Building the Bank of Tomorrow

It’s unusual to hear a CEO use a results presentation to praise the strategic decisions made by the company’s leadership team
in 1985.

But Sim Tshabalala, CEO of Standard Bank, clearly holds the vision of HP de Villiers and his team from the mid-1980s to early-1990s in high regard. They are to be credited for setting the group on its African growth path after Standard Chartered sold its stake in the group, despite taking a lot of flak for their decisions at the time, Tshabalala believes.

De Villiers and his team also started digitising the bank; set up an office in London to have a presence in this global financial centre; and “stopped thinking of Standard Bank as a British-owned bank operating in a difficult country, and started taking seriously our obligations as a constructive corporate citizen of South Africa, and to make this country a better place,” Tshabalala said at the group’s annual results presentation in March.

“We are where we are because we’re building off that base,” he tells finweek in a later interview. “The patience of a couple of decades’ work is starting to pay off.”

The numbers confirm his views, with the bank’s ‘Africa Regions’ outside SA – Standard Bank has operations in 20 African countries including SA – contributing 28% to banking activities’ headline earnings in 2017, reflecting year-on-year growth of 19%. In constant currencies, the regions’ headline earnings were up 35%. This compares with headline earnings growth of 10% in Standard Bank South Africa.

After the global financial crisis, Standard Bank decided to focus on the continent, rather than on emerging markets. This was the right decision, Tshabalala believes. “Strategy is as much about what you will do as it is about what you won’t do,” he explains. “We’re a regional player; we can’t compete in [all] emerging markets. We can compete on the continent.”

Growth potential

“Our footprint is now fit for purpose. We’re about where we want to be. The analogy is the factory is built; it now needs throughput,” he says.

A vocal Afro-optimist, Tshabalala says Africa will remain among the fastest-growing regions in the world, with favourable demographics, huge infrastructure needs and improving policy-making. “In the rest of Africa, demand for banking always grows on the basis of growth in GDP, and increasing banking penetration. On the continent you’ve got both on steroids.

“Yes, there are challenges,” says Tshabalala. “But if you look at our numbers, our return on equity in Africa is 23.8% [compared with 16.6% in SA], and our cost of equity in Africa beyond SA is around 20%. So we’re creating economic profits.”

A recent report by consultancy McKinsey says Africa’s overall banking market is the second-fastest growing and the second-most profitable of any global region (only lagging Latin America), with significant untapped growth potential. Fewer than 20% of African banking customers currently hold products such as lending, deposits, insurance and investments, McKinsey says, with most growth until 2025 expected to come from the middle segments of the market (individuals with an annual income between $6 000 and $36 000).

“Nigeria being the largest economy is the single biggest opportunity in the long term” for Standard Bank, says Lonwabo Maqubela, portfolio manager at Perpetua Investment Managers. As the group’s Africa earnings are “reasonably diversified”, Perpetua believes it is “more important for Standard Bank for the region to do well as opposed to any single specific country”. Improved commodity prices are improving the short- to medium-term outlook for the region, Maqubela says.

The digital experience

Standard Bank has also been investing heavily in technology as part of its strategic pillars to digitise the bank and be more client-centric. It has spent more than R20bn to upgrade its entire core banking system, allowing for real-time processing, the ability to handle greater volumes of transactions, closer integration across business units, and speedier service.

“In the modern era, where you’ve got a combination of factors – one, you’ve got customers that are used to being served slickly, 24 hours a day, at a time and place they choose, with security, with speed, by Google, Amazon, Uber, etc. That’s the type of experience a modern customer is used to. You have to become customer-centric and focus on the customer and be able to deliver to that customer at that level, because otherwise savvy competitors will stand between you and your client. You have to digitise the organisation, because that’s what your clients are used to and expect,” says Tshabalala.

“It is absolutely crucial to our competitive advantage. We are betting that the winners in banking will be those incumbents that are able to digitise and not allow themselves to be disintermediated by fintechs and/or people who own the platforms that we need, such as the mobile operators and technology companies generally,” he says. (See sidebar on competition.)

Bruce Hamilton, equity analyst at Morgan Stanley, writes that while technology advances such as artificial intelligence and blockchain will play a role in the evolution of banking, “modernising the infrastructure backbone – that is, the core banking systems which handle the backbone of a bank’s activities – is arguably the most important step banks will need to take”.

“In order to remain competitive, banks will need to update technology on the backend in order to deliver a seamless experience on the front end, since customers will have little tolerance for glitches, no matter how sleek the user interface,” Hamilton writes.

For Standard Bank, the investment in its core banking platform is already translating into higher market share in the affluent segment of the market, fewer complaints at the Ombudsman for Banking Services, and improvements in Net Promoter Scores (NPS) –  a tool that is used to measure the loyalty of a company’s customer relationships.

The bank of tomorrow

With the new core banking platform in place and most customers now migrated to its new SAP system in SA, opportunities abound to improve the ways of doing business and customer experiences.

“Another lesson I think you learn from the likes of Google and Amazon is the cardinal importance of data. There are few organisations that have as much data about clients and have it legally and fairly on the basis of the banker/client relationship. I mention Google and others because they are able to use their data by devising contextual offers for their clients and thereby delighting them.

“That is what clients are used to. Financial institutions must harness the knowledge and the relationship with their client, the channels that the client likes using to interface with you, and the data you’ve got,” Tshabalala says.

Where banks were historically designed around specific products and channels, operating largely as stand-alone silos, technology now allows for a more holistic view. “When you apply for a home loan, you can now go on your app and apply, and we can offer you life insurance to protect yourself and your family in case you were to pass on; homeowners’ cover, in case your property gets destroyed; and structure the lending for you in such a way that maybe you use some of it to leverage, but maybe you make investments instead of just borrowing.

“We now can do this within minutes, and you can do it on a Sunday sitting on your patio while you’re enjoying that Cabernet,” he says.

“This is why our vision is to create a universal financial services organisation. It’s to deliver seamlessly the full suite of product and services, meeting customer needs and creating value for them at a time that is convenient to them.

“We think that in this modern day and age, the ability to safely and efficiently deliver our product and services to our clients, when they want it, 24/7, digitally or in person if they prefer to do it in person, are what’s going to differentiate us.”

Keeping the competitors at bay

Technology is providing new opportunities for banks to build closer relationships with their customers, but it is also allowing new entrants to compete in an industry that has historically been protected by high barriers of entry.

One of the risks facing Standard Bank is fintechs, which could result in consumers disintermediating banks, particularly in the payments segment of the market, says Lonwabo Maqubela, portfolio manager at Perpetua Investment Managers. “In SA, banks are very entrenched and we would think that the risk is moderate. In Africa, consumers may leapfrog and move quicker to fintech products,” he cautions. A more outwardly focused Barclays Africa, owner of Absa, could result in market share losses for Standard Bank in SA, Maqubela says.

Tshabalala says there are many fintechs which on their own don’t really pose a threat to the major incumbents, “but taken together they’re increasingly becoming a very worrying threat. However, banking remains a scale business, so those that have scale and are also able to respond fast enough to meeting customer needs, can successfully challenge the fintechs.”

New entrants like Bank Zero and Thyme Digital in SA will also be watched very closely, he says. While they are likely to offer an attractive value proposition for a specific segment of the market, “they too will face the classic challenge of scale”.

The likes of Discovery, which operates in an adjacent industry, is more worrying, Tshabalala says. “They’ve got a customer base already, which is in what I call the sweet spot, the affluent market. They have a history and track record of being customer-centric and servicing their customers well. They’ve got systems; they’ve got excellent people. We don’t know when this year they will launch their bank, but we know they’ll be able to launch it with a great value proposition. So they are a formidable competitor; they loom large,” he says. “Of course we’ve got responses to them, which I’m not at liberty to share.”

While consumers may be looking forward to the new rivals and incumbents’ responses, it’s the big banks that cause Tshabalala sleepless nights.