THE FSCA PUBLISHES DIGITAL BANKING RESEARCH REPORT

The FSCA recently published a Digital Banking Research Report and its findings from a survey to assess and better understand the state of digital banking activities in South Africa. What is digital banking you ask? It’s the digitisation of traditional banking services in order to deliver financial services to customers with more convenience. This process comprises of the digitisation of marketing, customer onboarding, service channels, processes, products and features such as savings and deposits, loan management and payments of bills. It also facilitates digitally other lifestyle services such a ride hailing, e-health, edu-tech, telecoms, media, etc, through ecosystem orchestration, partnerships and open application programming interfaces (APIs). Below are some of the highlights of the report.

For starters, the report outlines the five different types of digital banks as follows:

• Challenger/new banks such as TymeBank and Monzo Bank Ltd – These banks have full banking licences and compete directly with traditional banks by offering the same services as they do, with more digital facilities. Essentially, they are like fintechs with banking licences.


• Neobanks such as WeBank and Chime – These banks do not have a banking licence, but partner with financial institutions to offer bank-licensed services. Typically, neobanks still require customers to have an account at an existing licensed bank. They are completely digital banks with no physical presence and reach out to customers via mobile apps and web platforms.


• Beta banks such as YONO and Hellobank! These can either be joint ventures or subsidiaries of existing banks, offering financial services through the parent company’s licence. Beta banks are often set up as a way to enter new markets, offering limited services to a targeted consumer base. They target the tech-savvy, millennial customer segment, as well as provide best-in-class innovations.
  


• Non-banks such as Curve and Monese, have no links with traditional banking licences. Instead, they provide financial services by other means. This unique model allows the company to operate independently of existing banks.
  


• Digitised incumbents: the likes Standard Bank and FNB are incumbent banks in pursuit of total digital transformation. They compete with other digital challengers by acquiring their capabilities, and target both digital and traditional banking customers.

South Africa has seen an increase in the adoption of digital channels by financial consumers. The proportion of individuals that used a banking app and cellphone banking increased by 4% points between 2018 and 2019. Retail stores have become more popular as a distribution channel for simple transactions, with store-based bank transactions having increased by 4% between 2018 and 2019. Some examples include Tyme Bank’s partnership with retailer Pick ‘n Pay; as well as the Checkers Money Market product.

According to the report, digital transformation is evident when an organisation reconsiders its use of technology, people, and processes in pursuit of new business models and new revenue streams. It’s largely driven by changes in customer needs and expectations around products and services. The more advanced entities are rapidly digitising across four components:

• Digitising the customer experience
• Digital products and services
• Digitising operations and technology
• Digitising the organisation
  

The aforementioned digital banking survey informing this report comprised of questions covering these four areas.

So, what are the findings?

According to the report, the South African digital-banking market in SA is growing as a result of the benefits being offered by digital banks to customers. The digital banking introduced by incumbents provides easy access to services, whereas that offered by challengers features more innovations than what traditional institutions normally offer.

Although a lot of the South African banks are making significant strides in providing a great digital experience, the digital banking landscape still has major room for improvement. An example would be how studies indicate that digital-only customers continue to report the lowest levels of satisfaction in the banking sector in SA. Another concern among South Africans is regarding the security of online banking, the lack of digital literacy and absence of infrastructure and resources in some communities to support digital banking.

The report further outlines the benefits and drawbacks of digital banking. Some of the benefits include:

• Simplified customers journey - Digital banks can onboard new customers much easier than traditional banks. It is usually a paperless process with documents like proof of ID, employment details and addresses uploaded via smartphones for quick, efficient verification.
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• Convenience and constant access - The digitisation of banking means that customers can now access their accounts 24/7 and carry out all manner of transactions with a few touches of a button no matter where they may be in the country/world.
  


• Lower fees - Automated services need no physical branches, have fewer employees means that digital banks have considerably lower costs than traditional banks. These savings can then be passed down to customers as reduced charges and services.

And now for the drawbacks identified:

• Downtime or Operational Stability – If customers rely solely on an online bank, there could be a challenge in accessing their accounts should the bank experience an online or mobile app outage. There is no branch to visit.
• Security issues - Although security is of higher priority with digital banks, there is always the chance that personal information e.g., username and password could be hacked.
• Technological illiteracy - For those who are not tech savvy, online banking and mobile banking apps can seem difficult to use.

What picture do these findings paint for the financial services sector?

The report puts forward six considerations for applicable entities to reflect on, in order to fully optimize benefits and mitigate the inherent drawbacks thwarting digital banking:

• Consideration 1 - Digital literacy and consumer education
  A transition towards digital banking propositions will require commensurate digital literacy and consumer education to bring customers along.
  
• Consideration 2 - Data protection and privacy
  A digital bank’s dependency on data to serve customers consequently requires enhanced data-privacy and data-protection practices.
  
• Consideration 3 - Cyber security and digital identity
  Digital Banking increases the risk around AML/ CFT, eKYC and cybersecurity, and thus requires competent mitigation strategies
  
• Consideration 4 - Data ethics
  The extensive use of Big Data by digital banks needs to be underpinned by a dataethical framework to ensure the fair treatment of customers they serve.
  
• Consideration 5 - Partnerships and third-party risk
  Digital banks’ dependency on third-party service providers and fintech/digital ecosystem partners requires a third-party management framework to manage the high risk of breach.
  
• Consideration 6 - Digital operational risk
  Digital banks’ emphasis on digital channels increases digital operational and technological risks that may negatively affect customers in adverse or stressful scenarios. There should be backup channels to serve customers in the event of stress or systems failure.
  
  To read the full Digital Banking Research Report, please click on the link below:
  Digital Banking Research Report