How banks can avert disruption with data analytics and AI

Late last year, shockwaves rippled through Africa’s oldest banking sector. Three digital banks in South Africa—Discovery Bank, TymeBank and Bank Zero— announced an aggressive commercial strategy which aims to lure away traditional banking customers with low fees. The announcement didn’t escape the attention of Africa’s bricks and mortar  banks, which are anxiously waiting for the digital banks’ market entry.

 

Grow Market Share

Not only do lower cost-to-income ratios provide a huge comparative advantage to the digital banks, data analytics is also a crucial asset in their quest to seize market share. Data-driven insights allow fintechs to target customers and offer new products. To maintain a competitive edge against these new players, traditional financial service providers (FSPs) should invest in leveraging data analytics as an asset for growth. Not only will data help drive customer acquisition, it can optimize marketing, sales and boost innovation.

 

Win Underbanked with Innovation
Armed with data analytics, traditional FSPs can capture insights to acquire new customers, especially among the unbanked population. Over the last decade, sub-Saharan Africa has made progress in closing the financial inclusion gap — with financial inclusion rates increasing from 23% in 2011 to 43% in 2017 — largely due to surging mobile money adoption.  While mobile money has focused largely on transfers and payments, the next wave of fintech platforms has expanded into lending.  Startups such as Branch, Paylater and Bank-MNO offerings like M-Shwari and Fuliza analyse alternative data sets to determine credit risk and lend to unbanked customers.

 

For example, Branch’s app crunches all types of data on users’ phones – ranging from bill payments to bank balance receipts – to generate their credit scores. Banks can also use data to compete for the huge pool of unbanked customers by partnering with third-party data analytics providers and building new data partnerships. For example, SuperFluid Labs’ data analytics platform offering includes SuperScore, which empowers lenders to manage life-cycle credit risk by building credit scores for customers from multiple data sets using the power of Artificial Intelligence and new alternative data sources.

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SuperScore provides predictions on likelihood of default by customers by analysing past transactional and behavioural data through proprietary algorithms.  Across the continent, banks struggle with a high rate of non-performing loans (NPLs); for example, in Ghana, over one-fifth of total loans are NPLs while Kenya has a 10 percent NPL rate, as compared to the global average of 3 and 4 percent. Using data-driven risk assessment tools, credit officers can to expand their loan books, increase revenues from interest payments, and improve recoveries and hedge risks.

 

 

Upsell and Cross-Sell Products

Data analytics can also help banks to optimize sales from existing customers, leading to opportunities to upsell and cross-sell new products and services. The global banking industry could increase earnings as much as US$1trillion annually, with  one-fifth resulting from informed pricing and promotion strategies. Fintech companies in sub-Saharan African have access to rich insights into their customers – their age, gender, online behaviour, purchasing power, and geographic location.

These insights are a gold mine, as they enable companies to develop tailored products addressing pain-points of users. Banks should follow their lead, using data insights into customers to offer new products. At SuperFluid Labs, after analysing customer data for a banking client, we observed that a large percentage  of customers, clearly cash-strapped, were regularly drawing down their savings accounts. We therefore proposed that the bank offer a new credit product, using the savings account as collateral.

 

The Power of Partnerships

With their increasing push into markets and sometimes explosive growth, African fintech startups can seem like the mortal enemy to FSPs. But this viewpoint is more fear than reality. Fintechs and traditional banks have mutual interests in working together. Data analytics is the crux of a successful partnership, bridging the differences between the two types of companies. While the global financial services industry is increasing spending on IT infrastructure, many African banks – hamstrung with macro-economic headwinds and legacy technologies – often struggle to maintain pace with rapidly changing customer expectations.

 

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In contrast, fintech startups are early technology adopters and are much faster to experiment and innovate, giving them a first-mover advantage. In turn, traditional banks can provide fintechs and their new offerings and use cases with market access, brand credibility, guidance and improved relations with regulators. Bank and fintechs can combine their natural strengths to pursue historically underserved customer segments, such as small and medium enterprises (SMEs), and retain existing customers through improved customer experiences. Third-party data providers play a critical role in ensuring successful partnerships between banks and fintechs. Not only do they offset limited digital and data expertise and in-house talent shortage, they can help bridge a potential culture gap between banks and fintechs by fostering a data-first ethos within bricks and mortar banks.

 

Sub-Saharan Africa’s financial services industry’s underdeveloped electronic transaction infrastructure was its Achilles heel, and led to the entry of global fintech companies. The lack of data analytics capability should not be another reason local financial institutions fail to adequately serve African customers. Using data appropriately and smartly, banks can unlock new growth by investing in innovative data analytics solutions and platforms and upskilling existing staff, and thus avoid losing their market to new disruptive players.

 

Higher customer acquisition and retention, lower NPL rates, and upselling and cross-selling opportunities – these benefits are just the beginning of what data can yield for banks and, most importantly, for underserved customers. Moreover, competitors can also be collaborators with data analytics – providing the fertile ground for partnerships between banks and fintechs. Bill Gates famously said: “Banking is Necessary, Banks are Not”. With the help of data and analytics, banks can maintain dominance in the provision of essential financial services.

 

 

 

The author is a director at SUPERFLUID LABS. The company helps businesses to harness untapped potential through predictive data analytics, business intelligence and dynamic customer insights, leveraging both traditional and alternative data sources. Its data analytics platform provides credit scores and provide business intelligence more effectively through Big Data and artificial intelligence.

Website: www.superfluid.io

Email: info@superfluid.io

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