If digital transformation is so important, why are banks not spending on it?

The African Banker published their annual “The African Digital Banking Transformation Report” for 2023 last week. While many of the insights have become second nature to people living and working in Africa (i.e. the continent’s sheer dominance in mobile money), some things were more surprising.

The report indicates that digital transformation ranks as the most crucial factor for the growth strategy of 51% of surveyed banks, with an additional 44.5% placing it among their top three priorities. Consequently, only 4.5% of banks consider digital transformation a lower priority, ranking it at 4 or lower.

At the same time, a mere 28% of banks are allocating more than $3 million for digital transformation and innovation. Although this proportion marks an increase from 21% in 2021, it represents a significant decrease from the 37% reported last year. In addition, the percentage of banks spending less than $300k rose from 21% in 2021 to 27%. That means that in many markets, banks are budgeting less for digital transformation than they are paying their CEOs.

On further reflection, I think I know what is going on. Banks are risk-averse, and the graveyard of failed digital transformation projects is overflowing. They have to be risk-averse, especially when making investments with OPM (other people’s money). Especially when OPM is customer deposits. Spending $1-2m on an initiative that might fail is scary. Just buy another billboard. Nobody has been fired for buying another billboard in a traffic-choked traffic circle. But launching a failed digital app can cost you your job.

They are getting something really right though. 35% of respondents cite ‘customer demand and satisfaction’ as their main motivation for digital transformation while 24% cite a desire to increase profits and grow market share. Only 3% cite FOMO (more eloquently stated in the report as ‘fear of being left behind by both their reestablished competitors and neobanks’). This could not be more spot on. Build digital products because your customers want them, and you need them. Don’t build them because you worry about a new neobank entering the market. With an ever-expanding youth population, the right time to start building your digital platform was yesterday. The second best time is now.

So, how can your bank navigate a successful digital transformation journey?

1. Design for the market you have; lay the foundation for the market you want.

Oze focuses on helping banks lend to small businesses. Most governments and many bankers wish that levels of formality were higher in their markets, but the truth of the matter is that a lot of businesses are run out of retail accounts. Enacting policies and incentives to increase formality will take decades. Small businesses need credit today. The most forward-looking banks we work with are open to providing credit for “income-generating activities” through retail accounts at slightly higher interest rates. As a result, the businesses’s level of formality doesn’t preclude them from accessing financing (design for the market you have) while still creating incentives for firms to formalize (lay the foundation for the market you want).

2. Put the customer at the Center.

Banking online is behavior change and people are creatures of habit. You may want to prioritize digitizing process X because it will save the bank a lot of money, but if it doesn’t make a meaningful change for the customers, they’ll default to their old behavior. You can get the customers to learn new behaviors and become your partners in the bank’s digital transformation by digitizing the services they need the most first. The size of the small business credit gap means that very few of your MSME clients have their credit needs met. If you start with lending, they’ll be excited to give you honest feedback and even more excited to adopt the new service.

3. Work with partners, not vendors.

You will not get it right on the first try. That’s why it’s important to have a long-term partner who is as incentivized as you are to make the system work. Off-the-shelf solutions do not work for markets that are very different from the ones they were designed for. Oze charges very modest upfront integration fees and earns most of its income from a revenue share on successful loans. This incentivizes us to keep tweaking the system to get the best user experience for your staff and your customers so that we maximize the volume of successful loans.

Oze specializes in helping banks lend to small businesses, understanding the unique challgenges and opportunities in emerging markets. By partnering with Oze, you can lay the foundation for the market you want while designing for the market you have, putting the customer at the center of your digital transformation, and working with a long-term partner incentivized to make the system work.

Get in touch with Oze today to explore how we can support your bank in achieving successful digital transformation and driving financial inclusion.