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June 20, 2023

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The banking sector is confronting fundamental structural changes and challenges that are going to shape its future and ability to serve financial needs of individuals & businesses.

Many banks are now reassessing their value given the constant technological advancements, new financial service providers and high customer expectations. Also, agile new entrants with differentiated value propositions and business models focused on the monetization of customer insights are posing a huge threat on traditional banks.

Digital disruption, however challenging, can open the door to new opportunities, but still banks must move towards developing digitally advanced products and customer engagement practices that seamlessly integrate with people's connected lives.

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Key Indicators on Electronic and Mobile-Payment Services in Banking Sector in Egypt

Number of Accounts Paired with Electronic Services:

  • Internet Banking: 2,084,385
  • Mobile Phone Wallet: 13,000,000
  • Electronic Cards: 34,000,000

Number of POSs Providing Electronic Services:

  • ATM: 13,000
  • POS: 92,779

Number of Banks Providing Electronic Services:

  • Internet Banking: 32
  • Mobile Phone Wallet: 28
  • Electronic Cards: 37

Digital transactions have continued to grow at a rapid pace, where MENA’s online payments penetration reached 76% in 2021 and it’s expected to keep growing.

BUT FIRST…

What Are The Structural Changes That Traditional Banks Are Currently Facing?

I. Waves of Digital Disruption

Digital disruption is occurring at every level of the banking industry; new competitors, new channels, new processes, and new consumer expectations.

The digital giants are posing a long-term disruptive threat that banks cannot afford to overlook given their strong capabilities in analytics and Al, wider customer reach and seemingly infinite quantities of data. For instance, Alibaba has an active customer base that is bigger than China’s largest banks. Some banks have responded, and we have seen some efforts at banks to digitally reimagine certain services, prioritize data and analytics or move towards agile ways of working. But still, such efforts are fragmented and experimental and do not reap the benefits of productivity, efficiency or even customer sat-isfaction.

Banks need to respond to such digital disruption that is happening on both supply & demand side. The supply side is mostly technological developments such as APIs, cloud computing, smartphones, digital currencies, and blockchain technology, which is leaving incumbents with no choice but to phase out legacy systems. For the demand-side drivers, they are linked to higher customer expectations in terms of higher speed, greater convenience and better user-friendliness of the interface and transparency. In a nutshell, banks need to understand what digital reinvention means for them based on their strategy, digital maturity, and readiness to compete in the digital space.

II. Business Model Disruption

Recent global trends show that traditional banks have realized the power and potential of digital disruption, especially with the rise of digital-only (neo) and bionic banks that challenged age old business models. Business models are under scrutiny in the banking industry.

Traditional banks need to evolve from reliance on a single, vertically integrated business model to multiple non-linear models and roles in the value chain. Depending on the size and maturity of the bank, an incumbent can embrace a mix of approaches to increase business model flexibility and differentiate itself from the competition. According to Accenture, banks could boost revenues by nearly 4% annually by rethinking their business models and embracing the innovative strategies of neo banks and financial services new entrants.

By unshackling themselves from the traditional value chain, banks can change how they interact with customers, manage their middle and back-office operations, and even scale in new markets with lower cost of growth. McKinsey estimates that 75% to 80% of transactional operations (e.g., general accounting operations, payments processing) and up to 40% of more strategic activities (e.g, financial controlling and reporting, financial planning and analysis, treasury) can be automated.

For banks to have long-term success in today’s low-growth, low-margin environment, they must ensure the functional alignment of business model activities with a customer-centric approach. They can start complementing their basic banking model (deposits, loans, transactions) with new value propositions to help differentiate and deepen customer relationships. Given the costs and time needed to develop new models and capabilities internally, some banks have started to work within financial services ecosystem to provide a complete range of products & services, provide their customers with enhanced digital offerings and respond quickly to future disruption in the market.

According to PwC, “61% of bank executives say that a customer-centric business model is very important, and 75% of banks are making investments in this area”.

According to a study by Accenture, the average compound annual revenue growth of banks and competing players that utilize different business models (between 2018 and 2020):

– 76% Digital-only players with non-linear models.
– 44% Digital-only players emulating traditional vertically integrated models.
– <2% Traditional banks with vertically integrated models.

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