – with many of the banks already introducing new products (like FNB’s eWallet eXtra and Absa’s WhatsApp banking and downloadable account) to meet the rising digital challenge.
According to Jan Meintjes, portfolio manager at Denker Capital, the ability of the established banks to hold on to these customers “should not be underestimated”.
“The new entrants will trade in a niche but will struggle initially to provide a range of services to customers (like the traditional banks),” he said.
Things look good for Discovery
Forrester believes that while some new digital banks will remain niche, others will fail, and some will gain a foothold as they engage customers in new ways.
One new banking entrant in South Africa stands out as having the best chance of success, Berdak said, that being Discovery Bank, which has an established customer base to leverage.
“(Discovery’s) existing customer base should make that (scale) easy,” she said.
Discovery was also on the lips of speakers at the BusinessTech Digital Banking Conference which was held in Johannesburg on Wednesday (13 February).
When pushed to name the new digital bank that is likely to see the most success in South Africa, speakers such as Aupa Monyatsi, managing executive of virtual channels at Retail and Business Banking (RBB) SA, Absa Group, and senior investment executive at Rand Merchant Investments, Dominique Collett pointed to Discovery.
Trends coming out of the conference, which focused on the future of banking and digital disruption in South Africa, pointed to two important factors that will play in the success of a digital bank in the country – scalability, and changing the way clients interact with their financials.
According to Collett, the big disrupters in the market will come from financial groups outside banking that have an established client base – like Discovery. Monyatsi, meanwhile, said that Absa had its eye on the group.
Discovery’s banking model will adopt the successful behaviour-changing strategies of its Vitality Health programme, which has proven to be successful in promoting certain behaviours among clients.
The group is also moving to fully-digital onboarding of clients, and has adopted a one-account transactional model, similar to what has been done by the hugely successful Capitec Bank.
Denker Capital’s Meintjies has also identified Discovery as the one to watch.
With a reward programmed on board (VitalityMoney), an established client base – many of whom are clients at the big banks that may switch over – Discovery is the most likely to pose a significant risk to the incumbent banks, he said.
Where digital banks should focus
According to Forrester, despite the challenges, digital banks still have strong focus areas.
Specifically, automation technologies allow product applications to be processed instantly and customer queries to be answered 24/7.
This includes AI and chatbots, which create virtual assistants that help customers.
“And let’s not forget cloud-based infrastructure, which allows digital banks to add capacity as needed,” she said.
“South Africa is a fertile ground for disruption, with a strong concentration in the banking market, high fees, large unbanked and underbanked population, and a young, digitally-savvy customer base,” Berdak said.
“It’s up to the digital banks’ leaders to make the most of this opportunity.”