South Africa continues to experience high interest rates and slow economic growth due to market challenges and domestic constraints. So, what does this mean for banks? Here are the themes we expect to influence South Africa's banking sector in 2024 — besides, of course, the continued focus on costs, resilience, and delivering on existing commitments.
Top macro trends shaping the digital banking landscape
Elections in South Africa and elsewhere around the world will greatly impact the regional and global economies. In fact, more than half of the world’s population will go to the polls in 2024. Elections always leads to short-term volatility and, as such, investor uncertainty will drive cautiousness, impacting revenues in the banking sector. Another macro trend to keep an eye on is a possible decrease in interest rates in the second half of the year, bringing much-needed relief for under-pressure South African consumers. The ongoing energy, transport, and logistics crises will, meanwhile, continue to impact businesses in 2024, although initiatives are underway at a national level to turn the dial. Additionally, South Africa’s continued presence on the Financial Action Task Force’s (FATF) grey list will continue to impact business and investment.
The pros and cons of interest rates post-COVID-19
We anticipate ongoing progress in post-COVID growth and recovery, with banks focusing on reducing provisions made during the pandemic. Increases in interest rates over recent years have resulted in higher net-interest margins, but they also led to elevated impairment rates in the banking sector, thereby reducing the return on interest revenue. Into 2024, non-performing loans (NPLs) may persist and continue to rise, putting pressure on returns. These challenges, coupled with economic growth concerns in specific markets related to debt sustainability, inflation, politics, and conflict, will result in general difficulties for businesses and, therefore, issues in the corporate and business banking sector. The question many banks will face is how to navigate this upcoming period effectively. We anticipate accelerated internal transformations aimed at cost reduction, as well as an increasing number of banks focusing on alternative revenue streams to enhance their return on equity.
The rise of AI in the banking sector
Whether banks will be touched by generative artificial intelligence (AI) is no longer in question — but how rapidly and effectively they can implement the technology is now the key element to watch. Banks are, after all, large and complex organizations and for such entities, transformation is always an arduous process. AI will be a big focus in 2024, with better algorithms and easier access to large data impacting everything from risk assessment to relationship management. We anticipate seeing the acceleration of AI use cases for banks in 2024 as AI adoption increases across the industry.
The power of diversification in digital banking strategies
As banks work on how to increase their revenue during a period of monetary tightening, we anticipate a focus on three primary avenues:
Beyond interest revenue: Banks have always strived to enhance profitability by diversifying revenue sources beyond net-interest income. It’s important to note that established banks enjoy an advantage over smaller banks when it comes to generating income from fees due to their scale. But across the board we may see a push to generate additional income from fees through various avenues, such as wealth and asset management. Additionally, to bolster the noninterest income aspect of their portfolios, some banks may either acquire or partner with fee-based businesses to grow their income in this area.
Beyond South Africa: In recent years, the African banking market has been rife with activity – there have been exits and new entrants, as well as a continued rise in non-banking players in many markets. While notable international banks such as Société Générale, Standard Chartered and BNP Paribas have exited markets, pan-African banks such as KCB and Access Bank have opted for inorganic growth by expanding their operations across Africa to diversify their earnings. This trend will continue, and South African banks will look for ways to diversify their revenue streams, particularly to African markets experiencing both robust GDP growth and the emergence of a burgeoning middle class with increased disposable income, for example those in East Africa.
Beyond financial services: Progressive players are looking to disrupt the traditional banking value chain. This is evident in the emergence of embedded finance and beyond banking initiatives such as Avo by Nedbank. The growing adoption of API-driven technology enables the development of ecosystem propositions and partnerships, allowing banks to create wider, one-stop-shop offerings in key areas such as insurance, energy, financial planning, and consumer goods and services. With this in mind, we anticipate a rise in these partnerships to augment service offerings beyond traditional banking.
Revolutionizing user journeys and intuitive interfaces
In most mature financial services ecosystems, customers expect a secure and personalized physical and digital experience that is simple and easy to use. They are also likely to switch providers based on frustrating physical and digital interactions, and so user experience will emerge as the real differentiator. We expect a noticeable shift towards redefining user experience to create enhanced, digitally enabled banking solutions aimed at providing better customer experience. Such expectations have largely been shaped by such tech giants as Google, Facebook, Amazon, Netflix, and Uber, and South African players such as Checkers Sixty60 and Takealot. These entities have redefined simplicity and personalization through their user interfaces and algorithms. We expect a clear focus for banks on digital experience, but we do not expect such a similar focus on physical experience, and the latter will likely remain an untapped competitive advantage for a while longer.
Finding the balance between physical and digital distribution
The COVID-19 pandemic highlighted that many banks find sustaining loyal connections with customers and selling more complex products (e.g. home loans) without in-person interactions challenging. While digitalization has empowered customers to be more independent, it simultaneously diminished banks' distinctiveness and made banking a less personalized experience overall. We have seen a back-and-forth debate for over a decade on whether the branch is dead. It is not, but its role needs to change faster to keep up with customer expectations of seamless omnichannel banking. While some players are expected to double down on their digital approach, others may choose a direction that emphasizes the role of branches and non-traditional/third-party players within a modern omnichannel model. We expect to see banks starting to test new physical distribution and service models this year.
Developing a competitive edge in digital banking
South African banks have invested heavily in advancing their digital capabilities, and it has paid off. In 2022, South Africa ranked first in the average digital maturity score in the Oliver Wyman Digital Banking Index when compared to eight nations, including Spain and the UK. While we have seen consistent improvement in South Africa's digital maturity, there are still opportunities to differentiate, and we expect banks to start pushing to do so. Progress in digital capabilities — particularly in platforms, financial coaching, robo-advisory, and integrated digital onboarding processes — will all provide an opportunity to develop a competitive edge in the South Africa market, attracting new customers through added value.
Expanding the data revolution
Banks are data rich organizations, however they often lag when it comes to utilizing the data to generate value. Banks lack the tools to access their data effectively and convert it into actionable insights that can help generate value for their customers and shareholders, especially when compared to big tech companies. This must be remedied because, when treated as a product, data can revolutionize the fundamental aspects of banking. In recent times, banks have been more effortlessly able to extract, enhance, and integrate their own data as well as that of other providers thanks to a bolder adoption of new technology. With this advancement and the rapid rise of AI, we expect a significant, game-changing push on monetizing data through segment-of-one targeted sales, alternate revenue streams, risk, and cost reduction/optimization use cases.
Green financing and a rise in ESG reporting
As carbon footprints emerge as a new economic parameter, a fresh risk management approach will be necessary to effectively address the risk appetite and capacity of different groups of local and foreign investors. Banks must develop innovative green products while simultaneously determining the industry and customer segments to prioritize. Anticipated developments include certain South African banks increasing their focus on the proportion of sustainable financing products in both corporate and retail portfolios. Prominent use cases include financing renewable energy projects, such as solar, and the battery-related commodity value chain.
Sustainability has become a regular topic of discussion in board meetings and is now a standard feature in annual reports. However, this is just the beginning, and more substantial progress is needed. While banks bear significant responsibility, they cannot achieve sustainability goals alone. The South African government and regulators play a crucial role in driving this process forward. As clearer baseline reporting standards and enhanced supervisory engagement processes take root, we anticipate increased resourcing and adoption of data and reporting tools across the industry. We also expect to see more extensive and granular sustainability reports, as well as public communication on transition pathways (both outcomes require a higher level of rigor in data and metrics), along with more clarity and less variability in how banks define "sustainable".
The role of Gen Z in the banking agenda
While Gen Z is often discussed as a significant focus area for banks across South Africa and the African continent, there has been more talk than action from banks in providing relevant and appealing digital offerings to this demographic. Gen Zers are determined to manage their finances differently than other generations, so timeworn strategies won't work, and waiting for this generation to conform to the old rules is risky. Gen Zers seek transparency, simplicity, personalized attention, democratized information, equitable treatment, options in terms of the products they buy, and a different engagement model. Banks must adapt quickly to appeal to this generation’s diversity and digital upbringing if they are to generate value from this segment before someone else does. According to Oliver Wyman Forum research, Gen Z will represent more than 30% of the population by 2030 versus 15% today.
Questions remain: Will banks truly invest in developing offerings and engagement strategies to cater to this generation's needs? And, importantly, how will they capture their loyalty?