Mike von Fintel
Head: Financial Institutions
Challenger entrants are changing the face of the FIG sector, impacting this year’s significant trends.
The majority of our time is being spent meeting with our clients to better understand their challenges and needs and in order to be better positioned to deliver appropriate solutions which enable our clients to achieve their ambitions.
While each client has specific issues pertaining to their business, we also note that each year there tends to be several key themes and topics that resonate with clients across different markets.
Every year, we pull together these discussions to summarise what we see as the key themes emerging within the FIG sector.
Industry disruption due to digitisation and technological changes
Top of the list is industry disruption due to digitisation and technological changes. In both the banking and non-banking sectors, traditional incumbents have seen new entrants moving into parts of their value chain and gaining market share by providing services backed by technologies that provide simpler, faster and more convenient offerings.
These entrants are gaining a foothold by identifying the needs of customers that are currently not served or are inadequately served by existing players.
Customers increasingly expect ease and convenience when undertaking financial services. They are no longer willing to be restricted to face-to-face contacts via branch networks, salesforces and field agents who only offer services at set times and often in set locations.
The growing expectation is that access to financial services, much like everything else these days, needs to be available 24 hours a day, seven days a week.
Hence, more financial services need to be distributed through readily available platforms. This means primarily mobile phones, tablets, computers and self-service e-branches that are always available.
The ability to provide customers with access to these platforms is of particular importance in Africa where branch networks are not only expensive to set up and maintain but are also under-developed outside of the top cities in each country.
With the cost of entry-level smartphones continuing to fall, challenger entrants have seized the opportunity to develop offerings that can be accessed, at minimum, on a simple basic smart phone.
Not only does this have cost benefits for a new entrant (versus setting up physical infrastructure) but it allows them to reach more customers relatively quickly and hence to faster reach the required scale to make their businesses profitable.
How are the incumbents reacting to these new challenges?
Disrupters in the FIG space can be grouped into several buckets based on their offering and target markets.
First and foremost, prominent are the entrants in the payments sector, where the focus is on both national and cross-border payment transactions. Here you find disrupters who are providing alternative payment methods for C2C, C2B, B2C, including developments in blockchain and cryptocurrencies.
As noted earlier, smart phones and mobile telephony have become the cornerstone to success in this market. What the payment disrupters have delivered to customers is ease of doing business, cost transparency and speed of service.
The second group of challenger entrants we frequently come across is focused on InsureTech.
Amongst other things these disrupters offer peer-to-peer insurance and group insurance schemes where a group of policyholders come together and assume collective liability in the event of damages.
This is similar to group lending schemes offered by microfinance lenders where the success of each individual is dependent on the success and credit worthiness of the group as a whole.
Another growth area in InsureTech has been the development of comparator platforms. These address the need for greater transparency for consumers when it comes to choosing insurance providers.
The platforms compare insurance quotes not only on price but also on key issues such as excess levels, cover inclusions and exclusions and rewards/bonus systems.
These platforms have proved particularly attractive to younger customers who have no allegiance to the old trusted ‘insurance salesman at your door’ method and instead, want to be clear on the value of the insurance choices they are making.
Unpacking the disruptors and their offerings
We have witnessed a renewed focus on enhancing their digital offering and value proposition to clients. In the banking space this has taken different forms.
Some banks have chosen to develop separate digital challenger banks under a separate brand as a standalone business to compete with the new entrants.
Others have focused on digitising their existing platforms. The result has been an increase in client transactions via new channels such as mobile, internet, etc., while the volume of transactions via more traditional platforms such as bank branches and even ATMS has shown declines.
This has resulted in some banks reviewing their branch networks and choosing, where appropriate, to rationalise the physical footprint. It is very rare these days to come across a bank that does not have a well-articulated digital strategy.
The same applies to the insurance sector, albeit it at a slower pace outside of South Africa.
In addition to looking at how they use digital channels to deliver products and services to a greater reach of clients, the bigger insurers are also looking at how they can leverage off their digital platforms to drive a faster and greater pace of convergence.
It is no longer sufficient for large insurers to position themselves as monoline providers of either life or general insurance.
With customers demanding a one-stop solution that covers the gambit from protection to wealth management, insurers need to position themselves more as leaders in wealth creation, investment management and protection providers in their markets.
Digital transformation is a conduit for driving this convergence and defending their wallet share against niche disrupter entrants. Similar to banks, the digital journey has become a core part of company strategies.