Digital transformation is a challenge for all sectors in South Africa, and increasingly so in the banking and financial services industries. This industry has seen an influx in innovative fintech and digital banking competitors, causing the existing players in the industry to reassess their business models.
This year will see the banking sector adapt to keep up with the competition. Banks will continue to find ways to steer away from conventional banking and adapt their approach in a more technologically suitable way for their customers.
Software AG foresees five probable changes in the banking industry locally and globally that will have a key impact from a competitive and operational perspective. Fintechs and digital banks will see conventional banks adapting to the practices of their competitors, and in some cases, acquiring them.
Client data will become a key decision driver
Client data will become the most valuable asset. Annually collecting data in banks receives significant investment but very few have capitalised on or operationalised this data to generate revenue. Moving forward banks will employ approaches such as predictive analytics and machine learning to achieve this. This provides banks with real-time opportunities to increase revenue by offering solutions to clients that are customised to their unique needs or to their needs at that specific moment. This mass-customisation approach also uses the data collected to continuously learn and provide automated responses to their customers.
Mergers and acquisitions
Banks are likely to start acquiring fintechs and digital banks that are disrupting their business. Banks have the balance sheets, distribution and greater trust with a broader range of consumers whilst fintechs and digital-only banks have newer and more agile technologies. These make for a powerful combination, though the cultures are significantly different. It will be an uncomfortable union at first, but the result of this collaboration could prove to have greatly beneficial result.
Rising interest rates will drive consolidation in mid-tier banks as well as divestitures, as large banks exit less profitable business lines. At the same time, active asset management is losing market share to the index providers. Automated advisors, offered by long-standing competitors as well as fintechs, pose a further threat to traditional asset management. With the rising interest rate environment, which few active portfolio managers have experienced, there will probably be more automation and consolidation in asset management as well.
Less branches, more value
Bank branch closings will accelerate as customers increasingly adopt mobile and online banking services. Most banks will maintain smaller, anchor branches to provide a reassuring brick and mortar presence versus purely digital competition. However, as they transform and focus on costs, they will transition remaining branches to low volume/high value activities.
Regulatory and market forces will ultimately change the way people bank. Competitive forces globally are seeing leading banks leapfrogging regulation to open up their systems and data, and begin to develop ecosystems of partners. The result will be greater choice and competition for customers, and the possibility of entirely new revenue lines for retail banks.
Banks will operationalise their data, open and partner up with their competitors and scale back on the physical world to invest in the digital world. These changes will impact the way everyone approaches banking in the future.