When will Banks start learning from Telcos?
Updated: Aug 26, 2019
On Thursday November 2nd Orange launched Orange bank, its own 100% mobile full-fledged bank. France was their pioneer market, but does Orange target Egypt for rolling out its banking services? Of course, Egypt is one of the main development markets for Orange. At the end of 2016, Orange reported 33,87M users in Egypt. In addition, the group already offers digital financial services in Egypt via its mobile wallet “Orange Money”, acquiring 34M customers in Africa and Middle East.
What pushes telecom operators to attack financial services so aggressively?
Similarities between financial services and telecom services can be relatively obvious. Both are mass market industries targeting all adult population, which generates heavy customer services costs and justifies heavy regulations.
Some may still ask, “Can you really compare banks to telecom operators?” The short answer is yes. Both industries rely heavily on electronic data processing that constitutes the backbone of their industries. These similarities made it easy for telecom operators to develop and provide digital financial services, and in emerging markets some even took the lead over traditional banks. Safaricom became the leader in Kenya thanks to its mobile payments service M-Pesa.
While the telecom market is expanding and developing new digital services, the banking industry in Egypt has fallen behind and seems helpless in this competition, which is just starting. All experts confirm that the coming years will witness increasing competition between banks and other players entering the financial services sector, telecom operators, of course, but also mobile equipment providers (Apple and Samsung), eCommerce giants (Amazon and Alibaba) and internet key players (Google and Facebook). In addition to all these competitors, there are numerous startup companies targeting the financial services industry with new products and services, some have already taken a serious lead such as payments company Fawry. Digital made all this competition possible.
Telecom operators are proving to be better than banks
The big question is: what makes the telecom industry better than the banking industry, particularly in Egypt? And why should the banking industry learn from the telecom industry despite of being much younger? In fact, both the telecom and the banking industry started using computers in their operations at around the same time; but telecom companies have already accomplished a full transition to digital services while many banks are still struggling to start in this full digital transformation. The results are clearly in favor of Telco’s.
"Market penetration in Egypt for telecom operators was at 114% by the end of 2016, far exceeding the estimated 20% for their counterparts in the banking industry"
Telecom services also have a much wider reach than financial services; in many parts of the country banking services are hard to come by, but you can always find a recharge card, even in the smallest Egyptian village. The telecom industry has successfully built a clear distribution model completely turned towards commercial functions. On the operational side, telecom processes are designed to optimize costs and to increase quality. Just think about recharging your telecom account and bank account, which is easier, faster and more reliable? Most users will answer in favor of telecom. The quality comparison of mobile wallets apps is again in favor of telecom operators, even though it’s a pure financial service.
So how were telecom companies able to outperform banks?
First off, telecom providers built many critical partnerships ranging from equipment manufacturers to regional distributors to small rural shops. They focused on providing simple products directly to the consumer and utilized varied distribution channels, making sure to build effective call centers that could route customer problems to the correct specialist. They set up agile operational processes that helped them acquire large numbers of customers quickly and efficiently, something that the banking industry is still struggling with. The telecom industry is also much less competitive than the banking market, with no more than four operators in a single market. But perhaps most importantly, telecom providers fundamentally sell happiness; their products are simple and easy to comprehend. Banks, on the other hand, cultivate a snob image selling complicated products reserved to an elite population.
Banks should first focus on their distribution to improve their competitiveness
But all is not lost for the banking industry. By completely reviewing the way their distribution networks operate, banks can catch up in terms of reach and service. They can set standards for branches that are tailored to the specific area where they operate (i.e., urban vs .rural, industrial vs. residential, high density vs. low density). Transforming the distribution strategy also needs to include performance management so that all employees in branches get clear commercial targets. Branches should also be more accessible with regular events to attract potential prospects from surrounding neighborhoods. Banks also need to differentiate distribution in terms of processes, i.e. commercial branches focus on acquiring new customers while operational teams focus on digital processes. Without mentioning names, several banks have adopted such strategy and already taken the lead in Egypt.
In order to adapt to the new market environment, banks need to improve their marketing.
Focusing only on large corporates is a mistake. Very small enterprises (SMEs) make up the bulk of the Egyptian market, and banks need to set specific targets to acquire large number of clients belonging to SMEs segment. Another improvement would be for banks to enhance their commercial relationships; in this regard, merchants should be considered as partners, not as clients.
"Point-of-Sale transaction costs are a huge burden for many merchants: up to %2 per transaction. This is why most merchants prefer cash, which increases operational costs for banks"
But if the bank worked with merchants, and offered free check deposits and reduced POS charges, more merchants would engage with banks and the bank’s market penetration would grow. Banks could also work with microfinance organizations as an acquisition channel, following the lead of increasing number of banks who have already established themselves in the microfinance space.
Operations are a key competitive advantage, often disregarded as cost centers
Operational processes need to be regularly reviewed and updated to cope with increasing volumes of business while improving quality of service. As we all know, many banks struggle in this regard because of legacy systems and processes. Banks should thoroughly rethink the customer experience for main processes such as opening a new account or making deposits; consider again how easy and seamless the telecom industry has transformed their operations, for the most part. Banks would also greatly benefit from working with regulators to reduce cash operations. For instance, setting a cash ceiling for payments would encourage customers to use digital payment services generating less operational workload. To reduce payments fees, Banks could introduce local cards less expensive than those labeled by Visa or MasterCard.
It all falls to reviewing the strategy
Lastly, Egyptian banks need to dramatically change their focus and develop a mass market strategy. Only 1 out of 41 commercial banks is retail oriented, getting 86% of its revenues from retail, the 2nd place falls to just 46%. In mature markets, the Boston Consulting Group estimates that banks generate between 55% and 60% of their revenues thanks to retail clients. Egyptian banks have a long road ahead to reach these levels. In the first 6 months of 2017, households’ deposits increased by 14%, while private corporates’ deposits decreased by 2%, confirming the higher growth potential of retail banking over commercial banking.
The present financial services market can be considered very small if compared to what it should be in the next 5 or 10 years, winners will be those who are determined to undergo the required digital transformations and adapt to their customers’ needs. They can certainly learn a lot from the success of the telecom industry.