Egypt is going through a digital revolution in banking. Authorities are multiplying initiatives to promote digital banking and e-payments. Targets are being set for banks to increase digital wallets usage rate and mobile banking adoption. The banks themselves would love to benefit from the economies of scale and operational efficiency brought by digital technologies.
6 key success factors need to be considered to foster digital banking development
a) Culture
Digital requires a specific mindset, always looking to leverage available digital solutions when facing difficulties. We are talking about people animated by curiosity and willingness to learn. Identifying such minds within employees and clients is a first step toward developing a culture that will promote digital solutions. To establish a digital culture, targets need to be attributed collectively to all employees, such as a percentage of operations delivered online versus offline.
b) Engagement
From day one, employees need to be involved in the digital transformation. They could be invited to workshops and later become relays to transmit news about digital transformation to their close colleagues. Employees and clients need to be convinced of the benefits of going digital to be able to advocate these benefits in their social circles, creating viral adoption.
c) Pricing
Digital optimizes operational expenses across the board, and these savings are expected to be shared with clients. The idea is not just to offer lower prices to attract clients, but also to reward those clients who accept spending time and making the effort to learn how to use a new digital channel. In business, this is called switching costs. Think of an eCommerce site: does it stand a chance if it offers higher prices than retail shops even if it offers higher value?
d) Convenience
Often measured by number of clicks, convenience is key to reducing switching costs for clients. If a digital service is easy to learn and addresses clients’ pain points, it will have a better chance of being adopted. Alternatively, if using a digital service turns out to be complicated without resolving any real problem, clients will reject it. A complex registration procedure is an example of what can be considered a convenience pitfall.
e) Seamlessness
If clients find a digital service convenient but discover that turnout time is longer than the offline equivalent, will they continue adopting this digital service? I don’t think so. Operational processes need to be designed to serve digital channels to avoid any breaks before the final delivery.
f) Monitoring
Monitoring is key to confirming and controlling all of the above. Operational dashboards provide insights about turnout times and usage rates that can be used to continue improving operational efficiency. Reporting is also used to follow the target’s realization and progress. Building a system in which employees have access to their sales figures and to statistics relating to their clients’ operations reinforces digital banking activity.
3 barriers limit the development of digital banking
Now that we have listed the key success factors fostering digital banking, we will present the three barriers preventing Egyptians from preferring digital channels over branches.
a) Adoption
Changing usage habits is, of course, a significant barrier. Few people are daredevils willing to test new digital services. Most clients naturally reject what they consider unknown digital banking and need to see their peers use it first. Most commercial staff are also still reluctant to use digital tools for their personal needs, because they have access to core banking systems. Once employees find out how simple digital features are to use, adoption is guaranteed.
What is really hurting adoption is the lack of trust in the reliability of digital operations. Short messages sent after every operation contribute to building trust, but this trust suffers a blow if a client receives a message that his account was already charged while he is still struggling to pay a merchant.
Now, let’s face it, informal transactions account for a large part of the Egyptian economy: more than 99% of transactions are cash based. Many workers depend partly or exclusively on tips for their income, not to mention corruption. Such a population will reject digital banking solutions because they feel threatened. For example, they may even go as far as sabotaging POS terminals to prevent digital payments.
b) Business model
We have already mentioned that digital needs a pricing advantage over offline services. Yet the business case for digital services must be profitable; otherwise, there is no incentive for banks to develop digital services.
The standard business model is based on covering IT developments and marketing expenses with clients’ monthly subscriptions. Operational savings are not accounted for in this model even though it is a main benefit. Banks should calculate the accurate unitary cost of operations performed by its tellers, which means accounting for all inherited logistical and operational expenses such as transportation, collection, distribution and counting of bank notes; the wages of tellers, operations managers and internal controllers; and also consider the cost of fraud and accounting errors. The profitability of clients who open an account with the bank because it offers digital tools needs to be considered in the digital banking business model. Probably the biggest expense category not accounted for is the opportunity cost of idle cash sitting permanently in branches without generating interest.
c) Internal shenanigans
Internal factors are also among the main barriers to develop digital banking. First, the internal organizational structure and performance management systems were adjusted over the years to fit primarily physical distribution needs, not the digital activity. Second, legacy information systems can be incompatible with new digital tools, making their integration impossible for some banks without requiring important IT investments. Third, digital requires new skills that may be absent internally and rare to find in the local market.
To sum up, digital banking offers so many benefits to clients, banks and the economy in general that it is a real waste not to try everything possible to develop it. At least we now have clear guidance on establishing a digital transformation strategy.
Author
Nadim Samna
Managing Partner