The Federation of German Industries (BDI) has recommended that the German government throw its weight behind the African Continental Free Trade ... Area (AfCFTA) Agreement, arguing the continent is pivotal in efforts to diversify markets.
“The bank has scaled quickly and built a uniquely powerful digital banking and technology capability,” says Hylton Kallner, Discovery Bank’s CEO.
Kallner added that the bank will be the “de facto operating system” for Discovery Group, which controls the insurance company Discovery Health and serves 3.3 million people (40% of South Africa’s medical market).
Ripe for disruption
“Surely, if Discovery, a mere insurer, bags one million customers and $600m deposits so quickly, it means the ‘Big five banks’ [Absa, FNB, Standard Bank, Nedbank, Bidvest] are complacent,” says Carter Mavhiza an independent public accountant in Johannesburg.
South Africa is the continent’s largest retail banking market and its banks carried a combined asset book of $448bn in 2020. However, the country’s more traditional banks are increasingly having to fight accusations of running a monopoly market, exchange-rate rigging, and levying high fees on transacting customers to such an extent that in 2017, a study compiled by Boston Consulting Group (BCG) revealed that though 71% of South Africans held bank accounts, only 24% of customers made more than three transactions per month for fear of exploitative costs.
It’s out of this consumer-led anger that the pandemic accelerated demands for a new form of low-cost, digital banking in South Africa.
“The first million accounts [are] an endorsement of our shared-value banking model and provide us with a strong foundation to continue to disrupt the market,” says Kallner, who claims that Discovery Bank is “now the leading digital bank in South Africa.”
Branchless banks look set to meet the same limitations that South Africa’s ‘Big 5’ traditional banks have encountered.
Other digital banks have also shown signs of success. Bank Zero, the App-only bank which touts zero fees, has set a target of 100,000 customers to break even and has reportedly seen up to 49,000 downloads of its app in eight months. Tyme Bank, majority-owned by tycoon Patrice Motsepe’s African Rainbow Capital, has grown so fast that in June, it was reportedly adding a massive 130,000 customers to its books monthly.
Repeating old mistakes?
Though illustrious, fully digital, branchless banks like Discovery, Bank Zero, and Tyme look set to meet the same limitations that South Africa’s ‘Big Five’ traditional banks have encountered.
First, industry experts say, there are no guarantees that fully digital banks will automatically mean low costs for South Africa’s burdened public, and cannot rely on low costs related to the elimination of brick-and-mortar branches.
Cost to income expenses are significant in South Africa’s banking market. Established financiers like Investec have still reported a cost-to-income ratio of 71% in recent years. Fully digital banks in South Africa like Discovery Bank and Tyme will likely grapple with this dilemma too. For example, Tyme Bank says it only expects to achieve a sustainable cost-to-income ratio of 25% in the 2025 to 2030 year range.
“If they do not stick to fundamental banking principles, the new [digital South African] banks will fail,” says professor Rabelani Dagada, who teaches the 4IR at the University of Johannesburg, citing an extraction from his book, Digital Commerce Governance in the era of 4IR in South Africa.
A huge chunk of South Africans can’t afford the internet
“I’m wondering, are millions of Discovery insurance clients being pushed to adopt the bank? Maybe the one million is not organic growth,” says Mavhiza, who questions whether the bank is being designated the ‘de-facto’ lender for the 3.3 million insurance customers that the Discovery Group serves.
Indeed, the dilemma of South Africa is that fully digital banks like Discovery Bank may repeat the trap of financial exclusion that old traditional banks have struggled with. “A huge chunk of South Africans can’t afford the internet,” says Mavhiza.
“It’s said 7.5 million low-incomer [earners] pay 80 times more for broadband. Fully digital Banks like Discovery Bank face an internet roadblock,” he says.
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