Incumbents vs Challengers

Uneasy Calm For Incumbents As Digital Banks Find Stomping Ground In SA

By  |  December 1, 2020

Who would have thought many years back that digital banks could in today’s world stand a chance, and even be put in the same discussion with traditional banks?

The growth of digital banks has been remarkable, and more so in Africa’s second-largest economy, South Africa. There, digital banks appear to be making giant strides in the last few years.

A recent CNN documentary report by Eleni Giokos shed more light in examining and reporting the trend for digital banks in South Africa. This report acknowledged the tremendous growth the sector has experienced over time.

To start with, a key thing worthy of note is the fact that digital banking is technically different from online banking and so shouldn’t be mixed up.

Digital banks are stand-alone banks that operate without physical spaces or branches. Online banking, on the other hand, is only a subsidiary or subset of the already established traditional banks and are used as alternative banking means.

The days when digital banks were just brushed aside and not given adequate attention have passed. These banks have evolved and grown over time across the globe.

Digital banks are a worldwide wave. A statistics by Allied Market Research puts the global market size of digital banks at USD 3.95 Bn and this figure is projected to reach USD 10.87 Bn by 2027. This glaringly spells out a massive industry growth outlook.

While the digital banking industry was seen to be growing well enough, the COVID-19 pandemic then further heightened its growth as the lockdown in a way forced the increased adoption of digital financial channels and digital banks weren’t left out.

For South Africa, the year 2018 saw the arrival of three major digital banks, which also double as the industry’s main players, and their growth in barely two years is applaudable. These banks are Discovery Bank, Bank Zero, and Tyme Bank.

These digital banks, on a seemingly good note, do not have plans to stop at being just digital banks. Rather, they are looking to becoming challenger banks in South Africa. A challenger bank is one that goes head-on with a brick-and-mortar bank and becomes a competitor.

The digital entrants have so far forged on in their mission as they have even lured and signed on customers of traditional banks on the premise of lower fees, better savings interest rates, and simpler, more transparent products.

CNN’s documentary particularly spotlighted Tyme bank and gave a highlight of how the bank has built and sold its solution over time.

The peculiarity of Tyme Bank’s digital banking model

Tyme Bank, which takes its name from the first letters of each word in the expression: “Take Your Money Everywhere,” is one bank that probably lives up to its name.

While the continent as a whole has a host of digital banks, Tyme bank however stands out as its approach to digital banking appears to be different and ideal for its market. In an overall view, Tyme’s bank model of bringing digitalization into banking is uniquely different. 

Tyme Bank, like other digital banks, was originally set up to tackle the underlying issues associated with traditional banks which range from cost to complexity of usage.

The bank prides itself in its zero monthly fee charges likewise a free day-to-day transaction and it also gives its customers up to 10 percent interest on its savings plan.

Unlike other top digital banks in Africa which majorly target the banked group and have worked to provide better banking solutions for this segment, Tyme Bank looks out for the underbanked and even the unbanked in its provision of digital solutions.

This makes it able to grab a part of the 11 million unbanked South Africans which makes up 20 percent of the entire population that even traditional banks have failed to tap into.

Technically, Tyme bank can’t be classified as a brick-and-mortar bank. However, it has incorporated strategic solutions from these bank-types which has helped it in broadening its target market. 

A big part of its strategic plan is the placement of over 600 entities it calls “kiosks” in high traffic places such as supermarkets. This placement of kiosks has been proven to have helped its users have a closer feel of a bank. 

This solution is particularly important as the CEO of TymeBank stated in CNN’s report that 60 percent of transaction volume is still carried out in cash.

Hence going fully digital from the get-go might mean that it is already losing out on 60 percent of its prospective transaction volume. And in fact, the path it has taken can be said to be one of the factors responsible for the tremendous growth the bank has had in the last two years.

In essence, Tyme bank combines the swiftness of digital banking with the face-to-face experience from traditional banks.

Beyond innovation through technology, the bank has also been seen to take customer service (which is one thing many traditional banks are deficient in) as a priority. 

A recent Forbes accolade touted TymeBank to be the second-best bank in the country due to its high levels of customer satisfaction and key qualities like trust, banking fees, digital services, and financial advice.

Digital banks and traditional banks: At loggerheads?

A major reason for the smooth entry of digital banks in South Africa can be attributed to the high transaction rate and complex sign-up processes associated with traditional banks.

This has given the new entrant challenger banks something to hold onto and improve upon.

Now, the question of how digital banks have succeeded in “challenging” brick-and-mortar banks.

In the CNN documentary report, a statement by the managing director of the banking association of South Africa, Bongiwe Kunene revealed thus: “There isn’t any fear from the big banks. There rather is an acknowledgment of new entrants but it is not seen as a fight”

This means it is true that the traditional banks still lead the banking industry, as South Africa’s big five banks still hold nearly 90 percent of the total market share. These big five banks are Standard Bank, ABSA, Investec, Nedbank, and First Rand Bank.

However, the breakthrough these entrant digital banks have pulled cannot be downplayed as this could eventually see them go head-to-head with digital banks.

For instance, Tyme Bank even before the pandemic, has recorded a customer base of 1.4 million and this number is growing rapidly. 

The CEO of TymeBank, Tauriq Keeran in CNN’s report said, “Tyme bank averages 150,000 new customers every month and this makes us one of the fastest-growing neo banks in the world and there is no reason why we can’t get to at least 200,000 customers a month”

The tremendous growth digital banks have experienced in South Africa cannot be ignored and it might only be a matter of time before they become real challengers to traditional banks in South Africa. And who knows, maybe that has already begun.

In all of this, as stated in CNN’s report, the huge role the South African Reserve Bank (SARB) has played cannot be put off. It was noted that the SARB has helped to transform the banking landscape and have played a part to encourage the adoption of modernized banking solutions.

At the end of the day, only time would tell how soon it’d be for digital banks to duel with traditional banks. However, the records seen so far have shown that more grounds can be expected to be broken by digital banks in South Africa in the coming years.

Featured Image Courtesy: venkat vajradhar/Medium

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