Financial Services: Circumventing conduct risk in a digitised Africa
Succeeding a period of rapid urbanisation and strong economic growth, Africa is well on its way to becoming markedly digital. With about 300 million internet users and over 850 million active mobile subscriptions on the continent, this picture continues to develop.
The evolving digital landscape is impacting consumer behaviour and, in turn, influencing African financial services providers (FSPs) to further invest in digital capabilities as a sustainable solution to meeting both compliance and strategic initiatives.
Customer perception is reality
Pushed heavily by self-service plus real-time data and analytics capabilities, such technological advancements are opening providers up to unforeseen issues. Though this is so, the risks involved are not only posed to organisations, but also to the consumer. With customer experience remaining the cornerstone of financial services strategy, maintaining customer trust and confidence is imperative in an industry so fierce and competitive.
One of the biggest impact areas of the changing digital landscape is financial inclusion. With the progress we are seeing in many African countries, more people are getting opportunities to participate in the formal financial services space. In addition, the changing digital landscape is also transforming customer experience – customer expectations are getting higher and FSPs are becoming increasingly aware. In KPMG’s Africa-wide Banking Industry Customer Satisfaction Survey, quality of customer experience was the most important reason why customers choose to stay with their FSPs. As a result, we’re seeing more banks embarking on the journey to offer customers multi-channel/Omni-channel experiences.
The reality is that consumers have changed and continue to change, with new behaviours and expectations affecting how they spend their time and money. Particularly, the competition for financial services players is no longer just within the industry – they now have to compete with retailers, tech giants and fintechs alike. But it’s not all doom and gloom for financial services, digital also presents a big opportunity to positively shape customer experience, satisfaction and also lower the cost to serve.
Regardless of the environment where service is being delivered – physical or digital – customers must have a positive experience with the organisation and feel truly at the heart of the experience that is being delivered. To remain customer-centric, FSPs must ensure that customer insight (using data and analytics) and a deep understanding of the customer journey (from pre-engagement to post-purchase) are at the foundation of digital propositions.
Digital is the new standard
Traditionally, the financial services sector has been an early adopter of technological advancements as it relies on high-level technology to optimise its business processes and interactions with clients. Now, it has had to take its place as a digitisation forerunner.
Owing to the continent’s evolving digital landscape, digital needs to become an agenda for each FSP’s management. Some African banks are already leading the way – we’re seeing organisations appoint Chief Digital Officers as well as Chief Data Officers to champion the digital agenda within the organisations. Visible senior leadership commitment is essential to both implementing digital initiatives and developing a digital mindset across the organisation.
Sustained investment in digital spend and resources is essential for FSPs to stay competitive. Eventually, digital has to become part of doing business and an integral part of the organisation’s strategy. Exploring avenues for effective collaboration can also help advance productivity and build a more agile organisation. The right collaborations can deliver access to best of breed technology, distribution channels and platforms.
The United Kingdom’s Financial Conduct Authority (FCA) has recently identified technology as the key driver of conduct risk with financial services going digital. However, conduct risk embedded a wide variety of risks (activities and behaviour) that fall outside the mainstream risks e.g. market, liquidity, operational and credit risks.
The Financial Stability Board (FSB) stated: “One of the key lessons from the crisis was that reputational risk was severely underestimated; hence, there is more focus on business conduct and the suitability of products, e.g. the type of products sold and to whom they are sold. As the crisis showed, consumer products such as residential mortgage loans could become a source of financial instability.” It would be presumptuous to pretend to be able to foresee all the risks of an innovation or disruption, no matter how obvious they may appear.
Pacing the action
Innovative products and services enable organisations and consumers to create or do what was not possible previously, however, innovation has the tendency of generating unknown risks and therefore impacting the FSP’s inherent risk appetite. The level of risk depends on the choices the FSP makes in delivering the innovative products and services.
Innovation by digitisation in the developing world (mobile money solutions e.g. M-Pesa) has created new strategic and business risks for banks. The cost of provision of services is typically low, therefore, introducing a strong source of external competition. Banks face risk from fintechs through alternative payment systems, types of money and currency platforms, among other things. However, the creation of new risks in itself should not be an issue if adequate risk management processes are in place to mitigate them.
With traditional revenue streams becoming increasingly unprofitable, they will not dissipate entirely although non-traditional players, such as fintechs, are putting up strong competition for banks in more advanced markets. Nevertheless, digital is an important platform for delivering a variety of products while at the same time helping FSPs achieve internal efficiency.
It is vital for each organisation to understand their level of maturity and organizational readiness when it comes to digital. This is the starting point for determining the digital strategy to be adopted. Indeed, it is possible that as the organisation looks at itself and the opportunities in the market, it may find areas for digital innovation which more mature organisations are not playing in.
Africa’s digital development shows no sign of slowing down, spurred by a young population, the uptake of social media and increased use of mobile technology. Though connected consumers are influencing brands to review their channel strategies and make digital a crucial part of their operations, opportunity seemingly outweighs any challenges. FSPs need to prioritise the management of new risks associated with digitisation, and understanding how they can arise throughout the product life-cycle.
By Bisi Lamikanra, Partner & Head Management Consulting, KPMG in Nigeria and FS Africa and Olumide Olayinka, Partner & Head Risk Consulting, KPMG in Nigeria