As banks continue to work towards new regulatory and compliance standards, all are having to find balance between resource and funding priorities and between step-change innovation and more operational requirements. And, while compliance is a necessity, lagging too far behind in new and innovative opportunities could see them losing their competitive edge. The answer to delivering on both compliance and innovation lies in good partnerships that will lower the back-office workload and allow banks to continue to deliver great customer service in a low-risk environment.
“South African consumers are eager to access all the new tech they see internationally, but as the regulatory burden increases, local banks are stuck with an opportunity cost conundrum when considering rolling out that new, exciting service. Banks will often have to choose between making sure they are on the right side of the regulator, or delivering new services. It is in this environment that the value of a managed service really comes to the fore. Banks can stop worrying about the heavy lifting in their back-office and spend more time designing and rolling out what their customers really want,” says Carlo Ricci, co-Regional Managing Director, Southern Africa and PALOPS at Network International.
It’s not just South African banks that are facing the innovation challenge as budgets shrink in uncertain markets and central banks across the globe look to tighten controls.
According to the Boston Consulting Group (BCG) 2022 Global Payments Report, “…the era of soaring market performance may now be in the rear-view mirror.” The report also warns that many governments will be looking to exert a larger control over domestic payment infrastructure in an effort to limit the role of international card networks. In addition, BCG believes an increasingly competitive environment will test payment networks in years to come.
BCG also warns that the rapid innovation from fintech domain experts poses a serious competitive challenge to traditional banks. It says that banks are no longer the primary provider of transaction banking services and that both the number and the variety of entities competing have grown massively over the past few years. The report adds that these challengers are forcing banks to ‘defend share across the value chain’.
There is room for innovation, if the environment is optimal
Ricci believes that a potential avenue for growth for local banks could be the expansion toward a payments-plus model that he says could serve as a gateway to a larger offering of value-added services.
“Banks need to get more creative and embrace a payment-plus mindset. This is especially important as transaction fees continue in the race toward zero. In the world of scale-based payment processing, where many capabilities are increasingly commoditised, it doesn’t make sense for banks, telcos and large retailers to be focusing on payments – these should be happening in the background as low, or zero, risk outcomes.
“When you are confident your daily services are taking place safely and securely, you are able to better explore how to take your valuable customer data, products and services and turn these into new revenue streams that will set you apart from your competitors – including the proliferation of new and agile fintechs. We expect to see more payment providers, both traditional and fintechs, develop more payment-plus options this year. But this can only happen when you know your day-to-day transactions are properly managed,” Ricci explains.
Traditionally, banks have either chosen or been forced to stick with iterative innovation, where processes are amended and improved over time. Ricci says this has allowed the institution to continue focussing on known revenue streams. However, he says when it comes to Type II innovation – where teams work independently of the rest of the business to develop new products and services – there can be game changing developments.
“I think the big challenge is that established businesses, making good profits, really struggle to disrupt themselves. Because that is what you’re effectively looking for when you ask for innovation. You’re asking a team to come up with new products and services that will make what they traditionally offer redundant. Leaders will always question why the business should be replacing services that are making money. This is the constant challenge with running innovation programmes inside large corporations that are doing well,” he shares.
Looking inwards can result in wins for customers and shareholders
Ricci explains that when innovation rests entirely with internal teams, businesses will often miss opportunities.
“People get locked into their context when it comes to idea generation. If you had to ask 100 people in the banking industry how to innovate, you would get 100 ways to do the same thing, only better, or in a different location, often outside regulatory constraints. It really helps to inject outside energy into the mix when looking to disrupt your offering and deliver the type of services that are enticing your customers away,” Ricci says.
However, innovation is not always about new products and Ricci believes that big wins can come from looking inwards as well.
“There should be a healthy balance between looking outward and looking inward. Any business should constantly try and optimise, reduce cost, improve their effectiveness, as well as process efficiencies. This could be the easiest and most effective ways for banks to innovate. What’s more, it’s not disrupting any other revenue stream, but it is certainly making them more efficient.
“Working with a trusted managed services provider can deliver this, while freeing up leaders to work with innovation specialists. With the right partners, banks can innovate like fintechs, while keeping shareholders happy,” he says.