Regulation, tech and digital innovation to disrupt South African banking

In light of digital disruption to the financial sector across the world, major banks in South Africa are stepping up their game to remain relevant and competitive. According to a new report from PwC, the banking sector of South Africa is due for major disruption, not only from digital technology, but also from a range of regulatory restrictions. 

The entry of digital technology into financial transactions has caused a revolution in banking industries across the world, including in South Africa, where the banking system has traditionally been dominated by a handful of banks. In addition, the financial sector of the country has strong ties with that of Europe, which means that it is set to be directly impacted by the stricter regulations that will accompany the implementation of GDPR next year.

Big Four accounting and advisory firm PwC has released ‘A Marketplace Without Boundaries,’ which details how the banking sector of South Africa will transform under these circumstances. As suggested by the title, the disruption comes in the form of a blurring of lines, primarily between incumbent banking institutions and newcomers to the financial sector.

Currently, four ‘universal banks,’ namely Barclays Africa, Standard Bank, Nedbank, and FirstRand, dominate the South African banking sector. As per the report, however, this scenario will change to some extent in line with three major trends in years to come.

Firstly, easily accessed digital solutions and the resultant cost-effective models are now a part of the repertoire for smaller firms in the sector as well, which allows them to nibble at the incumbents’ customer-baser. Secondly, the sector is set to see industry-specific banks over the next few years, which will have broader and more closely integrated supply chains.Thirdly, the universal banks have begun to evolve their practices in line with the latest customer needs, as well as to match the increase in the number of regulations. For these bigger institutions, the report highlights the “need to develop strong data analytics capabilities and develop new solutions to better meet the needs of their customers, as well as find efficiencies in their legacy businesses to fund the large-scale transformation effort required.”

According to the report, the performance of the universal banks has been relatively stable over the last three years, when assessed by their Return on Equity (ROE). For example, the ROE for FirstRand has remained at 23% over the last two years, after a minor dip of 1% in 2014. Similarly, the ROE for Barclays South Africa was at 17% in 2014 and in 2016, with a minor jump to 18% in 2015.

Nedbank has seen a small dip in ROE from 17% in 2014 to 16% in 2016, but has seen an immediate rise since 2015 when it fell to 15%. Standard Bank, meanwhile, has experienced only growth over the three-year period, having jumped from 13% in 2014 to 17% in 2015, and up to 18% last year.

Nevertheless, these banks are focused on remaining relevant over the next few years in order to maintain this stability. Specifically, the group, with the exception of Standard Bank, appears to be placing emphasis on the IT aspects of their transformation.In terms of capitalised IT costs, Barclays South Africa increased its spending from R5.4 billion in 2015 to R6.5 billion in 2016. FirstRand also saw a minor increase in IT costs, rising form R3.2 billion to R3.5 billion. Nedbank increased its spending by the highest margin, increasing from R5 billion to R6.3 billion. Standard Bank was the only one to have decreased its spending on IT, dropping from R21.7 billion to R20.6 billion.

Three out of the four, namely Barclays South Africa and Standard Bank, as well as Nedbank, will have experienced a setback to their transformational strategies, after having recently dropped McKinsey & Company as advisors due to their involvement in a political scandal. The three will have to reassess their strategies going forward.

Commenting on the findings of the report, Jorge Camarate, a Strategy Partner in PwC’s Financial Services division said, “The evolution of technology and increased customer expectations combined with the emergence of disruptive competitors, is placing significant pressure on the banking industry to implement new strategies to remain relevant in the future.”