Digital has become a key driver of banks’ earnings across our covered markets, but which countries have the best digital banking growth prospects? We have designed a framework to identify them.
There are four main ways digital banking can generate value. Firstly, operating efficiency can be improved, as the need for human intervention and physical infrastructure (branches, ATMs, call centres) is reduced. Secondly, transaction volumes tend to increase (due to lower unit costs and greater convenience), which can help drive fee income. Digitalisation also contributes to greater financial inclusion, which can increase the availability of cheap deposits. Lastly, digital banking can support greater customer engagement, boosting customer retention and cross-sell rates.
In our analysis, we surveyed the digital banking landscape in frontier and small EM and examined four key top-down determinants of digital banking growth: Existing digital banking penetration, digital infrastructure, traditional banking penetration and cash usage.
We found that Kenya and Zimbabwe banks provide the most sophisticated offerings, while Pakistan and Sri Lanka currently lag. Looking ahead, we think Uganda, Tanzania, Bangladesh and Pakistan have the strongest growth potential. In these markets, digital infrastructure (such as mobile phone and internet penetration) is strong, cash remains an important transaction medium and digital banking penetration is low.
To give this context, digital banking (including mobile money) already accounts for 46% of transaction value for customer-driven transactions; the remainder are still principally paper-based, branch-oriented transactions. However, we notice a wide spread in values – 90% of transaction value in Zimbabwe is processed electronically, compared with only 19% in Bangladesh.
Interestingly, we found out that mobile money (dominated by telcos) and digital banking can not only co-exist but are indeed mutually beneficial. The experience in Kenya and Zimbabwe suggests this – both are still primarily taking market share from cash-based transactions rather than each other. Ultimately, however, an end-game scenario is likely to play out. To help maximise scale and network benefits, industry players are likely to keep fees low and invest heavily in customer acquisition as well as product enhancements.
Although the initial impact of moving to digital banking can be negative for banks’ earnings, as low-cost electronic banking cannibalises traditional fee streams, the experience in the most advanced markets (eg Kenya) suggests a more positive longer-term story that should encourage innovation and digitalisation across developing markets.