The South African Reserve Bank (SARB) is responsible for banking regulation in South Africa and various Acts provide the legislative framework. To operate as a retail bank requires a license which is subject to the requirements of the SARB and a rigorous approval process.
Requirements include holding sufficient capital to ensuring anti-money laundering processes, as well as putting in place risk management and corporate governance.
The business plan is also scrutinised as well as product lines, internal auditing standards, external auditors and even IT capabilities are considered.
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All of these require significant investment, resources, time and focus; this must be managed by leadership teams with appropriate skills and experience.
Like any industry, banking also has unique aspects that require insight and strategy to be successful; managing people’s money requires trust, strong brand identity and suitable products and services.
Incumbents also have the advantage of existing market share that they can defend with pricing and products.
The Big Players In Retail Banking.
The dominant banks in the South African market have grown and consolidated off a base that was originally established during the country’s years of isolation from the world’s financial systems pre 1994.
The local industry was internally focused, opportunities for new entrants was limited and regulation was designed to compensate for isolation rather than encourage competition and efficiency.
Equally in the financial crisis of 2008 this approach was a shock absorber to the liquidity crisis that required many large global banks to be bailed out by taxpayers; at significant cost of trust and goodwill.
It is thus very difficult to overcome these barriers to entry and stay competitive and profitable long enough to attract a base of trust-sensitive customers away from established players.
There is also no incentive for banks to spin off because the value proposition requires end to end product offerings that are sold and serviced on integrated platforms. Although Momentum and Discovery spun off from the FirstRand group, at the time they were not considered core to the financial services offerings that that the group was focused on.
Non traditional, new entrants Insurance companies, telcos and tech companies are in various stages of rolling out banking services because controlling the main, transactional bank account of an individual or business is extremely valuable.
The level of customer intimacy and insight that revolves around the main bank relationship simply doesn’t exist in an insurance policy or cell phone account.
Tech companies were previously quite removed from the customer until Apple changed the nature of IT by personalising it and creating a whole new market for a slick and mobile experience of technology.
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Like banks, these non traditional players have also worked hard to build customer data, infrastructure, established products and market presence. Cross selling banking products into their customer base both leverages these existing assets and creates new profit pools from incremental cost.
Traditional banking players have relied on the barriers to entry to keep new entrants out but the rise of fintech appears to be changing this as banks have quickly built ecosystems, partnerships and incubators to ensure they have preferential access to this disruptive technology.
FirstRand continues Driving Successful Innovation
The FirstRand group has a range of initiatives that ensure it stays at the forefront of innovation, continues to offer competitive banking services and builds on its significant trust and brand loyalty in the market.
Most importantly the entrepreneurial, owner-manager culture ensures that individual business units are able to stay flexible and close to their customers while also working closely with eachother to provide integrated financial services across lending, investing, insurance and transacting.
Fintech initiatives at FirstRand include the Alphacode incubator which supports start-ups that are developing digitally disruptive technologies. RMB’s newly established Foundery division is driving various projects including leading the group’s engagement with the industry on blockchain.
FNB’s Innovators programme has been running for over ten years and paid out over R42m in employee incentives for implementing innovative ideas. The bank’s annual codeFest sees hundred of developers converging to build solutions and solve business problems in an extremely agile and transparent way; driving healthy IT and business collaboration.
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FNB’s Differentiators In The Market
The bank’s digital platforms have been rated the best in the market for the 3rd consecutive year and this demonstrates a successful commitment to ensuring frictionless and world class self service customer channels; this is often the starting point for disruptive new entrants.
Traditional bricks and mortar channels are being rationalised due to the success of moving customers onto these digital platforms. Customers benefit from improved mobility and accessibility while innovative new products can also be rolled out quicker.
Business banking at FNB has been rated the best in the market for the 3rd year running and features a highly innovative ecosystem of free value adds such as an accounting package, cash flow management solutions and employee payroll; all managed within the highly secure digital platforms.
Regulatory innovation includes real time fingerprint verification through home affairs from within our branches, FNB is the biggest user of this service, processing nearly 2m fingerprint verifications monthly.
The bank also offers ID and passport processing services in 4 pilot branches as part of the industry / government collaboration called eChannel.
Businesses can also apply for name registration with CIPC through a simple online process on FNB’s website and BEE scores can even be checked through FNB’s partnership with Empowerdex.
What’s happening globally
Google has banking licenses in 30 US states, nearly 30 new banking licenses were awarded in the UK during the last ten years. Looser banking regulation in these geographies is allowing a surge of new entrants who are taking advantage of Fintech while the incumbents struggle to optimise their large fixed cost infrastructures.
Brand strength, customer loyalty and trust equity is still strong with traditional players but global tech disruption such as block chain and cryptocurrencies are rapidly gaining traction and threaten for example the bank’s control of payment processes and the commission the earn as a result.
The local banking industry is extremely resilient, innovative and well governed; it is likely to anticipate and counter global fintech and local new entrants quite effectively.
The winners globally and locally are likely to offer an app store concept of financial services products that seamlessly integrate to provide maximum brand choice with frictionless service.
South African banking customers already benefit from numerous mainstream innovations that are only recently adopted in more established economies (such as chip and PIN cards) so it will be at least 5 years before large scale fintech starts to disrupt SA banking.
The Future of Retail Banking
Banking, telecoms, insurance and technology are all racing for ultimate ownership of the customer relationship. Exponential growth companies have been largely technology driven in other industries such as transport (Uber), accommodation (Airbnb), retail (Alibaba), communications (Whatsapp) and content (Facebook).
Banking as an enterprise is unlikely to grow exponentially although established banks could develop product lines that achieve exponential growth and cannabilise other parts of their business.
Part of exponential growth also requires the dematerialisation of assets into micro services that abstract simple usefulness into a peer network of distributed trust and exchange of value; a person’s car, a person’s bedroom etc.
If these industries are a model for banking in the future it is most likely that blockchain will play a key role in the dematerialisation of banking infrastructure but re-invented banks could still be important role players in these networks.
Even though people might not need banks, they will still need banking.
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