How Nedbank is preparing for the digital fast lane
By Chris Kapfer
Ciko Thomas, who runs retail banking at Nedbank, talks about how the move towards digital, combined with prudent asset growth and strong cost management, can yield long terms sustainable results in profitability and customer service
- Speeding up the innovation and development cycle critical to the bank
- Managed evolution approach in on-going core banking system replacement
- Investment in physical and digital infrastructure already yielding uptake in growth
Ciko Thomas, head of group retail banking at Nedbank since July 2016, leads a team of 22,000 retail banking employees to prepare the bank’s retail and commercial banking business for the digital fast lane. Recruited to Nedbank in 2010, with previous executive roles as entrepreneur and in consumer durables, he is taking charge at a time of massive changes in the financial services industry in South Africa.
Unemployment rate in South Africa is at a 12-year high, with 5.7-million people finding themselves without a job. GDP growth is expected to reach only 0.8% in 2017 and 1.5% in 2018, from 0.3% in 2016, levels significantly below the government's target growth, according to Moody’s investor service. The relatively weak economic growth points to potentially higher impairments for industry, especially on the retail banking front, exerting pressure on earnings.
At the same time, digital-only banks, with the likes of Discovery Bank and CBA Tyme, are moving into the market in 2017. P2P and P2B lending by Merchant Capital and Lula Lend, though not yet making a mark, are poised to grow in an environment where consumers are highly price sensitive. Smaller local banks such as Capitec were the first to offer innovative fee models to consumers that cornered the low-end banking market with its simplified, fixed-fee accounts.
Nedbank has been improving across a range of key performance indicators, such as in the net promoter scores, profitability and cost efficiencies. Currently, the bank ranked fifth out of six first tier banks in the dimension for financial performance score in the recently conducted The Asian Banker Excellence in Retail Financial Services Benchmark programme for 2016. The score tracks, top and bottom line growth, return on assets, retail asset size and growth.
Digital growth play
“The whole movement towards digital is a big factor in our business and it will continue to have a shaping impact. But to the point of view of how we think about digital driving better efficiencies in the way we have traditionally done business on the one hand, and on the other hand, how we think about digitisation improving the way we deliver our proposition to customers. We do this within the confines of our traditional banking model. So, we are going on a journey of full digitisation, but we do not foresee stand-alone digital bank spinoff outside the wall of our current digital operations, clarifies Thomas said.
The bank grew its retail accounts from 3.5 to 4.6 million between 2012 and 1H2016 contributing 63% to total bank accounts.
Over the years, Nedbank has built a strong digital active base which increased by 58% between 2011 and 2016, counting more than 3.4 million active digital retail users. According to the bank, digital is the preferred channel for ~55% of Nedbank’s clients on transactions and ~25% on sales, more than 90% of professional & small business clients are digitally enabled.
The bank wants to extend its lead in retail transaction banking into more asset and liability lines. In personal loans it is the sixth largest player, while in mortgages and credit cards it is in 4th position. The bank secured a 28% market share in auto loans in 2016 and a surge in retail deposits in the same year increasing its market share to 19%.
Given the economic challenges, the bank pursues a prudent retail asset growth. “We don’t have a homogenous view across our asset classes. We treat each of them based on the profile and the kind of markets we serve. For instance, if you take personal loans, we went through a huge growth ride over 2013, but we later took a hard look at it and we said the rate at which it was growing did not give us comfort. And, the risk profile that was accompanying that growth was starting to reach concerning levels. So, we slowed down the rate of growth and gave up market share, and we put processes and systems in place to capitalise the business when the cycle turns. We think we are at that point now,” explains Thomas.
“In June 2017, we launched a stand-alone full-service wealth management application for our affluent clients going beyond the financial aggregation of spending/transactions data. The methodology we used was towards an agile, faster innovation cycle, and development time using different stacks of technology to create this wealth app. This was developed of the back of our 'Digital Fast Lane', said Thomas.
The “Digital Fast Lane” is an enterprise wide capability that seeks to give additional impetus to the Group’s digitisation agenda. It is a dedicated business unit focused on rapidly commercialising step change innovation in the digital ecosystem and predicated on speed to market.
He added: “We have taken a view of the world that says most mono-branded banks have one app for its entire client base. There are exceptions though such as in the US where it is not uncommon for a wealth business to have its own app. A large part of our wealth business is the asset management component which is different from the normal conventional banking services. We needed to recognise that our affluent segment would be better served by building an app environment that recognises this uniqueness in asset management and insurance.
The bank already offers, online bond approval within an hour, money transfer to a mobile number and Nedbank, MarketEdge, an analytics platform for businesses to improve sales strategies to reduce reliance on costly research data firms. Nedbank’s business banking has a 20% primary banked market share, up from 18% in 2013.
Nedbank was one of the first banks in Africa to deploy combined remote and in person assisted video services, and the first in South Africa to launch mobile POS devices called “PocketPOS” in 2013.
Digitising its wealth business is also a move to counter an increasingly crowded & complex competitor playing field across all segments, and a middle -market segment, which Thomas sees ripe for disruption.
“Wealth is a high-value, high return on equity (ROE) business, but it is small in relative terms. Now you got a business like ours which is growing strong in the middle market, and I find, because of the centre of gravity being the drive towards this market, we take up a lot of time in terms of digital service and product development to see how we can deliver on our ‘app real estate’ faster, and at the same time add real value to our customers. And because of that, I end up crowding out my work colleagues, they just don’t have time to think about how they build their digital real estate for their business,” said Thomas.
The logic behind the “Digital Fast Lane” involves that the speed to market is becoming a competitive advantage. Thomas believes that Nedbank needed the kind of flexibility and to have this element of agility. “Competitive action increasingly forces us to turn around products extremely fast. Generally, the convention is that we do everything in-house. While we outsource peripheral development requirements, we have massive teams of employees that do all the work. In the context of ‘Digital Fast Lane’, we don’t have to do everything ourselves, even in product development any more. If there are teams and developers that can assist us with their energy and creativity, we can bring things to market faster. We were talking about a development time from concept to market launch between 12 to 18 months in the past. Now, we are talking about shortening this period to around 8-12 weeks. In the context of the ‘Digital Fast Lane’ we should function ideally at a level of 3 weeks. So if you take our wealth management app for example, from concept to pilot, it took us no more than 12 weeks,” Thomas highlighted.
Core banking replacement
Traditional product lines such as mortgages and personal loan are still work in progress for Nedbank when it comes to speed. The bank was built on the back of several acquisitions and banking systems forcing the bank to go into a period where it needed to function based on a multiplicity of platforms that were acquired over the years.
“We took a decision in 2013 to go into a replacement cycle and standardise the platform. But the approach we took was that we did not replace everything at the same time. It is a managed evolution journey of migrating one system at a time, and decommissions the old one. This will take us no fewer than five to seven years to complete. Because of the nature of the journey and the fact that it could impact speed of delivery, we talk of three lanes in this evolution. First, we talk of business as usual, these are old legacy systems. Second, we talk of lane two which is the managed evolution, and we created a third lane, the ‘Digital Fast Lane’. Eventually, we will get a platform that allows us to do world class things, but we cannot wait for that and that is why we are doing the ‘Digital Fast Lane’,” Thomas explained.
Nedbank reduced the number of core systems from 260 in 2010 to 143 in 2016 with the goal of 60 by 2020 latest. Despite an increased number of changes & rising transaction volumes from 634 million per months to 1.4 billion per months between 2011 and 2015, it saw a reduction in systems downtime by 46% in the same period.
Cost efficiencies and profitability
Given the developments in South Africa, the bank has focused intensely on driving down cost, manage risk, and increase profitability. Nedbank increased its retail ROE from 13.9% to 18.3% between 2014 and 2016 by focusing on margin improvements, reducing the retail credit loss ratio from 2.2% to 1.2% between 2012 and 2016 and an on-going active cost management that balances investments into digital & distribution with cumulative savings of more than $170 million since 2011.
“Nedbank has made technology investments in the last 5 years in excess of $156 million (ZAR2 billion) to bolster its infrastructure. We spent this money to grow our branch network because this is still a growing market, and our digital platform. We took a strategic decision that we are in an investment mode, and we anticipated that this will raise our efficiency ratio, but the investment community understood that. Already, the outcome of this investment has seen us out-indexing our competitors on the cost to income line. We are now at a point, where we are fully invested from a distribution point of view. So, there is natural reduction of the efficiency ratio taking place in the coming years and we are starting to see the benefits of growth. Our client base is growing between 6%-9% per annum. We believe our cost efficiency ratio should take us to a rate where our peers are in the next years,” he said.
Growth outlook for South Africa
Industry growth in retail banking remains bleak for 2017. Thomas believes that if profit pools remain flat in 2017, the industry would have been very fortunate. An economic downturn, the regulatory environment, which continues to impose a huge burden on retail financial services, and an increasing dynamic in competitive factors will make South Africa a tough place to do business in. “But it’s a market that enjoys healthy ROEs and it’s a good market to do business in and we believe we will return to better growth in the medium to long term,” he concludes.
Ultimately, Thomas needs to prove that he can break the bank out of the mid-rank position in retail financial services. With his unique background, he has the potential to take Nedbank’s momentum to the next level.
Keywords: Nedbank, ROE, Digitisation, Retail Banking, Cost Management