The South African banking sector is facing a material decline in non-interest revenues as technological innovations that have led to the introduction of mobile payments could potentially result in the loss of millions of Rands in transactional fees. Consequently, it is becoming increasingly critical for banks to formulate effective revenue-replacement strategies to offset this potential impact.
According to Colin Hundermark, a Director at Step Strategic Venturing, a boutique professional services company, data sourced from the South African Reserve Bank already reveals a noticeable slowdown over recent months in the ‘service charge’ growth momentum of local banks – from mid-teen annualised growth in mid-2011 to single digits in April 2012. Service charges currently represent 70-80% of net fee and commission income.
“There are likely to be many factors at play,” says Hundermark, “but it appears to us that the cumulative effect of regulation and the migration to lower-revenue electronic channels is taking effect.”
Hundermark says an increasing proportion of consumers are using electronic banking channels, which reduce transactional payment charges. “New innovations in mobile payments that enable people to send money via new methods, such as their cell phones, will similarly reduce the need for credit card transactions, debit card transactions and ATM withdrawals – and the associated fees.”
For every purchase that is made on a credit card, the issuing bank earns 1.7% of the transaction value, some of which is charged to the merchant. “When one considers the volume of transactions every day on credit cards, fees earned on credit cards form a significant portion of a bank’s non-interest revenue.”
Data released by the Reserve Bank revealed that in the 12 months to 31 March 2012, there was R170 billion worth of transactions on credit cards in South Africa, with the result that issuing banks would have earned around R3 billion from these purchases.
Hundermark says mobile banking payments are the next step in the evolution of retail banking. “We have moved from using cash in all transactions, to cheques, to debit and credit cards and we believe that the trend to mobile payments via phones or other mobile devices has begun. Some banks have already begun to embrace the use of mobile technology and are using recent innovations which reduce costs for customers as a marketing tool to attract new clients, sometimes cannibalising their existing revenue streams in the process.”
However, as more banks start to embrace such technology there will be fewer differentiators between the major players, with the result that they will need to conceptualise and implement a strategy to mitigate the downward pressure on non-interest revenue. “Banks need to have a clever and effective strategy to replace lost fees, as well as protecting their remaining non-interest revenue. This can involve a number of factors such as innovative marketing campaigns to attract new customers, reducing service and transactional fees, or introducing loyalty schemes that reward customers who stay with the same provider.”
Hundermark notes that some players have already embarked on aggressive client acquisition strategies. “The idea is for banks to add new clients at marginal cost, particularly if new clients adopt lower-cost electronic channels.”
He adds that if there is not a clear focus to grow the customer base, it becomes critical to implement a strategy aimed at increasing cross-sell ratios, to improve the efficiency of existing distribution channels to sell more products to the customer. “A bank is in an ideal position to cross-sell by offering products such as home loans, car loans, credit cards and insurance, in addition to a cheque account – yet if there is no clear strategy to ensure this happens the customer may be lured by other providers.”
“Ideally, dual strategies of growing the client base as well as growing the number of products per customer must be implemented in parallel.”
Hundermark concludes that in the end, the big winners will be consumers, as they benefit from lower banking fees and improved levels of service. “However, banks that can develop innovative business models that can adapt to the changing environment will be in the best position to temper the downward pressure on non-interest revenue.”