Taping the unbanked – why African banks are failing to tap into the unbanked?

Banks in Africa are failing to take advantage of the innovations happening in the area of financial services owing to their improper comprehension of the ever-changing environment. In Sub-Saharan Africa, only one-third of individuals have access to the financial services formally and the condition varies widely throughout the region. While mobile money’s penetration is in excess of 90 percent in nations like Kenya, it is only around 1% in Nigeria. Also, while few central banks like that in Tanzania has enabled innovations like payments to take place between multiple telecom operators a couple of years ago, others continue to ban them.

In addition to this, Africa also faces other challenges in the form of lower banking penetration, heavy usage of cash, limited coverage from credit bureau and very few ATM and branch networks. In this complex and fast-paced market, there are massive differences in the performance between lagging and leading banks. According to recent research, 70% of the African retail banking growth and revenue pools in 2025 will come through the middle market segments i.e. from people who earn anywhere between 6000-36000 dollars annually. On the other hand, the mass-market will contribute only 13% to the growth of this pool and will remain one of the most rapidly expanding segments in the banking industry.  But, irrespective of the segments that banks look to serve, they must develop exciting propositions aimed at those consumers.

Discover why banks in Africa are failing to tap in and what they must do to counter the situation.

Why Banks are failing?

The banking & financial sector in Africa needs to shake up. While mobile banking and P2P banking have started to thrive, the local banks need to function as real banks to fulfil the needs of SMB companies. Put simply, the transformation of the financial environment will be the ideal way of unleashing the full potential of banks. Following are some of the reasons why banks are failing to make the most of the increasing innovations and opportunities:

Fragmented Market

The African continent features 54 different countries with different banking opportunities and challenges. According to an estimate, the leading 5 banking destinations in Africa include Nigeria, South Africa, Angola, Morocco, and Egypt. Together they contribute around 68% of the entire banking revenue. This implies that the other 49 countries remaining in Africa contribute only about 32% to the entire revenue pool. Apart from this, the banking markets in Africa showcase high variations in profitability and growth. Thus, it is extremely crucial that banks draw the correct map to tap into the rising opportunities.

Lower-income Population

While the income of the lower class individuals in Africa is increasing at a steady pace, its population continues to remain poor on an average globally. Around 85% of people earn less than $5000 annually in comparison to 80% in Asia. This means that the banking revenue pool is focused on the higher and middle-income segments and customers in Africa strongly require cost-effective financial solutions. This further implies that the banks need to target the right market segments which clearly they have failed at so far.

Expensive Banking models

African banks have performed poorly on the productivity benchmark. At 3.7 %, the cost to asset ratio for banks in Africa is 2^nd highest globally when compared to 4% in banks in Latin America. Thus, banks in Africa have a higher number of manual processes, more number of tellers, and higher cash-based costs in comparison to their international peers. In fact, over 90% of all banking transactions in the continent are conducted in cash. This high usage of cash results in the addition of costs or expenses to the banking system in Africa. This also implies that banks need to move towards simpler and leaner banking.

Limited Bank Branches

The number of bank branches in Africa is the lowest globally. There are only 5 branches for every 100,000 adults in comparison to 13 in Asia as well as 17 branches in Latin America. This means that banks in Africa need to embrace digital-first innovations and approaches.

Other Challenges

According to the banking & technology experts, similar to the other markets across the globe, there is a generational divide that has resulted in a gap between what young entrepreneurs seek from their banking & financial service providers and what African banks are actually offering. The banking system in Africa is more than a hundred years old and has developed at the time of apartheid. But most of the SMBs that now operate in Africa are new and have emerged only after apartheid. As a result, the traditional banks have failed to match the speed of the changing needs of the younger market. Thus, owners of small businesses are forced to visit a bank branch physically and wait until they can interact with a representative personally. On the other hand, high rates of unemployment as well as the regulatory environment have impacted the small businesses negatively and further created a more challenging environment for the SMBs to operate in. In a nutshell, it is difficult for SMBs to acquire financial services of the basic level, especially financing, leave alone all the digital-first solutions that they yearn for.

How We Can Help?

At Horn Partners, we closely monitor and keep a track of the industry trends to assist our clients in making informed decisions. Our goal is to assist banks in transforming and adapting to an innovative operating model that further helps them to simplify their processes. We help our clients to identify opportunities for digital transformation & growth and streamline their functioning to achieve higher revenues while reducing their costs.

We also help banks & financial institutions to transition from a mere product-centric firm to a client-centric organization. Our solutions are tailor-made to match our clients’ needs and to enable them to provide superior customer service while complying with risk & regulatory requirements.