SA’s traditional banks may have to overhaul their entire operating models as consumers increasingly embrace digitisation to the extent that most clients expect there to be no need for physical branches within five years.
A new report on the future of retail banking — compiled by Boston Consulting Group (BCG) on behalf of Discovery Bank — found that 69% of SA consumers expect local banks to become fully digital in five years, with 60% believing there will be no need for physical branches.
The Discovery Bank-BCG survey was based on responses from 1,000 consumers from all walks of life and income levels as well as 400 local businesses and several international banking experts.
“What digital and the future of retail banking allows us to deliver is service at scale that previously wasn’t available,” Hylton Kallner, CEO of Discovery Bank, said at the launch of the report in Sandton on Monday. “You have the same level of sophistication in a retail banking account today that you would’ve had at a corporate managing entire accounting software packages [in the past].”
The survey states that if the global growth of internet banking continues to expand at the 13.6% average compound annual growth rate observed since 2019, the market value for internet banking will reach $31.8bn by 2027, while the value of mobile banking will hit $1.8bn.
That trend is likely to be accelerated by the effect of the Covid-19 pandemic, which has forced consumers to embrace online solutions for everything from day-to-day work activities to grocery shopping and banking.
“We can see that in our own client base,” said Kallner. “About 60% of those [opening new accounts] are doing so after hours during the week ... or on the weekends.”
The Discovery Bank-BCG report also found that 86% of SA consumers across all income bands expressed a preference for digital banking, with almost 60% indicating they would be comfortable with a full-spectrum digital bank offering that allows them to apply for mortgages or car loans online. As reliance on digital banking and cashless transactions grows, the importance of physical branches and ATMs and the need for on-site bank managers are likely to be increasingly replaced by alternative channels such as call centres and chat services.
The report found that age may be less of a barrier to digitisation than it was before the pandemic, when customers over the age of 60 were seen as being unlikely to use digital banking channels. The survey found that 56% of consumers over 60 years of age indicated they were now comfortable with digital banking.
“The value that our clients derive is not just from the efficiency that mobile banking and digital banking affords us, it’s from a behavioural model that allows us to use the data in the system ... bring it all together and effectively monetise better banking and better financial behaviour from clients,” said Kallner. “If you do that, it creates a virtuous cycle of value not just for the client but for society.”
Discovery Bank has notched up more than 1-million accounts since it began accepting applications in July 2019 and is rapidly evolving from a secondary to primary bank for clients, which Kallner said generally had “a remarkably low arrears rate”.
In fact, Kallner likened many of Discovery Bank’s clients to AAA-rated corporates, thanks to financial behaviour that indicates a generally high degree of creditworthiness.
“They simply don’t default, and you’re able to reward them and recognise that,” he said.
Undeserved
Despite the increasing embrace of digitisation among SA consumers, many of the country’s 11-million “underbanked” residents, particularly those in underserved townships or rural areas, indicated the cost of going cashless was often prohibitive.
Many are also forced to continue using branches or ATMs due to resistance from incumbent banks that insist on in-person onboarding. Fifty-eight percent of respondents in the survey said they had to visit a branch to open their most recent bank account.
The reliance of much of SA’s population on the informal economy means many consumers are still highly reliant on cash, with 95% of people surveyed saying they withdraw cash from ATMs at least once a month.
Some customers also prefer human interaction, especially when resolving complex or high-value transactions, which the report said may require regulatory changes to drive down costs and encourage a shift to a cashless payments system.
“If you compare the cost structures of a traditional branch infrastructure to what’s available to clients now through digital banking, it’s day and night,” said Kallner.
He also emphasised that digital offerings such as Discovery Bank were “income agnostic” as their enhanced data capabilities allow them to price client risk using behavioural metrics rather than income thresholds.
“Historically, banks tended to offer the best rates to the wealthiest clients or clients earning the most,” said Kallner. “What we’re seeing in our model is that clients of lower socioeconomic levels can manage their money just as well and present just as low a risk.”
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