What value has digital generated for Africa?
Starting from a global perspective, I think there are two dichotomies to the stage of digitalization in the global industry. When you look at more advanced markets, banking penetration has been high. This has been particularly true in the west over the last 40 years, but banking penetration in terms of access to financial services is not the same as digital financial services.
Now, if you look at the last 20 years for the African continent, I think there has been under penetration of financial services, but at the same time what has happened is advancement in communication technology. For Africa, this is because there has been a gap in infrastructure development. Africa is not generally burdened by deep legacy infrastructure. I think we have been the leaping frogs. We have been able to sort of leap over onto new kinds of technology that have gone much quicker and faster for communication purposes; and that has been a leveraging position. A leveraging position so much so for the financial sector that there was a huge gap in terms of delivery of financial services in Africa that has then allowed Telcos to be able to use their infrastructure to build over their services with financial services or to build entirely new value-added services in the finance value chain. This has allowed them to diversify their core business typically driving things such as voice-as-a-service, data-as-a-service, or communication-as-a-service to actually driving value chain-as-a-service.
A good case in point for this would be M-Pesa, which launched 20 years ago in Africa and today has 42M people in Kenya on their platform. But then if you consider EcoCash (Zimbabwe), which I came in to build 7 years after M-Pesa, it will show you the astronomical speed of financial services on the continent; because in just that short span of time, building bottom up, we went from 10% financial inclusion in Zimbabwe to contributing to 90% of financial inclusion in the adult population. In 5 years we did what the banks could not do in over 100 years. It is not that the banks are incapable, but also that the infrastructure capabilities did not make it possible. But in terms of customer needs and experiences, where banks have typically been laggards in their approach to the customer, Telcos and the way they approach customers is much more forward looking and customer centric.
Econet (the Telco that created EcoCash) was even faster than M-Pesa, with triple digit growth; whereas when M-Pesa started it trailed single digit growth and moved slowly into double digit growth. And Econet started 7 years later. This shows the speed at which digital adoption is happening and is enabled by factors such as: advances in infrastructure and greater cell phone and smartphone penetration. 45% of Kenya’s GDP goes through M-Pesa but if you look at EcoCash, they are processing 70% of Zimbabwe’s GDP.
But perhaps what is even more exciting about these advancements is that the banks have also started catching on fast. It goes without saying that with advancements such as the internet of things and the evolution in social media communications, data has become more accessible and it is now a lot cheaper to access internet infrastructure. Broadband and connectivity is actually a lot more pervasive, so you now have a diversity of financial services companies able to drive the same speed of innovation than in the past. There is an emerging ecosystem that is building a lot in a short amount of time in Africa because of the lack of legacy infrastructure barriers.
If you look at the story of Africa and the digital financial services landscape, you could look back at China 20 years ago and the rise of the internet. China did not have legacy infrastructure in their financial services. It reminds me of the Henry Ford story, where people who didn’t yet know what a car was would have asked him for faster carriages rather than to invent a car. When you don’t have legacy impediments, you can build on a blank canvas.
China was in the same place 20 years ago. In their financial services system they didn’t even have check books, and then when access to the internet arrived in the 90’s they just built their FS space on the web and apps. This is why they have the largest number of e-wallets globally and the highest digital penetration and inclusion in financial services. It is really about value creation and then leveraging that on the available digital infrastructure that gives us an opportunity to build really ground-breaking propositions in the financial services space. That’s where Africa is and how it relates to China from 20 years ago.
Africa would be the leap frogs if we were to use animal metaphors, but I think there is something happening on the scene globally, where even the leaping frogs would be outpaced by what I like to call the Dragons. I like to describe them as Dragons, but these are your platform players - the WhatsApps, the Amazons - that have no geographic restrictions. Again, it is fuelled further by advancements in technology - cloud first businesses will scale better and quicker with a multi-country presence. When we thought telecommunications were a breakthrough for Africa in terms of availability of infrastructure to the masses, cloud has been even more of a breakthrough in terms of its ubiquity and affordability.
We talk today about fintech and these are the players that are using technology to solve for the gaps that still exist in financial services. You have insurtechs doing the same for insurance. Beyond that, you are getting a new wave of technology and infrastructure providers who originally were just in commerce. If you take Amazon for example, they had a platform that unified buyers and sellers, but today they are an infrastructure provider. Buyers and sellers with a diversity of representations across multiple value chains are able to use the Amazon platform not only for their commercial needs but also their technological needs. This is the same model that PingAn adopted.
How much more can digital contribute to the FS industry going forward?
When you look at where the leaping frogs are (African players) and then at the Dragons and the incumbents; there is a fight for the market in digital. It will be interesting to see how the African markets fare in this fight because even though we have managed to leap over legacy infrastructure in many instances, digital will be very different in the next 5-10 years. Things like robotic process automation, artificial intelligence, data analytics, and integration with the client will become even more important. The vast amount of data – the world has collected more data in the last 2 years than it did throughout all of the preceding years – will continue to grow.
With the pressure from Covid, everyone is forced to go digital – which will only create more data. Digitization is no longer a necessity, it is fundamental. It is essential. If you don’t have tech in the home now, then children are not learning during pandemic lockdowns. If you don’t have digital in the health care sector, then you will not be able to manage Covid. If you are running your business solely off a legacy system, and if you’re not “teched,” you’re really out in the woods.
There are many more external factors that are forcing businesses to become digital. These external factors are changing everything, and I think it’s a real opportunity for industries across the value chain, especially for FS because this is now how we exchange value. And this will further challenge Africa on its digitalization journey. Africa will begin to discover that even though they have made the leap technologically, that was yesterday and now they need to move even quicker.
I remember sitting in London as part of the team that put together the initial solutions architecture platform for Metro Bank and we really celebrated the entrance of Metro Bank as the first new age bank to enter the high street after 150 years in the UK. We thought that was disruption; now consider Revolut and Monzo.
You can no longer be just a pure financial services company and say “I am typically an insurance company and digitalization will be about delivering my insurance to people on an app off a smart phone.” This is not enough to cut it. You now have financial services companies like Discovery saying “We provide insurance, but will also go into wellness and wellbeing, and also have a bank.” Financial services are increasingly entwined with lifestyle.
Companies therefore are under pressure to redefine their approach and how they interact with customers. I think that will be a challenge for the African continent: figuring out how diversified and deepened financial services can become. Diversification will be a big thing. We have already seen how disruptive players are redefining that globally and Telcos in Africa are leading the way but that doesn’t mean they are guaranteed to win. I think that is something that should be noted by any financial services company in Africa. It will be exciting to see how this whole journey will fuse itself in Africa. If it goes the way we are seeing in China and the rest of the world, then it will be very much an ecosystem play.
It will be interesting to see if these plays will happen organically by African firms or whether we are ripe and open to disruption from global firms. African firms still have a lot of leverage – 65% of Africa’s economy is highly informal and the ecosystems in Africa are largely informal – and Telcos have been able to crack these to an extent. But in terms of how they deliver tech they will need to partner with others who know how to deliver this better and that have the required infrastructure. While the incumbent firms stick to doing what they do best in terms of compliance, governance, products, and value creation. But on the infrastructure side of things most incumbent firms in Africa are not well prepared. Even the Telcos that are moving in this space are being disrupted when we look at satellite and cloud, which are much more affordable and pervasive than current technology.
Has digital lived up to expectations? Has it really transformed the FS industry? (specific to South Africa)
South Africa is very advanced in terms of its suite of FS offerings and access to banking services. But this play – of high value, low volume – is being disputed all over the world. South Africa has a huge opportunity thanks to its emerging middle-income segment. This middle income will redefine the FS space in SA. Also, with lower income in SA, if you look at successful Telcos in Africa, they offer ubiquity of service which allows them to operate in most segments. Ubiquity of service can be big business in Africa.
Take for example JPMorgan, which remains the world’s largest bank by market capitalization. It was never a digital-first business if you looked at them 15 years ago. But I think Jamie Dimon did fantastically well and at some point, they had 50,000 developers sitting in the bank, and in 2017 they accounted for 1 million new customers opening bank accounts. If businesses like that, who were the typical low volume, high value organizations, were able to look at their businesses in a different way, that shows the potential and importance of digitalization.
In terms of digitalization in South Africa, the game is not yet won in terms of access to financial services and digital. There are two things going on. The first is digital penetration of customers. If the incumbent firms can leverage the power and scale that digital provides, then it’s a double whammy for them. It’s not like Kenya, Zimbabwe, and Nigeria where they had a low level of traditional penetration at the start. The second thing is process improvement. Beyond the legacy system, you have to work out how you will change the internal culture of the organization and how you begin to execute transformation programs. This also involves bringing in experts and people who are dedicated to this strategy. It needs to be bold in its intent.
How have you driven your digital agenda?
Everything is about speed. I think Sanlam has been doing the right things in terms of approaching a digital transformation journey. But this game is won on speed. What you think was transformation yesterday is not transformation tomorrow. And I think Covid accelerated that even more. If you asked companies if they would have been able to make the transition to working from home in 2-3 weeks a few years ago they would have said no way. But it is your response to crises as an organization that matters. If you have the right attitude and culture then you are on a good path. What I find refreshing about an organization like Sanlam is that they clearly understand this. And being Africa’s largest non-banking financial institution and 103 years-old, they are definitely adaptable.
If this transformation requires more speed, then go for that speed. That is where I think you will have the winners and the losers. The Nokias and Kodaks, we know all about the stories of their downfall. It was speed that caused this, it is not that they didn’t have people thinking about it and didn’t realize what was happening, it is that they didn’t move fast enough.
How do you generate that speed of execution over and above the culture and the willingness to invest?
I think this will be an ecosystem play predominantly among other things. We are busy working on these things at Sanlam.
What are the key threats to digital going forward and how prepared are you to manage them?
The main threat is compliance. You may have seen recently in the Financial Times the Big Tech Chief regulator in the US, hired by Joe Biden – Lina Khan – coming in to do a big compliance job. The problem with digital is that it gives you scale and then you get into the space of anti-competition/monopolistic behaviors. Regulators have difficulty dealing with all of these things.
Compliance is a big deal and if, on this journey, you don’t do it compliantly then you are going to fail. That is why incumbent financial services firms could actually redefine this space in an interesting way. They have experience and expertise in accommodating and mitigating risk and then being able to incorporate innovation and technology in a winning formula. Start-ups, due to a lack of experience, will struggle.
It will be interesting to look back at this in five years and measure progress. Overall, journeys in the future are not just in start-ups and fintechs, it is an end-to-end process that pivots between whole finance ecosystems, for scale, and with compliance.
Another big thing will be data and customer ownership debates. Drawing the line in the future will be one of humanity’s greatest challenges in the digital world – and these questions have already started to emerge.