Rory Moore, CEO of Innovation Agency, explains the necessity for banks to evolve continuously

Banking in South Africa has been stable, considering the economic crisis that has gripped the banking arena the world over, Europe and the United States particularly.

This is not to say the South African counterpart has not been affected: mass retrenchments have been seen, so have increases in banking fees and strict lending parameters when it comes to bonds and loans.

Banks in South Africa have kept themselves afloat relatively comfortably for a number of reasons, one being their openness to innovation and therefore their ability to offer their customers new, better and more evolved products.

As Hendrik Nel of the Reserve Bank1 said, “Financial stability is an important factor in assessing the degree of development (innovation) of a financial system. Excessive stability may result in excessive regulation and restrictions on financial innovation and risk-taking, and thus may reduce the opportunities for growth in the long run.

“Aggressive innovation, however, may lead to a lack of stability and trigger financial crises that are costly and inefficient, as it leads to severe economic downturns, and the large economic and fiscal costs of cleaning up a financial system in distress and crisis.

“A balance therefore needs to be found between innovation and stability, which stresses the point that, like central banking, maintaining financial stability is probably more of an art than a science,” he added.

Innovation is a combination of art and science, and finding the balance between the two will ensure banking stability and the happy customers essential for keeping the industry if not thriving, but most definitely afloat.

According to a recent study on banking innovation, South African consumers are for the most part content with the products and technology offered by the Big 4 banks, as well as the others.

Banks leading in innovation have exciting opportunities and products such as PayPal™, and inContact services such as SMS notifications.

The results imply that customers enjoy the convenience of technology such as remote access to products and services.

Even newcomers to the industry receive high ratings for being innovative, particularly among people who fall in the R250 000 and below income bracket.

Furthermore, South Africans are loyal to their banks, with only 9% – a relatively small percentage – switching banks in a 12- to 18-month period.

The need to innovate

One of the key reasons for innovation is to meet the new demands of the continually evolving customer requirements in terms of expectations. A case in point would be the younger generation, who are accustomed to instant gratification and free services such as Facebook and Gmail. The revenue models of banks will always be challenged in trying to cater to this segment.

The next group to consider is the bankable population – individuals earning more than R4 000 per month.

Ninety-eight percent of this segment has a bank account, as they qualify under the traditional model.

Banks have been competing tooth and nail for the remainder of the bankable population. However, this population segment requires a new banking model, one that will not swallow their income with banking fees.

If you broaden the scope of target market to include the unbanked population, there is a whole market out there waiting for access to financial systems. Banks will need to find a way of providing banking services to people earning less than R4 000 per month, and this will make a huge change in the South African context.

What is next in innovation for the banking arena?

• Simplicity and the necessity to remove complexity from banking. The old model of fancy new products will disappear in the near future, simply because of the perception that the financial crisis was brought about by complex financial products.

• Gaining trust. The Great Recession of 2008 had a lasting effect on the public perception of banks. The net result was a general lack of trust in the banking community and a need for improved transparency in the move to gain back that trust. Although South African banks were largely not party to the cause, they have been painted with the same brush as their international peers and will need to regain trust. Trust in banks is still an issue among high-income earners using private banking facilities. According to an article in FinWeek2, “Global trends in private banking”, the 2009 report showed 46% of high net worth individuals had “lost trust in their primary adviser”. Trust and transparency are key to gaining and keeping loyal customers.

• Attracting individuals with an erratic income. South African banks need to produce innovative products and services to attract those individuals with an erratic income. By attracting those with an erratic income, considerable access will be gained to the 24% of the population who is unbanked.

1 Hendrik Nel – Commentary: “Financial innovation and a new economics of banking: Lessons from the financial crisis.”

2 Back to Basics, 8 April 2010, “FinWeek”