OPPORTUNITIES AND CHALLENGES FACING FINANCIAL INSTITUTIONS IN THE DIGITAL ERA – Philip Owiredu, Executive Director and CFO, CalBank
Digitization in Ghana has evolved at a very fast pace in the last ten years especially with respect to the payment ecosystem. The mode of funds transfer has moved from Automated Clearing House (ACH) transfers, Express ACH to Instant transfers and mobile money transfers. The payment channels have also grown from solely ATMs to Point of Sale Terminals (POS) Unstructured Supplementary Service Data (USSD), Quick Response (QR) Codes, e-commerce, Mobile Phones and the use of Agents.
Ghana’s payment system has been predominantly cash-based, however the recent growth of Information and Communication Technology (ICT) and mobile phone penetration has led to a burgeoning e-commerce and mobile money transactions growth. E-commerce is now acting as a medium of carrying out business transactions (B2B & P2P) through electronic means such as the Internet, it is the most recent step in the evolution of business transactions as retail transactions are initiated and completed online. As electronic payment systems have rapidly sprung up as means of business transactions globally, most organizations such as banks and insurance companies are leveraging on this technology to bring convenience to their customers. Most business have also striven to automate their operations by digitizing their systems and processes thereby reducing turnaround time and improving the speed of service delivery to customers.
THE BANKING SECTOR
Banks have now improved on their service delivery by moving from in-branch solutions to offering electronic payment services by leveraging the use of Internet, mobile phones, ATMs, POS and Agents. The target for these services has also moved from solely the elite in the society to include the unbanked and underbanked. Currently, digital solutions being implemented by Banks include but are not limited to the following:
- Centralized processing systems
- Internet Banking
- Mobile Banking (Banking App and USSD)
- Debit/Prepaid / Credit Cards
- QR Codes
- Advanced Collection Solutions
- Web Acquiring (Online card payments)
- Mobile Money payments and transfers
- Agent Banking
THE ROLE OF FINANCIAL TECHNOLOGY SOLUTION PROVIDERS (FINTECHS)
With the constant changes in customer demands and the need to offer the best of services to clients, Banks in the country have partnered with various financial technology solution providers (fintechs) and payment facilitators. The fintechs develop and provide Banks with solutions which are aimed at enhancing the Banks product offerings and aid in making banking easier for Bank customers. Products like the USSD, cardless ATM transactions, account to wallet transactions, mobile apps are some of the products developed by fintechs and provided to Banks to customize and use as offering to customers.
Payment facilitators/aggregators on the other hand put together several important services which customers require on a regular basis (e.g. online shops, utility payment services, etc.) which customers are able to pay for by using their various Bank cards and mobile money wallets. (e.g. ExpressPay).
Due to resource constraints and high cost of investment, most Banks are not able to develop these sophisticated payment systems on their own and so partner with the fintechs /payment facilitators to leverage the latter’s solutions to provide service to their customers. Most Banks partner with the same fintechs hence the current trend of Banks with similar product offerings with the key differentiator being the pricing and the quality of service. Going digital is a journey that every financial institution must undertake in order to remain relevant and not obsolete. Today’s consumer of financial services has options and varied needs and can chose from viable alternatives presented by non-bank innovators such as fintechs, social media organizations or telcos, who are all competing in the digital financial services offering with minimal regulations.
A World Bank economic analysis report, Ghana Economic Update: Enhancing Financial Inclusion, June 2019, states that “Ghana can reach universal financial access across regions and key demographics by using innovative technology.” Digital innovation presents numerous opportunities to the financial sector like improving service delivery, product choice, convenience, competitive timelines and prices. However, there are challenges in striving to remain relevant in this digital era. This paper explores the opportunities and challenges that digital technology presents to financial institutions.
THE MILLENNIAL ADVANTAGE
The average age in Ghana is 21, thus most Ghanaians fall within the “millennial age” description and this offers opportunities in today’s digital age. The number of consumers physically visiting Bank branches is set to decline by 36 percent over the next five years, while mobile banking usage is projected to increase by 121 percent. “According to research from CACI International Incorporated, formerly known as Consolidated Analysis Center Incorporated, UK the typical consumer will visit a Bank branch just four times a year by 2022. Currently, consumers are averaging around seven visits to a branch per year. Younger ones between the ages of 18 and 24 will currently visit their bank around six times a year, but this will dip to just two visits annually by 2022” The migration from ‘bricks to clicks’ is to fulfil a search of increased ease and convenience.
Millennials and generation Z, who are high adopters of digital technology are essential drivers of this change and this presents financial institutions with the golden opportunity to design superior and quality user experiences and products and services which are streamlined, interactive and intuitive. Banks need to recognize that no one wants to use a bank for the sake of using a Bank. Customers of all ages want products and services to help them manage their finances more effectively in order to meet other needs in their lives. Millennials are less worried about risk, less afraid of technology, and more focused on convenience than any other generation.
Implicitly, Banks must leverage this opportunity and learn to balance risk with usability and develop digital products that compete with non-bank innovators in terms of ease of use and range of functions. The age group of this country is therefore a significant target to tap into in this digital era, as they form the bedrock of our future clientele base.
ENHANCING THE PRESENCE OF FINANCIAL INSTITUTIONS
Going digital enables Banks and Financial Institutions to gain a competitive presence, expand quickly, capture a great market share and also improve on processes and timelines. The time, resources and efforts it takes for a Bank’s mobile app to secure 100,000 downloads and 100,000 digital account activations is minimal, compared to physically opening 100,000 paper accounts. In this Digital era, Financial Institutions do not necessarily need to put up branches to gain presence or expand their networks. Transitioning from “bricks to clicks” is a more effective means of improving presence and availing financial services to the masses.
DRIVING FINANCIAL INCLUSION, MOBILIZATION OF CHEAP DEPOSITS, & LOWERING COST OF FUNDS
Digital financial services provide opportunities to drive financial inclusion and also lower cost of funds by mobilizing cheaper deposits. Products like Mobile Money, Mobile banking (Apps and USSD) and Agent Banking create avenues to reach a large portion of the unbanked and underbanked customers within the different demographics as well as gender. Bringing the financially excluded into the financial sector has huge potential to spur low cost deposit mobilization and significantly lower cost of funds with a high potential of promoting commerce through affordable credit. Digitization thus, has the knock-on effect and potential to transform the economies of developing countries such as ours.
VALUE ADDED PRODUCTS/SERVICES AND INNOVATION DRIVE
Partnerships are key and it is evident in many markets the tremendous growth that can be achieved when the various players in the digital space work together to drive the financial inclusion agenda. Product development collaboration is essential, in that, it will ensure a strategic and operational alignment between telcos, Banks and fintechs towards a common objective of a cash lite society.
According to research by the International Finance Corporation (IFC) on Digital Access, 2018; “An excellent example of such collaboration in other jurisdiction is M-Shwari, the first Digital Financial Service that developed micro savings and loan product specifically for the unbanked using a telecom service provider (Safaricom) and data from the Commercial Bank of Africa (CBA).” Within 4 years, M-Shwari had 14 million customers, was holding US$81 million in deposits and had disbursed nearly US$1bn in loans.
This initiative transformed CBA which was principally a commercial bank, into the largest retail bank in terms of registered customer numbers.
Signing on these new customers would not have been possible without such a partnership and it is reasonable to speculate that similar partnerships in Ghana between mobile network operators (MNOs) and financial institutions have the potential of onboarding the unbanked and underbanked into the financial services ecosystem to have access to banking products as well as offer financial institutions access to funds that hitherto were either held with Susu companies or stashed away in homes due to lack of access to the suitable financial products designed with these target groups in mind. There is the potential also to improve the lives of Ghanaians within the poverty brackets by providing micro loans to serve as capital for the underserved to start small businesses.
For example, in May 2019, Arnold Parker, AFB’s (now Letshego) Chief Executive Officer, noted that although the business has been in operation in Ghana for almost a decade, its peak customer base was just 80,000 but Qwikloan, the micro loan product partnership with MTN had helped swell the customer base to two million within a year and a half.
Products offered on digital platforms also have higher adoption rates due to the convenience of accessibility and greater processing times. The real-time data resource and feedback available to financial institutions on digital platforms can also be assessed to further improve service offerings and retain clients over longer periods of time.
EFFICIENCY IN DECISION MAKING, SERVICE AND OPERATIONAL COST
Digitization presents the opportunity to access large data of clients and potential clients. Transaction information and detailed customer spending patterns are readily available on digital channels like banking apps which also provide access to client’s location and social media profiles that can be leveraged to offer customized and well thought product offerings as well as create a realistic risk profiling for lending purposes.
Digital channels offer the opportunities for financial institutions to overhaul operations and go green by reducing the reliance on and use of paper, thereby cutting back on operational expenses, staff cost and processing time. ATMs that offer cash deposit services, automated loans, self-sign on apps,
remote account opening, paperless branch transactions, internet banking, etc., are all examples of how digital solutions have been leveraged to streamline and automate operations and in effect improve efficiency in transaction processing and cost to both the Financial Institutions and its customers.
MARKETING AND COMMUNICATION EFFECTIVENESS
Digital innovation has transformed the world into a global market place and Financial Institutions that offer unparalleled services can expect to get good ratings and reviews from clients and influencers making such organizations and their products go viral quickly. Social media options like Facebook, Twitter, WhatsApp, YouTube and others are affordable and effective communication tools available to market bank’s products and services to achieve the top of mind awareness and interest that will drive and sustain mass product adoption and use as well as collate feedback to improve financial services delivery.
DRIVING FINANCIAL LITERACY
Embracing digital technology provides the platform to share knowledge with consumers and develop a sound and stable financial landscape which has long term benefits of lowering cost of funds, lowering non-performing loans (NPLs) and growing the deposit base of banks. Poor financial literacy is evident in poor records keeping among SMEs, poor investment choices, lack of budgeting and deficient savings habits etc.
Recent challenges to the financial services system, where consumers have been victims of fraud, can be traced to poor financial awareness on the part of the victims. Digitisation presents the opportunity to promote financial literacy and as we progress in this digital era, it is essential to bridge the financial knowledge gap of the unbanked and underbanked, which is plaguing the effective use of digital financial services. This is important because when people make informed and effective decisions about personal finances, we reduce the risk of financial fraud, empower individuals to establish long term healthy financial habits leading to greater financial security, happiness, health and economic growth.
Cash Dominance “Cash is King” Although Digital Financial Services have seen a significant growth in the country in the last five to ten years with the introduction of e-zwich, mobile money and most recently Agent Banking etc., majority of transactions are peer based and eventually redeemed for cash thus making cash the common “Enemy to Digitisation”. Ghana has been issuing e-zwich cards since 2008, however, remittances onto these cards are redeemed as there exist little infrastructure to facilitate payments with the card, as such merchant acceptance is low.
Per Ghana Interbank Payment and Settlement Systems (GhIPSS) statistics, out of GHS225 million loaded on e-zwich cards in August 2019 from employer cards, GHS198million was withdrawn for cash whilst only a value of GHS462,829 was processed in respect of merchant payments. Individuals still withdraw cash from the ATM to pay for goods and services even in merchant locations where point of sale devices are present.
This situation is not different from Kenya where advances in mobile money has not had a profound effect on the way low income people pay for things. Most income received electronically is cashed out to pay Merchant who also accept mobile money.
The dominance of cash in transactions, the continuous reliance on informal savings institutions (Susu Collectors) and low acceptance of digital payments is a challenge to the scalability of digital financial services. Part of the problem can be solved with education, whilst a larger part relies on formulating enabling policies to drive digitization and building the right infrastructure to promote acceptance.
CONVENIENCE OVER BRAND LOYALTY
When it comes to creating an experience, and an environment where customers especially Millennials will spend time and money, Banks aren’t just competing with other Banks – they are competing with other retailers and service providers like Uber, Apple, Samsung, car manufacturers etc. Millennials for example like to make memories in everything they do, banking apps must have features that make them easy to use and exciting enough to return to, the branch experience must be memorable, personal, and strong enough to get people from their home and offices into the branch.
Millennials prioritize usability and a quality user experience above brand loyalty, thus delivering a poor customer experience can be devastating. While their parents might have been willing to endure inconvenience from their Bank, Millennials are quick to seek alternatives and more often from non-bank innovators. That tendency has created opportunities for alternative non-bank applications like PayPal, Mobile Money, Apple Pay, Fido etc. which allow them to manage their transactions easily or access credit without the perceived hassle of dealing with a traditional bank.
When millennials become unhappy or dissatisfied with their Bank, they’re not afraid to move to greener pastures. According to a Gallup poll, millennials are 2.5 times more likely than Baby Boomers and 1.5 times more likely than Gen Xers to switch banks. With this in mind, we must continuously seek to understand what Millennials seek in a Bank and how Banks can attract and maintain millennials in this digital era.
In addition to providing solutions that create access and convenience, Banks must keep an eye on the competitive landscape, as disruptors are emerging by the day. In order to compete, Banks must launch more sophisticated personalization strategies that enable more targeted marketing and personalized experiences, which means investments in AI and Data Analytics. Today’s consumer is adapting to technology and Banks must stay ahead of the game to remain relevant.
EXPOSURE TO FRAUD
With data being a resource, financial institutions must take steps to secure digital platforms and make them safe for customers to transact without compromising their identity and details. One of the biggest challenges to Digitization is fraud which has the potential to deter customer interest and deteriorate channel utilization. Banks owe a duty to clients to safeguard them and as such must invest in fraud detection and mitigation tools as well as train their staff to be abreast with new challenges. A breach of a bank’s system can lead to financial loss, fines and reputational damage and as such banks must be a step ahead of this threat at all times.
WEAK NATIONAL INFRASTRUCTURE AND HIGH COST OF INVESTMENT
The growth of Digital Financial Services (DFS) is limited to the enabling infrastructure that supports innovations. For example, weak address systems and inadequate credit data serve as challenges to develop micro loans or offer competitive pricing due to the higher risks associated with the lack of these systems. Poor internet connectivity across the country also affects acceptance of digital payments. Even though digitization eventually saves cost and improves efficiency, initial cost of setting up is usually high with a longer investment recovery or payback time. This is against the background that digital channels thrive on reliable platforms, internet connectivity and GPRS to function.
Chinese government ministries and research institutes met recently to establish a national research and development group for the sixth generation of wireless technology. Beijing’s move to invest in the infrastructure to develop 6G comes days after that country’s top three Telcos rolled out 5G mobile phone services nationwide. Meanwhile Europe and the US currently use 4G and the total number of subscriptions for 4G Data in Ghana was 1,128,498 as at the end of December 2018. Beijing’s plans clearly show how governments are embracing digital technology for its potential and significance to economic growth and therefore investing in the right national infrastructure to stimulate growth in digitization.
As at December 2018, internet penetration rate in Ghana was 33.6%, we therefore hope Ghanaian leaders embrace same foresight and vision as their Chinese counterparts and that the proceeds from the Communication Service Tax (CST) which was recently raised to 9% would actually be channeled to enhance the digital infrastructure in the country. It is also critical that telecommunication service providers are held accountable for poor Internet connectivity and service interruptions as these pose challenges for digital solutions provided by Banks.
EMERGENT THREATS FROM NON-FINANCIAL INSTITUTIONS
Digital technology propels heightened competition for financial institution for the provision of services that were hitherto limited to banks. The announcement of Facebook’s Libra is an example of how an international social media firm, when granted the license can leverage on their platform for payments of goods and services across the globe. Foreign remittance hitherto accessed at bank locations for a share of commissions and forex income are now sent directly to wallets. These non-financial institutions are typically not held to the same strict rules and regulations as financial institutions. Because of this, they have more freedom to use their already large customer base and multi-generations of technology and security to more easily contend with institutions that are limited by regulations.
LACK OF COLLABORATION
Banks in Ghana still compete with Telcos and other Financial Technology Solution Providers for access to data and ownership of some financial services which poses a threat to the income and survival of some financial institutions. Zelle, a person to person mobile payments platform developed by thirty major US banks and hosted on their banking apps or downloaded as a stand-alone app, was birthed out of partnership. It allows users transfer money from one Bank account to another in minutes, by using the email address or phone number of the recipient, Ghanaian Banks need to learn from the Zelle partnership and work together to fight the use of cash.
Policy initiatives are important in creating an enabling environment to promote the growth of digital solutions as the success of financial inclusion effectively translates to economic growth.
The role of Government in fostering collaborations in DFS and driving financial inclusion includes but not limited to the following:
- Taxation: Ghana is currently a fast-growing mobile money market; this translates into significant opportunity for the growth of provision of DFS. However, there have been calls for mobile money transactions to be taxed which will be a deterrent to efforts being made to drive financial inclusion and also in conflict with the government’s agenda of shifting from taxation to production. Research shows that the expansion of mobile money transactions in developing countries also supports the formalization of the dominant informal economy.
Within three months of Ugandan regulators introducing a so-called social media tax and a levy on mobile money transactions, there was a decline in the number of internet users, total revenue collected, and in mobile money transactions. On the face of it, this proposed tax appears to be discriminatory as it will only apply to mobile money transactions, when similar taxes on financial services have been reversed. Telcos already pay taxes on profits as well as VAT and what we should be doing as a country is to encourage the use of mobile money to promote financial inclusion, and the use of mobile money to pay taxes rather than taxing mobile money transactions!
- Tax Rebate/Holidays Framework for FI Operators; Current tax policy does not support innovation by offering tax incentives to organizations that focus on driving financial inclusion or organizations that drive digital payments. Granting tax incentives on digital innovations will be encouraging to Industry Players to invest in DFS to drive financial inclusion. Loans by Banks to organizations that develop digital solutions and investment in technology by banks in digitization solutions should be allocated a lower capital charge to motivate finance for investment in the right technology. Duties and levies charged on the importation of plastic cards and payment terminals should be reduced or waived to drive the digitization agenda.
- Telco SIM Card Recycling and Fraudulent SIM card registration: The National Communications Authority (NCA) has a policy on SIM Card recycling which needs to be reviewed considering the role of MNOs in Digital Financial Services as there is the potential for SIM reassignment to provide avenue for fraud when banking information is available to new users of previously assigned SIM cards. Telcos are largely aware of the irregularities that vendors perpetuate in registering SIM cards but have done barely enough to address the issue.
Data of customers during the onboarding process is critical and pre-registered Telco SIMs should be addressed by the Ministry of Communication and NCA.
We hope that the Ministry of Communication will actualize the intended SIM reregistration scheduled for 2020 and deactivate SIM cards that do not comply after the six-month re-registration period. This action will go a long way to minimize fraud and promote the grow of commerce and finance including digital loans.
- Low Government Adoption of Digital Financial Services: Current digital solutions are significantly peer based and there is a need to drive up the processing and acceptance of payments. Government has a role to lead the way in accepting digital payments for government revenue as well as implementing directives that encourage individuals and Corporates to use electronic channels for payments.
- Lack of Insurance Cover for Instant Digital Loans: It has become clear as Banks pursue the automation of quick or instant loans to the average Ghanaian through digital platforms that the Insurance Companies in Ghana have no or little understanding of retail or mass loan processing and disbursement. This has made it difficult and frustrating for Banks pursuing this agenda as Insurance Companies are usually not able to provide insurance cover for such loans to support the Banks with loan defaults.
It is therefore important for Government, the Central Bank and the National Insurance Commission to work with Insurance Companies through possible regulatory framework and workshops to understand this Digital age and the need to provide convenience and improve lives by offering instant digital loans at a reasonable interest rate so they can provide workable and adequate insurance policy to support Banks pursuing this agenda.
- The Big Data Challenge: Google has more data about citizens than some governments including the Ghanaian Government which is worrying. Integrating the unbanked and underbanked into the financial ecosystem will create a database that can be leveraged to determine spending patterns and revenue trends that will influence government policy on taxation, housing, education etc. as well as monitor real time effects of these policies digitally. Cities like Dubai are leveraging big data to build smart cities and provide convenience for visitors leveraging on real time data for policy formulation. As the gateway to Africa, getting everyone integrated into the financial ecosystem is a step in the right direction and Government has a role to play which involves formulating the right policies and providing the right incentives to drive financial inclusion towards generating data set for decision making.
CRITICAL SUCCESS FACTORS
The points listed below are Critical Success Factors, which when adopted, will assist Financial Institutions to take advantage of the opportunities that Digitization offers and surmount the challenges mentioned above.
- Financial institutions require leaders that are agile, adaptable and curious with a high tolerance for disruption to spur innovation.
- It is critical for financial institutions to invest in the requisite Risk and Cybercrime Management Systems as indicated above in order to safeguard the interest, goodwill and going concern of financial institutions, as well as the financial and privacy interests of their numerous customers.
- Enhancement of employee awareness and training in order to successfully drive the digitization agenda.
- A need to intensify the lobby for enhanced national infrastructural development, technological platforms and an enabling regulatory environment and sound policies that mandate data sharing to accelerate the pace of digitization.
- A commitment by financial institutions to improving financial capability through financial literacy programs to equip consumers with the information needed to identify the benefits and risks of financial products.
- Effective collaboration among each other in order to drive investments costs downwards and leverage each other’s strengths and capabilities
Digital banking is promising a better banking experience for both customers and banks, it is without any doubt that the future banker is a digital banker.
Digitization has improved significantly in the last five years and has the potential to thrive and create convenience for both financial institutions and its customers. DFS has realized significant growth in the number of financial access points primarily related to the spread of mobile money, mobile banking and Agent Banking.
The digital revolution has come to stay and offers a myriad of opportunities and benefits; however, it poses its own systemic challenges but this should not deter financial institutions from taking the necessary initiatives and making adequate investment in systems and people to take advantage of the next frontier.
Government will have to play its role as enumerated to ensure there is a complete ecosystem that will facilitate the drive to an effective and efficient digital financial service provision.
Season’s Greetings and Best wishes to all of you!