/ 1 May 2020

Digital banking offers an entry point to the fourth industrial revolution

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South Africa finds itself on the cusp of another industrial revolution. This one, which the World Economic Forum claims will “fundamentally alter” the way we live as humans, is being driven by rapid developments in computer-processing power, artificial intelligence, 5G networks, the internet of things, energy storage and other technologies.

The fourth industrial revolution (4IR) has become a major policy initiative in recent years under the administration of President Cyril Ramaphosa and his governing ANC. Ramaphosa wrote in a Brookings Institution report in January that the 4IR will help South Africa take a “quantum leap into the future” and that new technologies will help make South Africa more equitable.

However, in a nation deemed “the most unequal country in the world by any measure” in 2018 by the World Bank, critics of the 4IR movement dispute Ramaphosa’s claims that the technological revolution will lead to a more equitable South Africa.

“Simply overlaying these advanced technologies on structural inequalities that we have will actually just amplify those inequalities,” said Alison Gillwald, the executive director of Research ICT Africa, a nonprofit organisation that conducts research about the effect of digital technologies in more than 20 African countries.

Consensus among academics, though, is that the arrival of disruptive new technologies associated with the 4IR is inevitable. Brian Armstrong, a professor of digital business at the University of the Witwatersrand in Johannesburg, said there are pockets of technological advancement occuring because of the 4IR that will have a more immediate effect on the lives of South Africans. These advancements, such as the growth of online and digital banking in South Africa, Armstrong said, could pull other industries, and South Africans generally, into the 4IR.

Digital and mobile banking is on the rise in South Africa. TymeBank and Discovery Bank, two digital banks, officially launched in the country last year, while Bank Zero, a third digital bank, is slated to launch sometime in the next few months. Users banking with these new digital banks will do so without ever coming face to face with a teller, and will manage the majority of their banking through mobile applications or online platforms.

Young people lead digitisation movement

Moleboga Makokga, 24, is among the millions of young South Africans embracing online banking. Makokga, who lives in Fourways, Johannesburg and works as a digital customer-care consultant for MultiChoice, banks with Capitec Bank and began using its mobile app in recent months. And, even though Capitec is not an exclusively digital bank, she said the app “is pretty awesome”.

“My life is so much better [since I started using the app] because I don’t have to go to the shop to buy airtime,” Makokga said. “Because I have the app on my phone, I don’t have to get up and drive to the garage or to a store to get airtime or get data — I can simply do that on my phone.”

Like most South Africans, Makokga chooses to buy prepaid cellphone data, rather than purchase a monthly plan.

Convenience extends beyond just purchasing cellphone data. Users can also make payments for electricity to Eskom right from the app.

“Another advantage is that when I need to send somebody money, I don’t have to walk to an ATM and transfer that money at the ATM — I can simply do that on my phone,” Makokga said. “[The app] saves you a lot of trips and it saves you a lot of time. It gives you convenience as well.”

Makokga also said she has no reservations about banking through the Capitec app. She explained that to set up the app on her phone, she had to go into a Capitec branch and have a bank employee activate it on her phone. This practice is the same for connecting any device to the Capitec app, she said. After recently getting a new phone, Makokga had to return to a Capitec branch to get the app reactivated. However, it is possible to activate the Capitec app without visiting a branch.

Online banking fuels innovation

Armstrong identified three areas of the South African banking industry that digital banks can disrupt.

First, digital banks make banking more inclusive. Because they lack physical locations and, in turn, don’t require customers to travel to open bank accounts, they are ideal for serving the underbanked and unbanked populations in South Africa, Armstrong said. Online and digital banks are able to serve South Africans who otherwise did not have access to traditional banks, creating a large potential customer base, and simultaneously providing an opportunity for many South Africans to access formal financial services that previously may not have been available.

Second, digital banks have lower operating costs than their traditional competitors. As a result, these new approaches to banking are able to reduce the fees customers have to pay. Lowering the cost of banking through digital platforms also makes banking more inclusive, introducing even more South Africans to online transactions, and offering familiarity with these tools and platforms, Armstrong said.

Finally, digital banks fundamentally transform the banking experience of customers, as they lack the salient touchpoints of physical bank branches. Because most South Africans still require physical money in their daily lives, these new banks have had to establish alternative ways for customers to withdraw cash.

For example, TymeBank has partnered with Pick n Pay and Boxer to allow their customers to withdraw cash from cashiers with no fees. They also allow customers to open accounts at TymeBank kiosks located inside the stores. These alternative touchpoints help build trust with customers by showing that digital banking can be reliable, even if you never meet a representative from the bank in person.

“Once people are comfortable transacting online, doing anything else online becomes a no-brainer,” Armstrong said. “For me, it is an important thing. If digital banking can play a role in making South Africans more comfortable in virtual space, in virtual services, then it’s a great opportunity.”

Online doesn’t guarantee equitable

Palesa Shipalana, who leads the economic diplomacy program at the South African Institute of International Affairs, echoed aspects of Armstrong’s optimism about online and digital banking.

Shipalana, whose research focuses on, among other topics, public finance and the South African economic and policy development landscape, said the “digitisation of financial services forms the foundation to leapfrog into technological or digital services or e-platforms for other industries”.

She cautioned that a countrywide embrace of digital financial technologies will take years, potentially even decades. This slow growth, Shipalana said, is because South Africa has a “twin economy”: the cash-based economic systems of the country’s townships and rural areas versus the growing e-commerce and electronic spending habits of South Africans in major cities.

“It doesn’t matter how many digital banks we get; how fast we adopt digital banking and digitalise our financial services industry in the country,” Shipalana said. “The fact is that a majority of the population still resides in rural or marginalised or township setups that are cash-driven societies.”

Low or no-fee digital banks could help address this disconnect. “South African bank fees are four times higher than those in countries such as Germany, Australia and India,” Shipalana wrote in an October 2019 report focused on digitised financial services in the country. As a result, “only 24% [of South African adults with a transaction bank account] conduct more than three monthly transactions such as withdrawals, deposits or card swipes, resulting in more than 60% of all purchases being paid for in cash,” she wrote.

Lowering or eliminating bank fees could help to enable and promote a digital payment ecosystem in currently cash-based societies, Shipalana wrote.

Shipalana also said trust in online and digital banking remains low among older South Africans, especially older black South Africans who were excluded from formal financial services under apartheid. Shipalana said it took these older South Africans “forever to trust that you can walk into a bank and not call the 25-year-old banking agent that’s helping you ‘sir’”, let alone trust them with their money. However, given that 18- to 34-year-olds make up nearly a third of South Africa’s population and the country’s middle class is growing, Shipalana said adoption of digital financial technologies is inevitable.

“If I’m comfortable with moving my money electronically, I’ll be comfortable with getting my groceries online,” she said. “Once I can trust the channel that my money moves in, then it will be easy to trust other items moving through the same channels.”

The arrival of 4IR technologies, in one form or another, is inevitable. Online and digital banking could serve as an avenue for South Africans into the 4IR.

Jack Kelly is a graduate journalism student at Northwestern University in the United States. He visited South Africa earlier this year on an international reporting trip that formed part of his class