The time is 6:02AM, the year 2026, the location Lagos Financial City. Fatima Abouzeid flails at her digital personal assistant to silence the alarm, which in return flashes her a miffed/not-miffed emoji and starts to warble the main news headlines of the day.
“Markets in Shanghai closed up today on news that the Chinese bullet train manufacturer Fujian Corp won the contract to connect Casablanca to Abidjan… Shares in Echobank rose after chief executive Rosa Lawal suggested the Lagos-based lender might consider a sweetened buyout bid from an interested consortium of Nigerian and South African banks… Energy supplier AfriMaterials announces a new solar farm next to the industrial estate of Tema… And don’t forget your 7:30 with Mr Solarin.”
Fatima sighs and rolls over. “Dammit. Dammit!” Lawal was playing with her. A veteran of the long war between the mobile phone companies and the banks on the continent, Abouzeid is now in the frontline of a new battle. The Nigerian/South African consortium and her own consolidated NorthAfricaBank are struggling to be top dog in the financial landscape. Echobank was the last big player up for grabs, and she had flown there to sound them out. It looked like she had company…
This is, of course, fantasy. There is no way a bullet train will soon cross the Sahara. The rest is in the realm of possibility. Technology, consolidation, fast-rising urban centres and changing industrial structures will all reshape African banks. So who will survive, and who will thrive?
There are issues that may trip up today’s bankers, both from the current global economic malaise and from problems such as the correspondent banking drought caused by new global banking regulations. This hits African banks, which need partner banks to complete transactions for their clients in foreign countries. J.P. Morgan and Citibank have already cut ties to 500 foreign lenders, says Adebisi Lamikanra, a partner at the KPMG consultancy in Nigeria.
But in the longer term, the real threat to banks is from technology. It is now moving much faster than banks, which are “by nature conservative, bureaucratic and not known as being the most innovative of institutions,” according to Brian Richardson of South African financial technology company Wizzit.
HERE COME THE DISRUPTORS
Just as disruptors like Uber and Airbnb are shaking up the taxi and hotel industry, new competitors want to eat the lunch of the banks in core banking functions: payments, storing value and credit. They will do it without bringing with them expensive ‘legacy’ infrastructure such as brick and mortar retail outlets. And they will use ‘big data’ to swiftly gauge creditworthiness. “In 10 years’ time, the technology will be so good,” says Andrew Nevin, chief economist at PwC consultants in Lagos, “that when someone applies for a loan, the only question you will ask is: ‘Can we access your data?’”
For Brett King, co-founder of United States-based banking app Moven, by 2025 the dominant form of bank account will be mobile. “It won’t even be close. Banks that are geared towards distribution of bank products and services using physical branches will be in rapid decline.”
There are also large players impinging on the payments space. They include Alibaba from China and PayPal, Amazon and the forthcoming Google Pay. M-Pesa has been a roaring success for Kenya’s two largest mobile network operators, Safaricom and Vodacom, and others are coming to market with new ideas. France’s Orange, for example, bought a stake in a bank, Groupama Banque, in April to help it to offer payment services.
Does this all add up to an existential crisis for banks in Africa and across the world? Barclays Africa Group’s chief data officer Yasaman Hadjibashi does not see it that way: “It’s true that between 2013 and 2015 it looked like this was a serious threat,” Hadjibashi says. “Today, we are much more likely to offer equity finance to interesting fintech companies. It’s about collaboration, not necessarily competition.”
Safaricom’s M-Pesa is now providing loans, but in partnership with KCB Group – Kenya’s largest bank by assets. It has given out KSh10.3bn ($101.6m) in credit since 2015. That represents just 0.5% of total bank lending in Kenya.
Wizzit’s Richardson agrees, saying that the pushing is even occasionally going the other way. For example, Equity Bank in Kenya and First National Bank in South Africa have mobile phone licences to compete in the telecom space. While you might have thought that the customer-handling and marketing skills of a mobile phone company would be the ideal partner for a bank, many problems arise in the few attempted marriages. “Who owns the customer, for example?”, asks Richardson.
BANKS MUST ADAPT
Even banking doom-mongers like Moven’s King argue that things like credit, especially for larger sums, will remain proper to banks. He explains: “It is more heavily regulated and requires a significant understanding of risk.” He also points out that a startup is less likely to be able to scale up in the same way a bank might.
Nonetheless, Richardson says banks still need to find ways to adapt, and fast. While many banks may have developed a mobile-banking app, they are often a one-size-fits-all solution, instead of specially tailored to students, workforce entrants, senior executives or pensioners. “There is a perception that you can’t have multiple apps all running off the same platform,” he adds.
This also gets to a serious trouble spot for African banks – the back office, where the hard grind of processing payments, clearance and position-taking happens. Oluwatoyin Sanni, the group chief executive of United Capital, a Nigerian investment bank, says that a lot of work needs to be done on this across the board. “In a lot of markets, it’s still grossly underdeveloped,” she says.
Sanni argues that the successful financial institutions of tomorrow will not be those that spend massive amounts on their own platforms but rather those who use open information technology (IT) architectures: “In the mutual fund industry, for example, a lot of the administration and processing of information is being shared on an industry-wide basis. Similar innovations can be used to help banks shed more weight and share back-office resources,” she says.
Those IT systems, even with a revamp, need to be better used, says Barclays Africa Group’s Hadjibashi. Understanding the streams of data that come from individuals is critical for banks, especially less obvious data points such as a person’s social-media profile. Banks could also make better use of data they already hold, such as transaction histories or clients’ interactions with the bank. “Eighty per cent of information sitting in big banks today is still not being fully utilised”, she says.
Banking group Atlas Mara co-founder Ashish Thakkar (see page 26) tells The Africa Report that you do not want to get ahead of the customer and that human contact is valued, too. Hadjibashi says using data to build holistic pictures of customers may help bridge that gap. She explains: “We want to bring authenticity back. Obviously, we can’t go round to our hundreds of thousands of customers daily, so it has to be done with examining patterns of lifestyles: Where do you shop? What do you buy? We see you got married. We see you have kids. What can we offer you based on that?”
This is not an easy task. As Nitin Rakesh, chief executive of US-based fintech company Syntel, told reporters: “It’s like changing the wheels on a moving car.” But the banks that evolve will be best placed to pick up the customer of tomorrow: the millennials, the largest cohort of youth to emerge in the history of the world. For PwC’s Nevin, working with 17-24 year olds will require “an easily explicable offer, paying 6% interest, no charges to move money around, branchless banking, perhaps discounts in their mobile phone bundle.”
Millennials are also the talent pool in which African banks are fishing to staff their operations. A recent report by consultants EY on transforming talents shows that people born between 1981 and 2000 will comprise 72% of the global workforce by 2025. It preaches building teams from a broader mix of people and predicts that organisations will change from a nine-to-five culture, where everyone turns up to the office for a day’s work, to a task-oriented workforce that works more flexibly from various locations.
Ziyad Bundhun, chief finance and investment executive with Rogers & Co in Mauritius, has big ideas about what is to come in terms of the relationship between banks and manufacturers: “The future is all about green energy, the integration of the Internet of Things into manufacturing processes, the mining of polymetallic nodules from the sea bed,” he says. He also argues that the students he meets today are still too conservative in their career choices, studying banking, accountancy and law rather than looking at how the world is changing: “Industrialisation is about material science!”
This idea that tomorrow’s banker needs to get closer to industry has long roots. Germany’s Mittelstand, the richly woven network of middle-sized companies, has ties to lots of mid-size banks that have grown up alongside the companies they finance. The bankers have gained a great deal of industry experience in the process, something which has benefited all partners.
Francis Mwangi, head of research at Standard Investment Bank in Kenya, recommends Africa’s next financiers to benefit from “deep analysis and understanding of industries, companies and economies. This is the only way banks will adequately serve both underserved small and medium-sized enterprises (SMEs), new industries and large industries transcending multiple jurisdictions.” Might Nigeria’s bankers have been so badly burned in the toxic asset crisis of 2009 if they’d had better understanding of the margin lending and energy sector companies which led to their downfall?
United Capital’s Sanni agrees that expertise, closer relationships with different types of clients and “more specialised banking groups or divisions within particular banks” would be helpful. This could prove a survival route for middle-sized banks in Nigeria. “Diamond, Skye, FCMB, Fidelity – they are all going to have to have a distinctive strategy because they are too far away. They are not going to challenge the big banks in terms of economies of scale and size,” warns PwC’s Nevin in Lagos. He says that another wave of bank consolidation is possible in Nigeria.
Certainly, Nigerian banks face a particular challenge, with an economy so skewed towards servicing the oil sector – almost a caricature of an Africa-wide problem. Sanni says this is both an opportunity and an imperative for the diversification of the continent’s economies. She targets agriculture, mining, SMEs and manufacturing as the major opportunities in Nigeria and across Africa. “And, of course, it’s tough because these other sectors are historically tougher to finance,” she adds.
To get round that, the banker of tomorrow needs to be more innovative in structuring funding for clients. “We can layer it, derisk it to some extent,” says Sanni. “When it’s a long-term manufacturing project, look for development banks to take on some aspects of the funding such the infrastructure component. The commercial banks can take the working capital.” She also says there is room for more credit enhancement institutions and export credit agencies, something that the ministers of finance of the future should be working on today.
There are other opportunities, too, for agile banks looking to extend their footprint outside of their traditional industrial stomping grounds. Yabacon Valley, the nickname for a Lagos neighbourhood called Yaba, sits at the confluence of the Yaba College of Technology and the University of Lagos. It is the hub of a thriving technology startup scene and is attracting venture capitalists who see possibilities in a country where 20 million people will have smartphones by 2018. Those companies, if viable, may just need a banker specialised in technology once they leave their startup period in a few years time.
Meanwhile, at the other end of the scale, large pan-African banking groups will continue their attempt to stitch together a string of outposts across West, East, Central and North Africa. Banks need to be prepared for the growth in intra-continental ties too. “There is going to be more investment, trade, and cross-border employment across Africa over the next decade,” says PwC’s Nevin.
So who will be top dog? The leaders in this current war are: Moroccan banks – Attijariwafa Bank and BMCE Bank of Africa; Togo-based Ecobank, itself a big player in Nigeria after the purchase of the bailed-out Oceanic Bank in 2011; Nigeria’s United Bank for Africa and Zenith Bank; and the South African giants Standard Bank, First Rand Group, Nedbank and Barclays Africa Group – the South African subsidiary of Barclays, part of which is now up for sale.
FELL THE BARRIERS
As Africa’s economies expand, there will be room for all of them, says United Capital’s Sanni. She welcomes foreign banks fleeing a lack of yield in the West caused by near-zero interest rates after nearly a decade of quantitative easing. Sanni concludes: “We still have a very large unbanked population.”Technology will help bring in some of Africa’s great unbanked masses, with new companies using data points such as how people store contacts on their phone to gauge creditworthiness (see box).
The regulator of tomorrow has a role to play, too. After the World Trade Center attacks in New York in 2001, stringent ‘know your customer’ regulations have acted as a barrier to participating in the formal banking sector for people who may not have a formal address or a birth certificate. “Take the example of a farm labourer who is earning under $200 a month”, says Wizzit’s Richardson. “How much money-laundering or terrorist financing is he really going to be doing? By having this enormous [demand for] paperwork, we are not allowing him into the system.”
He points to countries that have adopted a risk-based system, with maximum transaction limits and maximum balance limits for those without good paperwork. This is a way of getting people integrated into the banking system while they improve their documentation. Richardson’s radical proposal? “When people are born, they should get a birth certificate and a bank account as a fundamental right.” Regulators and bankers of tomorrow might agree.