Africa’s digital banking revolution

African Bank Holdings Ltd. is joining the rush into digital banking to fail-proof the business and provide an exit for shareholders that resurrected the South African lender from its collapsed former parent.

Background

Digital banking is part of the broader context for the move to online banking, where banking services are delivered over the internet. The shift from traditional to digital banking has been gradual and remains ongoing, and is constituted by differing degrees of banking service digitization.

Digital banking involves high levels of process automation and web-based services and may include APIs enabling cross-institutional service composition to deliver banking products and provide transactions. It provides the ability for users to access financial data through desktop, mobile and ATM services.

The decision for banks to add more digital solutions at all operational levels will have a major impact on their financial stability. While not all banks are in a position to make quick changes to IT infrastructure or the architecture on top of it, banks aiming to be disrupters can move toward broad end-to-end automation and can do so over about a six-month time frame.

Emerging forms of digital banking include BaaS (Banking as a Service which allows for third-party integration), BaaP (Banking as a Platform for integrating core systems with software), Cloud-based Infrastructure (allows less reliance on IT staff) and White Label Banking (such as co-branded credit cards). These solutions build on enhanced technical architectures as well as different business models.

Analysis

African Bank is staging its comeback in a much tougher economy and a crowded field as its bigger competitors and owners, including Standard Bank Group Ltd. and Absa Group Ltd., compete more aggressively to boost revenues. At least three new players are entering the industry, hoping to draw away customers with low-cost digital offerings.

The firm’s unusual owners, which includes the South African central bank and six of the nation’s largest lenders, stepped in to save it with an equity injection when African Bank Investments Ltd. went into administration five years ago. Now, as the business gets back on its feet, the bank’s competitors will want a way out, whether that be an initial public offering or a takeover, said Chief Executive Officer Basani Maluleke.

African Bank’s peers came to the rescue to protect the nation’s financial system when too many of the lender’s customers defaulted on their unsecured loans and it was unable to raise more cash on capital markets. Now, the bank is diversifying its revenue base away from unsecured credit, and trying to raise deposits to strengthen its funding base, Maluleke said.

African Bank is launching a transactional-banking offering to clients and will add more products, such as additional insurance policies. The lender is partnering with Direct Transact Pty Ltd., a Pretoria-based provider of electronic-banking and payment processing services, and Portuguese financial technology firm, ebankIT.

After tightening its credit risk appetite, African Bank is digging deeper into client data to find other ways of growing the business, Chief Financial Officer Gustav Raubenheimer said in the same interview. For example, it’s extracting information from two different credit bureaus rather than just relying on one.

African Bank will also keep prices low and turn its 392 branches into service hubs where clients can seek advice, Maluleke said. The company is aiming to grow non-interest revenue to more than 500 million rand by 2021, from 27 million rand at the end of September, and more than double its customer base to 2.5 million by then.

“While changing our unique shareholder structure is important, it is not on the front burner,” Maluleke said. “Our aim is to first create an asset that investors will be keen to buy into.”

Assessment

Our assessment is that a digital banking revolution is the need of the hour for struggling African banks. We believe that the centralisation and digitisation of key banking services will reduce the operating costs of African banks while expanding coverage of basic banking services to the masses.