Digital Innovation is Driving Disruption in the Banking Industry

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Digital innovation in financial services is placing a premium on efficiency and opening up competition that will continue to drive disruption across banking business segments, including payments, lending, capital markets and wealth management, Moody’s Investors Service says in a new report.

Agile incumbent banks, that consistently assert digital leadership, will thrive and prosper, while laggard banks that lack the vision or resources to develop competitive digital strategies will be disrupted. The Nigerian banking industry has shown this, with the renewed relevance of Wema Bank, a mid-tier bank in the country that took the initiative to introduce Africa’s first fully digital Bank ALAT. Despite being the longest surviving indigenous bank in Nigeria, at 72, Wema Bank showed leadership in digital innovation by launching ALAT.

According to Moody’s, the bank of the future will cater to high and rapidly evolving customer expectations by harnessing key enabling technologies, leveraging increasingly mature and dependable digital distribution channels, and applying these tools across multiple businesses and product segments. Customers will gravitate to providers that best meet their demands for convenience, personalization and affordability, with privacy and data security a growing competitive differentiator. These are some of the things Wema Bank seeks to achive through ALAT. Other fintechs like Paga are also leading in this respect, giving banks a run for their money.

“In the face of these threats, successful incumbent banks will be those that, either on their own or in collaboration with others, pursue aggressive digital transformation to become more efficient and responsive to evolving customer demands,” Fadi Abdel Massih, a Moody’s analyst and co-author of the report says.

Digitization will offer efficiency enhancement opportunities for incumbent banks through the optimization of branch networks, data collection, analysis and reporting process but not without high initial investment.

In this disruptive scenario, banks would remain subject to all regulatory requirements, while “white labeling” their products, and big tech partners will hold the key customer relationships and avoid regulatory barriers.

Continent-wide, a digital-first attitude by Africans has shaped the banking landscape, making it “among the most exciting in the world” and “a hotbed of innovation,” according to a recent McKinsey report, which confirmed that Africa’s banking market is the second-fastest-growing and second-most profitable of any global region.

According to the report, some 40% of Africans prefer to use digital channels for transactions. “In four major African countries – South Africa, Nigeria, Kenya, Angola – a higher proportion of Africans prefer the digital channel for transactions to the branch channel.”

There are about 1.1-billion people in Africa, 300 million of which are banked. McKinsey estimates this could rise to 450 million in the next five years. This presents an opportunity for forward-thinking brands to expand reach using growing digital capabilities to acquire more customers and improve service.

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