Banking review: Seeing beyond 2011 Getting the balance back
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Contents
Foreword................................................................................................................................ 1 Executive summary................................................................................................................ 2 Adapting to new regulations ................................................................................................ 4 Rise of the value driven bank................................................................................................. 12 Data management – the starting point and golden thread.................................................... 13 Mobile payments at the tipping point.................................................................................... 16 Expanding into growing African markets............................................................................... 18 Prepared for 2012?................................................................................................................ 21 Contacts and acknowledgments............................................................................................ 22
True stability results when presumed order and presumed disorder are balanced. A truly stable system expects the unexpected, is prepared to be disrupted, waits to be transformed� Tom Robbins (American Novelist. b.1936)
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Foreword It is somewhat axiomatic to observe that the banking industry locally and globally is undergoing a period of great change. The expectation for SA banks is a continued period of low returns with a focus on cost reduction and meeting the ongoing requirements for new and ever more rigorous regulatory change. We believe that the current business climate in South Africa, though still tough, is also showing signs of recovery. So whilst we should not expect miracles and growth for local banks this year might not be at the levels seen prior to the economic crisis, Deloitte is of the view that 2011 is a year for banks to regain balance. They certainly cannot go into hibernation until the difficult times are over, nor can they afford to allow the current environment to force them into an overly internal focus. For example, it would be short-sighted to focus attention only on cost cutting without gearing up to be able to take advantage of opportunities when the markets shift. Banks need to use this time to reassess and change the way in which they manage their data in order to truly understand all their stakeholders and to use their data to build a competitive advantage. Attention should also be focused on balancing their efforts between cost optimisation, complying with regulation and identifying future growth opportunities in 2011. All this in an effort to bridge the gap between their response to the current environment and where they need to be by 2012. In the following pages, Deloitte SA has identified several key areas of focus that banks may wish to consider in 2011. I should like to thank my colleagues who have contributed to this publication and whose names and contact details are listed on the last page. Kind Regards
Roger Verster Partner | Financial Services Industry Country Leader
1 Banking review Getting the balance back
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Executive summary As South African banks find themselves in a more regulated global economy with a higher emphasis on risk consciousness and increased stakeholder interest, they need to prepare for these conditions and like leading institutions around the world, respond proactively to these market shifts. We perceive 2011 to be the year for banks to regain balance. In an effort to bridge the gap between what local banks are currently facing and where they need to be heading by 2012, Deloitte has set out its view of the key imperatives banks need to tackle in order for them to remain competitive and prepared for 2012. Some of the primary considerations include: • Adapting to new regulations In the past it was possible to view many of the regulatory requirements as a “box-ticking” exercise that was often left as an after-thought once key business decisions had been made. However, that has changed and the impact of the regulatory changes are now central to a bank’s strategy as they will potentially inform decisions about products, clients and even countries in which the banks may wish to operate. Currently there is significant regulatory activity underway, which will affect banks, including the revision of the Basel Accord (commonly known as Basel III), accounting standards relating to financial instruments (IFRS 9) and the risk and capital standards for insurers (Solvency II), which will affect any bancassurance groups. New proposed regulations in the form of carbon tax, executive remuneration and new labour legislation are also on the horizon. Banks will need to understand the business impact of these new regulations quickly in order to realign their strategy and operations where required.
• Rise of the value driven bank There has been much written around value based management and the need for a framework to facilitate value based decision making has perhaps never been greater. A proper value based management framework should unify business’ needs for constant improvement and growth with the ability to manage risk and stress a bank’s portfolio. A risk reward culture needs to be deeply embedded at all levels and this can only be achieved through extensive consultation and training. • Data management – the starting point and the golden thread Despite an increased focus on systems and data, it is our view that by and large information and data systems are still not sufficiently aligned. Consequently banks are still faced with the challenge of redundant (and even conflicting) data housed in still largely separate data environments. In addition, the available data may lack sufficient granularity and its quality may be uncertain. A recent global Deloitte risk management survey found that almost half the financial services executives surveyed, cited a lack of alignment among information systems as a major concern. We believe this is also a valid concern in South Africa. These concerns over the fragmented nature of bank systems and the availability and quality of data obtained from these systems is not new and banks will need to focus on resolving this in 2011.
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• Mobile payments at the tipping point Mobile banking gives banks the potential to expand beyond their geographical footprint as well as the ability to cross sell and up-sell products to existing customers. Banks that harness these additional mobile financial services capabilities can see a profound impact on the nature of the banking relationship. Unlike supermarkets, department stores and other businesses that see only one dimension of consumers’ spending habits, banks have a broader view of what their customers buy and where they like to shop. This puts banks in a prime position to develop a new line of business focused on bundling data analytics for retailers and other entities vying for customer intelligence — while maintaining the privacy of individual customers’ information. Banks could also use the knowledge of their core customers to strengthen their own abilities to acquire new customers, cross-sell to existing customers, improve decisioning capabilities and provide better customer service — resulting in significant value streams for banks. • Expanding into growing African markets Given the expected GDP growth and significant change in consumer expenditure patterns of other African economies (in addition to the well publicised corporate, resource and trade related opportunities), bank subsidiaries in Africa are increasingly likely to offer greater returns on new investments than local operations. In this fast changing environment, managing the investment decision-making process effectively, as well as maximising delivery capabilities and efficiencies, will position banks well for the opportunities to come.
3 Banking review Getting the balance back
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Adapting to new regulations Where banks are at and where they are heading The financial crisis has provided the impetus for a fundamental re-look at regulation across the financial services industry and at accounting standards. Currently there is significant regulatory activity underway, which will affect banks, primarily: • The revision of the Basel Accord (commonly known as Basel III) • The revision of accounting standards relating to financial instruments (IFRS 9) • The revision of the risk and capital standards for insurers (Solvency II), which will affect any bancassurance groups • Expected discussion papers from National Treasury and the eventual promulgation of the financial Markets Bill. Although none of the changes stemming from these regulatory initiatives are due to take full effect in 2011, it is important to consider that: The proposals are a moving target • Standard-setting bodies in the US and Europe are currently debating the principles of the proposed reforms. Therefore, banks should be vigilant for further changes proposed during the course of 2011 and should consider their operating model consequences The associated timelines are short • Certain elements of Basel III go-live in 2012 and IFRS 9 must be implemented from 2013. In order to have implemented the required models and operating model changes and to have fully tested these changes, banks will have to begin their implementation programmes in 2011.
Apart from the existing regulations currently being imposed, banks are in for another turbulent ride as they begin to consider new proposed regulations in the form of carbon tax, executive remuneration and new labour legislation. What actions must banks take with regards to regulation in 2011? Key areas of Basel III (and related regulation) that banks should be focusing on. The 1 January 2012 implementation for the revised market risk requirements puts pressure on banks to fully test their models, processes and data and understand the impacts that significant increases in market risk capital will have on financial markets. Therefore, banks’ funding desks should formulate a strategy now for taking advantage of the relaxation of Regulation 28 relating to the spread requirements for pension fund assets to enable banks to extend their funding well before the 2018 implementation of the Net Stable Funding Ratio. The 1 January 2012 implementation of the Financial Stability Board’s Principles of Sound Compensation Practice may require banks to renegotiate key senior management compensation arrangements during 2011, focusing particularly on increasing the risksensitivity of compensation for all risk types, and incorporating compensation deferral and claw-back arrangements.
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“Under Basel III’s Liquidity Coverage Ratio, fixed deposits subject to the CPA are likely to be deemed to mature within the prescribed 30 day stress scenario because of the embedded option” As inputs into the Liquidity Coverage Ratio and the countercyclical capital buffer calculations, banks’ sectoral and geographic data will assume a new prominence. Banks need to therefore begin to examine the quality of this data, how it is managed and used (refer also to “data management – the starting point and the golden thread” on page 13). There are some areas of Basel III where the impact on South Africa is only likely to become evident during 2011 but may require rapid reaction by the banks. Banks need to watch and be aware of the following: • As a G20 country, South Africa is party to the G20’s commitment to trade standardised over-the-counter derivatives contracts through exchanges or electronic trading platforms and clear them through centralised counterparties by the end of 2012. Although there will be a capital saving for our banks, the economics of the infrastructure development is unknown and its operational impact significant • New legislation is expected to regulate hedge funds in South Africa • At the end of February 2011 National Treasury issued a policy document called “A safer financial sector to serve South Africa better” which sets out government’s proposals to ensure a stable financial services sector. This document deals with issues such as: • Financial stability • Consumer protection and financial inclusion and, amongst other recommendations, makes provision for a new Financial Stability Oversight Committee, as well as a Council of Financial Regulators
• This broadens the structure of the FSB to include a banking services market conduct regulator. These and other proposals will be the subject of new legislation during 2011 • Similarly, the activities of credit ratings agencies and use of their ratings is likely to be impacted by the Credit Rating Services Bill. The Consumer Protection Act could impact Basel III compliance The Consumer Protection Act (CPA) becomes effective on 1 April 2011. It applies to the provision of banking services to any natural person, or juristic persons with an asset value or turnover under a threshold which is still to be determined by the Regulator. Retail deposittaking activities naturally fall within the ambit of “banking services” unless the bank can prove that they are subject to the Financial Advisory and Intermediary Services Act, 2002 (FAIS). This may be difficult to prove, as FAIS covers the giving of advice, rather than the provision of the deposit itself. Should the CPA apply to retail deposit-taking, it entitles either the bank or the depositor to terminate any fixed deposit contract with 20 days’ notice, at any stage from origination until the contractual termination date. Under Basel III’s Liquidity Coverage Ratio, fixed deposits subject to the CPA are likely to be deemed to mature within the prescribed 30 day stress scenario because of the embedded option. As a result they will attract more onerous withdrawal assumptions under Basel III, requiring banks to hold more liquid assets. This exacerbates the difficulty already faced by local banks to significantly increase their statutory liquid asset portfolios (up to a 35% increase is likely to be required under Basel III), with knock-on adverse impacts on profitability.
5 Banking review Getting the balance back
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Preparation will be required for banks to position themselves for the anticipated implementation of IFRS 9 A number of impairment models are currently being discussed in anticipation of the release of the revised exposure draft in the 1st quarter of 2011. The revision is expected to address operational challenges raised on the initial exposure draft. However, the expected implications of the revision will possibly require banks to separately manage the “good” and “bad” portions of their loan books. Practically, the movement to expected loss impairment will necessitate a re-calibration of existing impairment models which will require system changes, to cater for a forward looking assessment of asset performance. This is likely to create great implementation complexities and data implications in achieving compliance with the requirements of the new pronouncement when it becomes effective. The intention behind the revision of hedge accounting is to relax the stringent rule-based requirements and to allow for a more principle-based application. The suggested changes are designed with a view to enhancing reporting transparency through an alignment of hedge accounting with the risk management policies and practices of the business. The effectiveness of the hedging relationship will therefore be determined by a qualitative assessment of the hedging instrument’s ability to mitigate the risk exposure for which it was entered into, in terms of the management practices of the business. The complexities that are likely to arise will relate to the ability of management to provide well structured justification for its decision to enter into a particular hedging transaction. Therefore, in anticipation of adopting the new requirements, an assessment of all hedging relationships will be required in the next year. 6
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Thorough understanding of what is expected of bancassurance groups as a result of the implementation of Solvency II is needed With the implementation date for Solvency Assessment and Management (the South African adaptation of Solvency II) expected to be 1 January 2014, South African banks involved in bancassurance activities should be preparing for compliance over the forthcoming months. Based on the EU’s experience with Solvency II some of the key areas likely to be impacted as a result of Solvency II include: Industry profitability and returns It is anticipated that quality of earnings will improve due to: • More accurate pricing of risk across products • Withdrawal or amendment of unduly risky products
Industry structures Solvency II encourages diversification of risk. As such, we expect to see accelerating corporate action once the final rules become clearer. We see this taking several forms: • Smaller companies joining forces • Big insurers taking over smaller ones that are at a competitive disadvantage due to disproportionate capital needs • Insurers looking to dispose of non-core, capitalintensive back-books • We could also see companies diversifying their risks through internal product or geographical growth of their businesses. Assets held by insurers We anticipate that insurers will continue to own risk assets, though we would not foresee an increase in risk appetite from current levels.
Although companies might not be required to raise additional capital to address Solvency II requirements, there is an expectation of higher capital buffers since balance sheets will tend to be more volatile under Solvency II. Consequences on valuations of insurers (i.e. how the investment community regards them) Increased quality of earnings and a focus on “Capital lite” products will likely be offset by companies maintaining higher capital buffers than before. It is expected that improved risk management within companies could lower their risk premium and this might impact positively on their share price.
7 Banking review Getting the balance back
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Government lobbying and a company-wide strategy relating to sustainability and climate change legislation needs to be devised and implemented The South African National Treasury has been considering placing a price on carbon for some time. One of the mechanisms to put a price on carbon is to use either a carbon tax or a market mechanism such as a “cap and trade” (carbon credit) system. In December 2010, they released a discussion paper on carbon tax. If government chooses to implement a carbon tax, more than R300 million per annum will be collected from the banking and insurance sector directly (Calculated using information from the Carbon Disclosure Project 2010). The impact of carbon tax on the economy will be significant and, as a result, a lower rate may be used. A carbon tax would either be implemented on carbon emissions directly or on fossil fuel prices. If levied on fossil fuels, a tax rate of R165 per ton CO2 would have the following effect: • The price of electricity could increase by R165 per MWh and Government could collect R34 billion per annum from businesses (Based on Eskom’s 2010 Annual Report) • The price of diesel could increase by R434 per kl and Government could collect R1 billion per annum from diesel sales (Based on Econex diesel consumption figures for 2009) • The price of petrol could increase by R381 per kl and Government could collect R955 million per annum from petrol sales (Based on Econex petrol consumption figures for 2009).
Apart from the direct impacts of a carbon tax on the sector itself due to its own carbon emissions, the banking and insurance sector needs to be concerned with the exposure to a carbon tax on its investment and finance portfolios. It will have to be factored into business case assessments going forward and also the impact on the viability of businesses currently financed. This tax would have to be built into future risk analysis of new and existing investments. With these large numbers in mind, it is important that the industry understands the implications of a carbon tax with National Treasury. How much carbon tax will banks be expected to pay? Assumptions: - An initial carbon tax of R165 was assumed. This is based on the tax rate given in the Integrated Resource Plan 2010. - The South African emissions of the companies are from the Carbon Disclosure Project 2010. - Scope 1 emissions are direct emissions released primarily as a result of the combustion of fossil fuels on site. For example the combustion of diesel on site generators or the combustion of coal in boilers on site. - Scope 2 emissions are energy indirect emissions and are emissions associated with the use of purchased grid electricity. - The scope 1 emissions of Eskom are effectively the scope 2 emissions of the companies. Including the scope 2 emissions of companies and the scope 1 emissions of Eskom is like double counting
Financial Institution Nedbank
Scope 1 (Rand per annum)
Scope 2 (Rand per annum)
Total (Rand per annum)
70,785
27,679,410
27,750,195
Standard Bank
1,696,860
22,917,510
24,614,370
First National Bank
4,135,395
61,250,970
65,386,365
ABSA
3,952,905
60,208,665
64,161,570
204,105
5,260,365
5,464,470
Investec
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Banks will need to get a handle on new executive remuneration practices 2010 witnessed governance in banking remuneration gathering further momentum from that which was initiated in the aftermath of the global financial crisis. This was particularly evident in the work undertaken through the Basel Committee on banking supervision which published a number of guidelines and working papers on issues of risk management, supervisory oversight and executive remuneration. In South Africa this resulted in a number of submissions by South African banking institutions in order for the South African Reserve Bank (SARB) to assess the level of compliance with these guidelines and governance frameworks. We anticipate that during 2011 this trend will continue as regulators around the world seek to ensure that the guidelines are implemented with greater levels of compliance. We further anticipate that the SARB will need to provide guidance on the standards which will be applicable in a South African context. The European Union has stipulated certain ranges and guidelines for awards and deferral which many European countries will seek to enforce, but translation of these into a South African context has yet to occur. South African banks have not required the “bailouts” witnessed in USA and UK and thus we anticipate, in the light of the very different banking landscape in South Africa, that many of the European standards regarding executive remuneration will need to be modified to suit South Africa.
Finally, we expect that shareholder activism regarding executive remuneration will continue to increase and that the following issues will be “hot topics” which will require attention from not only the leading banking institutions in South Africa but all major listed corporates during 2011: • The need for ever greater and clearer disclosure on executive remuneration in line with the recommendations of the King III principles and the disclosure witnessed in European, particularly the UK, major financial institutions • The need for greater transparency on the drivers behind all forms of variable remuneration awards (both cash and share based) with shareholders wanting to be assured of a clear link between performance and the award of remuneration • In banking in particular, the need for independent and prudent risk metrics to be incorporated in a clear and transparent manner into the award of bonuses • That over time shareholders see clear evidence of clawbacks or forfeiture occurring as intended through the deferral mechanisms • That prudence in executive remuneration needs to be demonstrated if the recovery in banking fortunes begins to gather momentum during 2011 and business results are thus anticipated to improve from 2011 onwards, particularly with what transpires regarding employment and wage increases for unionised employees during 2011.
9 Banking review Getting the balance back
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“The proposed amendments especially in relation to labour broking in South Africa seem to be going too far and may aggravate rather than alleviate unemployment” Labour amendments on atypical employment in South Africa will have consequences Many employers including employers in the banking institutions make use of atypical employment. Some businesses have been employing employees on fixed term contracts or using the services of a labour broker so as to avoid the risks associated with employing employees on a permanent basis. Draft amendments to the Labour Relations Act (LRA), the basic conditions of Employment Act and the Employment Equity Act, and a new piece of proposed legislation - the Public Employment Services Bill were published in the Government Gazette on 17 December 2010. Final comments were provided on the amendments and the new bill by all stakeholders by 17 February 2011. It is clear that the amendments are meant to respond to the “growth” of atypical employment in South Africa. The most significant effect of these amendments relates to labour broking arrangements and fixed term contracts which may have some impact on banking institutions. The repeal of section 198 of the LRA will see that labour broker clients (employers) have to directly employ workers, thereby incurring administrative and other costs. The labour broker will also now be liable for any unfair dismissal or unfair labour practice claim that an employee may bring, while in the past, the employee could only hold the labour broker liable for these types of claims and not the client company. As a consequence of the proposed changes, the risk is that employers will not be willing to incur the costs and risks of directly employing an employee and therefore those employed through labour brokers will lose their jobs.
Furthermore, if these proposed amendments do become law, all employers including employers in the banking institutions who use fixed term contracts, will have to be extremely cautious and wary when employing employees on fixed-term or short-term contracts. Unless the employer has a reasonable justification for employing the employee on a fixed term contract, it should not, as the employee may well have an expectation for permanent employment against the employer. This will be one of the consequences if the proposed amendments are passed into law. Another consequence of the proposed amendments relates to section 32 (5) of the Basic Conditions of Employment Act, which effectively states that employers must contribute benefits of similar or equal value to employees employed on a fixed term contract as the benefits afforded to permanent employees. However, it is important to note that benefits are not defined in the Act so we are not clear as to what benefits this proposed amendment refers to. The proposed amendments especially in relation to labour broking in South Africa seem to be going too far and may aggravate rather than alleviate unemployment. The consequences for both employees and employers will be far reaching and will necessitate a huge change in the way employers contract with employees, if these amendments are to become law.
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11 Banking review Getting the balance back
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Rise of the value driven bank Banks have a growing need for value based management There has been much written around value based management in terms of the need for a framework to facilitate value based decision making, which has largely been driven by: • Customer affordability, particularly in the mortgage sector, is at an all time low, negatively impacting on new business volumes • Regulatory concerns regarding global financial stability have resulted in an increased cost of capital (Basel III) and higher administrative burdens on banks • Politicians and consumer journalists regularly question the sources of bank margin, the size of the net interest margin, bank charges and other non-interest income • With increasing financial education and the age of the internet, it has never been easier for customers to obtain comparative pricing placing pressure on relationship bankers • Banks are a victim of their own success with maturity in many markets, resulting in increased competition and limited growth opportunities. Indeed, increased regulation and access to internal and external information, are both driving increased transparency. This increased transparency will aid in identifying the fundamental risk factors affecting a business so that they can be managed more effectively. Financial institutions will have to adapt in order to stay relevant to an ever more demanding set of stakeholders. However, increased transparency and risk reporting creates a need for key cultural and technological changes in an organisation to take place. With this in mind, value based management has never been more relevant, but the matter of how such a concept can be implemented comes into play.
Moving towards a unified framework In our opinion a value based management framework should unify business’ need for constant improvement and growth with the ability to manage risk and stress a bank’s portfolio. While this may sound utopian, practical steps are possible. As with most initiatives, stakeholder buy-in is imperative at inception. A risk-reward culture needs to be deeply imbedded at all levels and this can only be achieved through extensive consultation and training. Any attempt to fast-track or bypass this process increases the risk that business units develop independent strategies resulting in the classic patchwork of systems that do not easily integrate. Only once conceptual buy-in for a unified framework has been obtained, can work on the detailed implementation begin. The first step is to define business and risk requirements. Items such as financial forecasting and reporting requirements, regulatory risk reporting and marketing strategy requirements are generally known, just not consolidated in a single place. It is typically in this phase that banks will determine their required single views of customers, including both risk and value measures. It is critical at design stage that consideration is given as to how metrics can link directly into management strategy and targeted action.
“Banks are a victim of their own success with maturity in many markets, resulting in increased competition and limited growth opportunities” 12
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Data management – the starting point and golden thread Still connecting the dots when it comes to data management Elsewhere we comment on the continued regulatory requirements facing South African banks and the imperatives to sustainably reduce their cost base and maximise their revenues. The level of success achieved in dealing with these challenges is heavily dependent on the quality and availability of the relevant data the banks have at their disposal. Despite an increased focus on systems and data, it is our view that by and large, information and data systems are still not sufficiently aligned. Consequently banks are still faced with the challenge of redundant (and even conflicting) data housed in still largely separate data environments. In addition, the available data may lack sufficient granularity and its quality may be uncertain. A recent global Deloitte risk management survey found that almost half the financial services executives surveyed cited a lack of alignment among information systems as a major concern. We believe this is also a valid concern in South Africa. These concerns over the fragmented nature of bank systems and the availability and quality of data obtained from these systems is not new and banks will continue to grapple with resolving this in 2011. Regulators, boards and shareholders have significantly increased their demands for information. Regulation is forcing the better alignment of risk and finance data and a much larger focus on risk data. Key though is for banks to go beyond merely replacing platforms, but thinking strategically how they deploy data throughout their organisations, recognising that the integrity of data is critical to the effective management of risk. Banks also need to understand that different parts of the organisation have different uses for the same data. In the end, a bank may only be as effective as the data it uses to manage itself.
What are the focus areas with regards to data management in 2011? Aligning systems while reducing costs Central to this is the requirement for banks to store, access and use their data more quickly and more efficiently across all of their divisions, businesses and products – effectively to become more efficient in their core operations. Conversely, getting their systems in a position to do this will, in most cases, require continued significant technology spend and this will not be an area where costs will be easy to manage in the years ahead. Although common business operations have three dimensions: People, process and technology, many organisations, when they embark on transformation and require one view of the business, choose to lead with the implementation of technology, such as a new Enterprise Resource Planning (ERP) system. In an effort to minimise costs, Deloitte recommends that banks should not try to lead transformation through technology. The right way to transform an organisation is to: • Begin with people and process • Make sure that technology is set up to follow the people and process rollout in an aligned manner. In our experience, a pure technology-led effort often poses the threat of becoming overly technology centred, resulting in low acceptance and a less than expected positive business impact. This should be seen in contrast to a significant number of organisations which prefer to lead the transformation of their business with structured and well thought through process- and -people-related efforts to gain early benefits. These are then embedded and expanded through a relatively low-key technology entrenchment.
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From the concept of single view of the customer to customer intelligence systems Original research conducted by Gartner in 2006 identified that many organisations often had fragmented information on customers due to operating separate systems between divisions. This made it difficult for organisations to truly understand the value of customers. This research mentioned that without a single view of those customers, organisations would find it difficult to effectively retain, cross-sell, deliver effective customer experiences or manage the risk associated with its customers. As we fast-forward to 2011 where customers are demanding seamless, multi-channel sales and service experiences and not consistently receiving them, it is clear that the traditional retail bank is at an inflection point. Many customers get contacted for products and services they already have or products that don’t meet their preferences due to a lack of data synergy regarding their records, within a banking institution. Simultaneously, other financial institutions and non-traditional players are looking for opportunities to invade this space or to redefine it through disruptive innovation. The result is forcing banks to examine a more balanced, aligned approach to the customer experience and growth.
It is key for banks to accept that merely pooling all the information they have on a particular customer is not enough. Obtaining and sustaining customer trust and loyalty requires that their interactions with the bank are timely and applicable to their needs. This involves banks having up-to-date accurate information collated from every touch point with the customer. IT planning and effectiveness is critical, as banks seek to minimise costs and maximise value. Knowledge of how customers behave and interact with the bank can aid in fuelling the future strategy of how banks do business. Deloitte believes South African banks need to have customer intelligent systems that will aid banks in unlocking the true value sitting in their data. Banks should focus on using information infrastructure to be better positioned to serve their customers and understand customer and product profitability better in order to maximise their revenue. In order for this to be achieved, banks need to apply sophisticated analytics and employ timely, accurate data, which ultimately aid it in maximising revenue and minimising risk.
“...it is clear that the traditional retail bank is at an inflection point�
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Ensuring data is secure Control of information continues to be critical to an organisation, its employees, vendors and business partners. Yet never has it been more difficult. Unauthorised system access leading to compromised data and information causes anxiety on the part of executive officers and security consultants, of almost every organisation across the globe. Current business trends only exacerbate the problem. Complicating the issue is an intricate web of regulations and guidelines that have been enacted by government and industry watchdogs in an attempt to create a framework for the access to and dissemination of sensitive information, particularly personally identifiable information. In the massively interconnected world in which business is conducted today, organisations face the burden of managing complex information systems that are accessed by thousands, if not hundreds of thousands, of people daily. The rapidly increasing number of users who require access means that even seemingly simple activities such as resetting passwords can become timeconsuming and costly. Passwords themselves represent a notorious weakness within systems, applications, and sites. Overwhelmed users, left to their own devices, fall back on simple, repetitive devices that hackers and cyber-criminals have no difficulty cracking. Untangling this mix of disparate approaches to access management and control, requires a strategy that centralises access to corporate systems and programs and draws on issues of identity recognition and permissions, such as provisioning or deprovisioning, that control access to corporate systems and programs. Handled effectively, access control and management can lead to cost savings through operational efficiency and improved productivity. 15 Banking review Getting the balance back
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Mobile payments at the tipping point
Increasing sophistication 80% 2011?
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As banks develop their strategies for giving customers access to their accounts for various uses through cell phones and other mobile devices, they should also regard this emerging platform as a potential catalyst for generating operational efficiencies and as a vehicle for new revenue sources (see transactions on cell phone platforms 2009 on page 17).
Transactions on cellphone platforms - 2009
lan
Mobile banking is on the cusp of transformation from a niche service for the technologically elite to a massmarket service demanded by all customer segments. South Africa’s online presence is increasingly being dominated by cellphones and this trend is likely to grow Mobile technology allows banks to gain cost efficient access to the unbanked market pockets of not only the South African but the African economy, smaller banking competitors in South Africa are already realising the gains of this market. Banks must prepare to defend their franchises against threats from not only other financial institutions, but also mobile carriers, credit card processors and other nonbank competitors that want to help consumers conduct financial transactions wherever they — and their mobile devices — are.
Quick facts concerning mobile in Africa In the third quarter of 2010 Informa Telcoms and Media reported there are: • More than 500 million active mobile subscriptions in Africa • By 2015, there will be 265 million mobile broadband subscriptions in Africa • By 2014 there will be more than 360 million users of mobile-money services on the continent
Ba
Mobile payments – banks have been whistling the tune... Bankers have been talking about using cell phones as a channel for consumer banking almost as long as energy companies have been trying to make solar power affordable. However, it has taken a confluence of factors to make mobile banking a reality, these include generation Y leading the charge on all things mobile, the increasing adoption of smartphones, product and service innovations and consumer preferences shifting to the possibilities of banking wherever and whenever. Most banks have made substantial investments in mobile banking capabilities and smaller financial institutions are not far behind. As mobile banking grows, so too, will opportunities for banks to increase revenues and gain operating efficiencies.
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...but need to start moving to the beat Mobile banking gives banks the potential to expand beyond their geographical footprint as well as ability to cross sell and up-sell products to existing customers. Banks that harness these additional mobile financial services capabilities should see a profound impact on the nature of the banking relationship. Unlike supermarkets, department stores and other businesses that see only one dimension of consumers’ spending habits, banks have a broader view of what their customers buy and where they like to shop. This puts banks in a prime position to develop a new line of business focused on bundling data analytics for retailers and other entities vying for customer intelligence — while maintaining the privacy of individual customers’ information. Merchants could employ such aggregated information to target customers more effectively than they might through other means. Banks could also use the knowledge of their core customers to strengthen their own abilities to acquire new customers, cross-sell existing customers, improve decisioning capabilities and provide better customer service — resulting in significant value streams for banks.
After a few years of relative neglect, M-payments are once again a hot topic in the payments market. Much of this resurgence is down to the growing role of contactless payments. The “tap and go” that is synonymous with the UK’s Oyster card payments is now finding its way into mobile handsets as near-field communication (NFC), making the dream of paying for retail goods with a wave of a mobile phone a viable proposition. Banks cannot ignore this technology if they want to protect their current market share and maintain a competitive advantage in the future. There are a number of reasons why a bank might be tempted to invest in mobile NFC technology, including lower handling costs relative to cash and cheques, as well as the potential to generate incremental customer and merchant revenues. Contactless cards however, have most of the speed and convenience of NFC mobile, and the replacement cycle for bank-issued cards is at least as fast and more easily controlled than the mass replacement of handsets. More importantly, establishing the mobile phone as a core payment device may result in mobile operators demanding, at a minimum, a fee for the use of their SIM “real estate”, which would dilute banking returns. Though contactless cards add the same upside as mobile, banks cannot afford to ignore these technologies. Failure to plan for new mobile technologies will leave banks at risk of losing business and market share to other players in the retail, technology and telecommunication industries who are proactive and possibly more willing to implement such technologies given South Africa’s saturated cellular market.
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Expanding into growing African markets Set for growth Arnold Ekpe, Chief Executive of Ecobank, commented in The Banker magazine that there are several challenges associated with banking in Africa including geographic, technological and infrastructural limitations that cause banking in Africa to have higher costs in comparison to other more developed financial markets. A low savings culture and lack of financial education, particularly amongst Africa’s unbanked market, further contribute to these difficulties resulting in lower levels of deposit accumulation and asset growth. However, the growth appeal of African markets far outstrips the challenges. According to the IMF, Africa’s emerging market countries have good prospects for 2011. Foreign direct investment, particularly from Africa’s new trading partners in Asia, is expected to strengthen and demand for African bonds is set to increase.
If we consider the world’s ten fastest-growing economies according to the IMF, it important to note that half of them between 2001-2010 were African countries and it is expected that between 2011-2015, seven out of the ten fastest-growing economies will be African countries. Furthermore, we analysed household consumption expenditure in West Africa and identified that it is expected to be higher than South Africa’s. This is being driven largely by higher growth rates than South Africa’s forecast rates.
Annual average GDP, % (2001‐2010)
Annual average GDP, % (2011‐2015)
11.1
Angola
10.5
China
10.3
Myanmar 8.9
Nigeria
8.4
Ethiopia Kazakhstan
8.2
China
9.5
India
8.2
Ethiopia
8.1
Mozambique
7.7
Tanzania
7.2
Vietnam
7.2
Chad
7.9
Congo
7.0
Mozambique
7.9
Ghana
7.0
Cambodia
7.7
Zambia
6.9
Rwanda
7.6
Nigeria
6.8
Sources: The Economist; IMF
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Billions
Household consumption expenditure (WDI, IMF, EIU, 2010) $ 350
324
$ 300
2005 2010
281
2015
248 $ 250 219 205 $ 200 156 $ 150
155 125 94
94
$ 100
75 58
$ 50
32
50 31
48 20
32
24 3
10
$ 0 South Africa
West Africa
Nigeria
East Africa
West A Excl. Nig.
Southern Africa
Angola
These values are estimated from macroeconomic data which does not take into account incomes or household sizes. These values show aggregate demand rather than an estimated market size (as the PovcCal.net and IES estimates do).
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Real Household Consumption growth percentage (IMF, WDI, EIU, 2010) ,25
Key points
,24.6
2005-10 2011-15 ,20
,19.2
,15 ,12.6
,10
,9.7 ,8.2
,5
,10.4
,9.6
,10.6 ,9.6
,9.9
,10.1
• Forecast Household Consumption is expected to decline slightly for the next five years • However, the rates are still high in comparison to South Africa which is expected to be less than half of these rates • The decline in the rate, coinciding with accelerating growth, reflects the increasing importance of the business sector in driving growth going forward, which has positive long-term consequences for growth.
,8.7
,4.2 ,2.2
,0 South Africa
Southern Africa
West Africa (excl Nigeria)
West Africa
Nigeria
East Africa
Ripe for exploration Management are increasingly called upon to allocate limited resources between local and international operations, identify operating synergies with current and new operations and picking the biggest opportunities for their investment spend going forward. Given the expected GDP growth and significant change in consumer expenditure patterns of other African economies, (in addition to the well publicised corporate, resource and trade related opportunities), bank subsidiaries in Africa are
Angola
increasingly likely to offer greater returns on new investments than local operations. In this fast changing environment, managing the investment decisionmaking process effectively, as well as maximising delivery capabilities and efficiencies will position banks well for the opportunities to come.
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Prepared for 2012? A season of regulatory change will alter the face of banking as it has always been known, pushing banks into a new, more regulated era that embraces a wide range of stringent regulations as central considerations to effective and sustainable business operations. Banks need to be seen to proactively and effectively manage their risk, minimise costs and maximise value. In this review Deloitte has focused on the fundamental activities that should be considered by banks to help them regain balance during 2011 and to effectively prepare for 2012. By placing these challenges prominently on their agendas and tackling them proactively and creatively, leading banking institutions can ensure they are prepared as the economy resets and new consumer and regulatory demands emerge. Innovative and holistically orientated banking heavy weights constantly reassess the status quo, are prepared to experiment, achieve total command over their data and are open to investments in new systems and new markets.
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Contacts and acknowledgments
Roger Verster Deloitte Capital Markets: Partner Email: rverster@deloitte.co.za
Murray Dicks Deloitte Legal: Director Email: mdicks@deloitte.co.za
Catherine Stretton Deloitte Capital Markets: Partner Email: cstretton@deloitte.co.za
Pravin Burra Deloitte Capital Markets: Director Email: pburra@deloitte.co.za
Duane Newman Deloitte Tax Consulting: Director Email: dnewman@deloitte.co.za
Ben Davis Deloitte Strategy and Innovation Consulting: Lead Email: bedavis@deloitte.co.za
Alethia Chetty Deloitte Capital Markets: Senior Manager Email: alchetty@deloitte.co.za
Candice Burin Deloitte Markets: Market Insights Analyst Email: cburin@deloitte.co.za
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