The African continent has witnessed an increase in the use of digital payment platforms as governments disseminate stimulus funds to mitigate the economic impact of the COVID-19 pandemic. This means not just safer, cashless payments to facilitate social distancing during the pandemic—but in the longer-term, it also means a shift towards financial inclusion that could help get economies back on track faster after the crisis.
Notably, the emergence of payment systems that are designed to function seamlessly with mobile devices, in-app methods, or browsers has prompted wide-ranging innovation from banks, digital giants, and FinTechs. According to a research paper published by the Boston Consulting Group (BCG), the volume of digital payments is soaring and by 2020 is likely to approach $5 trillion worldwide. There is no denying that fintech is one of the fastest-growing emerging sectors globally, employing thousands of people and generating new sources of revenue for economies worldwide.
The continuing move to digital payments will powerfully affect retail banks because payments remain central to their customer relationships. Although continued low interest rates, reduced transaction fees and margin pressures have made the business more challenging, payment-related revenue (including revenue from accounts, non-card payments, debit cards, and credit cards) still accounts for a third of banks’ top line.
According to a report recently released by the Standard Chartered Bank, Cash withdrawals from ATMs are now half what they were two years ago. The report states that today, 89 per cent of transactions are being conducted digitally with a 68 per cent and 90 per cent penetration for their Retail and Corporate clients respectively.
As transaction volume for digital payments in large and small amounts continues to grow, the payment provider needs to be innovative to meet increased demand. And as digital user interfaces have improved for apps and websites, consumers are finding it easy to forgo cash when paying for a wide range of goods and services. The result is rapid growth in digital payments. This growth has elicited major competition, with digital payments firms such as Visa doing their best to attract more users through their banking partners.
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The benefits of digital payments cannot be overstated. According to the Cost of Banking 2019 report by Financial Sector Deepening (FSD) Kenya, bank customer who transacts digitally saves an average of Sh9,350 in annual transaction costs. A customer who prefers to transact at the branch will incur an average of Sh14,970 in annual transaction costs compared to Sh5,620 if transacting digitally.
A customer can also save money in various ways, including late payment fees by opting for the facility to pay bills online. Additionally, there are service providers like credit card issuers, who charge a fee for branch payments. Some banks also offer bonus points for online services, which can then be redeemed for online shopping through the bank’s partner.
“COVID-19 is reshaping the market outlook for payments in Africa and how African banks and non-bank players are responding. Many are adapting their operating models and products to help lower barriers to mobile banking and payments that bring more people into the cashless economy”, McKinsey and Company states in their paper tiled How the COVID-19 crisis may affect electronic payments in Africa.
Furthermore, the McKinsey Banking Consumer Sentiment Survey finds that customers want to execute more electronic payments during the crisis. Kenya and Ghana may have further increases in mobile money, mobile wallet, and bank-to-wallet transactions. At the same time, the pandemic is driving significant changes in consumer behavior that are likely to persist long after COVID-19.
To improve their payment offerings and provide a more engaging customer experience, banks need to build on their core strengths, focusing on four imperatives. In order to prevent customers switching to non-bank providers, banks must make signing up for and using payment products as frictionless and seamless as possible. Such a result requires reimagining and redesigning the payment journey. This appears to be the trend as most banks have focused their redesigns on winning new account and credit card customers.
To make their offerings more appealing, banks must pay greater attention to these aspects of the customer experience. Addressing them end-to-end can also deliver substantial cost savings, particularly through deployment of smart processing technologies. Ultimately, individual banks can be pragmatic and work with the digital giants’ device wallets, as this will increase their card transaction volume. Besides establishing strategic partnerships, banks must differentiate based on services they provide around the payment.
Banks must also step up their awareness creation of digital payments by making use of a range of communication platforms including websites, social media, traditional media and text messaging. But for this to happen, there must be a policy shift towards measures that encourage the use of digital finance. At the same time, this should be combined with strong efforts to counter financial crime and assure consumer protection.
The writer, Edith Chumba is the Head of Retail Banking Kenya and EA at Standard Chartered Bank.