COVID-19 Triggering African Banks & Financial Institutions to adopt Digital Transformation

Updated On : August 2020

COVID-19 pandemic has become a single biggest catalyst for digital transformation across the world. For the institutions adopting digital mediums for survival has become the new normal.

As per the analysis by McKinsey, because of COVID-19, the African banking revenues will fall by 23 to 33 % between 2019 and 2021. During the same period, African bank's return on equity could fall between 5 and 15 % points, driven by rising risk costs and reduced margins. The analysis says that the banking revenues might only return to pre-crisis level in 2022-2024, depending on whether a rapid or slow recovery situation prevails.

The banks and financial institutions of Africa need to take some bold actions to manage risk, capital, streamline resources and cost, and adapt to changing consumer behaviours, to weather this storm.

African banks and institutions need to achieve the productivity of 25 and 30 % if they wish to restore pre-crisis profitability. To do so they need to manage their cost and streamline resources. Following are the short term and long-term actions that can be taken by institutions

Short term actions

• Reset third-party spend : The institutions need to reset the third-party spending's, this can be done by predicting and allocating physical cash through advanced analytics which will help the bank to achieve 20 to 40 % reduction in the full cost of physical cash.
• Redeploy the workforce and reskill at scale : The institutions in order to increase the speed and agility can introduce flexibility in workforce management. They can redeploy 50 to 65 % of the workforce across low-complexity roles and can also promote multiskilling to enable institutions to reconfigure the workforce dynamically.

Long term actions

• Rethink distribution : The intuitions can introduce digital-only banks, digital-first models. To serve the lower-middle-income clients they can introduce agency banking. To serve higher-income clients banks can create remote consultation centres which provide digital customer services.
• Expand shared utilities : To improve efficiency and to reduce the operating expenses, the institutions could expand shared services and utilities. Like ATM pooling, cash in/ cash out, KYC, back-office services and transactional infrastructure.
• Adopt technology to reduce costs : To improve the net cost savings and to provide banking services remotely, the institutions can adopt cloud-based core banking platforms, mobile banking, internet banking platforms. This will help to reduce costs in the long run.
• Adopt new dynamics to improve productivity : The institutions can adopt agile approach by coding and rolling out agile ways of working like setting up cross-functional teams for crisis response, this will help institutions to harness their new dynamics of faster decision making and action-oriented approach to further improving the productivity.

We can see rapid change in consumer behaviour, these diverse demands are forcing the financial institutions to redefine their business models so that they can deliver their services online.

Following are some of the areas where the banks and financial institutions can cope up with the crisis

• Banks and Financial Institutions could leverage digital tools and analytics to reform the lending processes and revamp the customer journey and risk scoring frameworks. For the same first the institutions can automate credit processes as credit distribution is typically one of the most time-consuming processes.
• The institutions can simplify the Know-Your-Customer (KYC) and client documentation processes with digital customer onboarding software.
• The institutions can use artificial intelligence and advanced analytics for credit scoring. This machine learning algorithms are run on millions of mobile wallets, cell phone and transaction data signals which helps financial institutions to identify and segment the risk profiles of the customers.
• Banks can partner with Fintech. Banks have an advantage of trust and large customer base but are not able to innovate than Fintech players. Over the last few years, African Fintech has grown and are providing strong innovation in payments and lending method but are not able to scale and does not have a level of trust as banks. Hence by partnering with them will help banks to accelerate the innovation and address the talent gaps and FinTech players can scale up.

Banks and financial institutions can accelerate digital transformation by prioritizing the following specific milestones

• Rapidly digitize the customer journey by adopting mobile banking, internet banking solutions, this will help to cover 100 % of simple sales and services.
• Simplify the consumer and commercial product catalogue and make digital channels easier to navigate.
• Start digital banking adoption programmes across all customer segments, this will spread awareness and importance of digital banking to customers.
• Increase cybersecurity and technological flexibility, and having zero tolerance for outages of ATMs or mobile platforms.

According to the Africa Consumer Sentiment Survey by McKinsey of May 8, 2020, there has been a 30 to 40 % increase in usage of online banking, mobile banking and mobile payments. Post-COVID crisis, once normal life resumes 30 to 40 % of consumers expect to increase their use of digital channels. Hence financial institutions need to adopt digital banking platforms.

Despite the pandemic crisis, the banks and financial institutions will be a critical role player in the support and recovery of the African economy and livelihoods.