South African banks debate which business model is the most effective to support their expansion plans and the creation of a sustainable interregional banking network for Africa.
- Shannon Manders, deputy editor, GTR (moderator)
- Dominic Broom, managing director, treasury services, BNY Mellon
- Karen Henwood, regional manager, treasury services, Southern Africa, BNY Mellon
- John Johnson, international market manager, EMEA treasury services, BNY Mellon
- Nico Agenbag, regional head: bank sector sales, transactional products and services, Standard Bank
- Francis Brand, divisional executive – corporate banking, Nedbank
- Ghita Erling, product head, global transactional services, First National Bank (FNB)
- Minos Gerakaris, sector director: banks and DFIs, FirstRand Bank
- Hendus Venter, head of transaction banking, Absa
- Mike von Fintel, head of international financial institutions, Absa Capital
BNY Mellon kindly hosted GTR’s first South Africa-based roundtable meeting in Johannesburg.
Manders: What trends are you seeing in the transaction banking space in South Africa, and how are banks developing systems, products and services to meet clients’ needs in this space?
Sophistication today requires somewhat of a back to basics local banking approach.”
Erling: The obvious starting point is the movement of trade to the east, in terms of the Asia corridor; South Africa to India and South Africa to China, as opposed to Europe previously being a top trading partner. I think that is the first very big trend that we can talk about.
But then I think from an African and a South African point of view, there is the opening up of the Africa region, and South Africa increasingly being seen as a gateway to what is now starting to hopefully be regarded as a viable market.
von Fintel: One of the other trends we are seeing, especially in terms of the South African retailers and the corporate customers, is that they are increasingly expanding into the rest of Sub-Saharan Africa as it is the next home market. So they want to be banked by a branch or a subsidiary of their home bank, and naturally because of that, we need to get these home transaction banking services out to African countries as well.
Also, if you look at the South African banks, there has been an increase in the sophistication of the products that we offer. I think before, a lot of the business in Africa was dominated by a lot of the bigger European and American names, and I think the South African banks are certainly getting there in terms of the sophistication of their products. Obviously, there are a lot more credit lines being made available and a lot of time is being spent in looking at how else we can enhance and collaterise facilities, for example, just to make it easier to trade.
Gerakaris: There is certainly a demand for sophistication that moves away from the vanilla products. It is not just doing a simple letter of credit (LC) for the imported goods anymore. It is the value-add over and above that, in terms of the potential to extend tenors and look for local currency funding – because that is ultimately off take for a number of markets – and how that can be hedged to take risk out of the system for the client.
Erling: The obvious thing that goes with local funding is physical infrastructure on the ground. So the ability to raise that by a deposit base, rather than necessarily having to raise that funding elsewhere. We have seen a lot of this aggressive expansion of all of the biggest South African banks into the African environment. The better your physical infrastructure and bricks and mortar on the ground for all the requirements for sophistication, the better your chances of setting up a credit line and tapping into those flows can be.
Broom: Looking both regionally and globally, I am convinced that sophistication today actually requires somewhat of a back to basics local banking approach, because sophistication is no longer seen as a global standard of products and solutions that can be applied anywhere.
It is really about understanding local market dynamics and local market needs and trading off a local position of strength to deliver customer value. I foresee an enormous value in the local banks doing precisely that. As many around the table know, this has been the BNY Mellon model for a little while – supporting that local process.
Venter: It is also important to note that South Africa and the African market have not gone unscathed in the global economic recession. There has been a prolonged contraction in the local market, and we have seen it in the volumes, both cash and trade. That remains a concern around the general economic outlook, that sometimes the sophisticated services that we provide are our biggest Achilles heel. In your point around back to basics, what are the types of services that are in demand from our customers? We have become so sophisticated in our local market, the question is, are our products and services appropriate for the rest of Sub-Saharan Africa?
Bringing a greater share of the population into the formal banking sector will help boost consumption and create more opportunities for trade.”
Questions like, despite being globally present and having coverage, can you be locally relevant? Can you make a meaningful difference in the markets that you play in?
Agenbag: Just taking a step back from corporates, I think the relevance of something as simple as workers’ remittances is definitely a trend that we need to stay in touch with as South African banks. I am not only referring to payments originating from South Africa that are destined for beneficiaries elsewhere in Africa, but all payments, irrespective of the origin.
Erling: I think there are two very big points that come out of that. The first is the impact of workers’ remittance on the local GDP, and the ability that that has to drive consumer use of goods and services and the trade that follows that.
More importantly, I think, as South African banks have been quite successful in bringing the unbanked populations of South Africa into the formal banking sector, we should look to take that model into our neighbouring countries.
Bringing a greater share of the population into the formal banking sector will help boost consumption and create more opportunities for trade. The general population and the consumption that goes with it, so the ability off the back of trade to actually create more opportunities for trade by bringing people into the formal sector and creating opportunities for consumers.
Gerakaris: A theme we are seeing is that presence is key. I think the days are over for the correspondent banker or the transactional banker flying in to Africa on a suitcase banker basis to do a trade deal or pick up a particular transaction without having the support of a local operation, which is going to offer that end-to-end service to the domestic corporate. There is certainly a need for that presence to back up the service offer.
Venter: It also the convergence in full global transactional banking of trade as well as cash services that means that no longer do our corporates only demand trade services, but also ask: “Can you assist me in the local market with my account facilities – with electronic banking and with the management of physical cash?”
Unless you can provide that full service offering, especially to the corporates, your value proposition starts to diminish very quickly. The challenge from a consumer point of view as well, would be how much time do we actively spend as a bank, educating our corporates and their customers around cash and trade in the appropriate behaviours, especially in a sophisticated market? How do we create that level of sophistication that we demand in order to service that?
Broom: We were talking about this in some of the sessions at the GTR conference in Cape Town earlier this week. That sophistication involves understanding the local market need. For too long bankers of many kinds, but most certainly transaction bankers, have been selling standardised products, while actually what the market is requiring from us is a customer-centric approach, and really a requirement that we, as the financiers, the bankers, understand their specific transactional needs.
If you look around this continent and globally, the way in which transactional activity takes place differs quite markedly from one location to another, because there are well-established local practices and local norms. All too often, the tendency has been to try and standardise much of that solution offering. Why is that, in my opinion? It is because much of that solution offering has historically been propagated at the top of the corporate tree.
We started to look at this in terms of a pyramid structure at BNY Mellon and, at the apex of that pyramid you have got a small number of global corporations who, quite understandably, need a common global service standard. But the reality is the vast bulk of economic activity, be it here in South Africa, be it elsewhere on the continent or elsewhere in the world, actually takes place at SME or mid-cap corporate level. It is understanding needs at this level and translating them into the global context and ensuring that there is recognition of the value that is delivered, that is the Holy Grail.
Henwood: To add to that, when you look at the SME space you then come across the constraints that we all face in the current environment around credit. The questions then become: is there a need for players in the financial services space to collaborate more in order to meet these needs, or is it a one-stop shop? Can certain providers do it all? How much collaboration is needed and who needs to step in to fill some of the gaps?
von Fintel: What you are saying is correct. There are three streams: low income, which is workers’ remittances and that type of cash flow; SMEs, which is mainly trade financing and cash management; and then you get your multinational corporations (MNCs) and larger corporates, which require the investment banking flavour. That is really where we are seeing corporate and transaction banking peers working very closely with the investment bank to bring in expertise such as currency swaps and global loans. There are then, three distinct categories, each having their own requirements.
In South Africa, traditionally, when people spoke about transaction banking, they spoke only about cash and trade – that is all it was. Now, however, there is mobile phone banking, and the investment banking flavour is coming in. So there really are three distinct areas with each of them growing quite rapidly.
Johnson: An earlier white paper that BNY Mellon did illustrated that the top end of that pyramid tends to be sophisticated. There are some subtle dynamics here. A Scandinavian multinational entering an African market is likely to try to adopt the practices that it would have adopted in Scandinavia. This presents a dichotomy: top-end corporates that look to act as a global bank, versus multinationals from outside the region coming in and trying to adopt the best practices that they would have in their own regions. That is an extra requirement for those banks’ services in those markets.
Venter: While we are talking about trends, transactional capability is becoming increasingly important. Even more important is the ability for us as banks to provide informational services to our clients. The shift is away from purely processing trades and cash to delivering informational capabilities that enable clients to understand their full multi-currency cash capabilities across the whole continent.
The interesting thing in Sub-Saharan Africa is the opening up of the economy, coupled with national pride kicking in around in-country processing. Delivering services and coverage in-country is becoming increasingly difficult. Just having suitcase banking, driving in and out, gives you just one component of the value chain. Extracting the full value and really delivering value-added services to the local country, requires you to be in-country relevant. No longer can a bank just be in and out by adding a brand name to the outside of a building; they have to play a meaningful role beyond just normal transactional banking by being locally relevant and even opening up lending, which raises other issues, as well as starting to consider retail banking services in-country.
Brand: It is also about shareholder appetite. If you are going into full-service banking, it is a long-term view, because you have to set up significant and substantial infrastructure, which requires capital, product sets and skills transfer. You cannot just do a wholesale skills transfer; you need to have local knowledge on the ground. If you do not, you will be at risk. From that perspective, you need to have a well thought out plan and to understand what value you are going to extract across the three market segments, from the retail sector to multinationals and the larger regional corporates that are also growing within the continent.
If you go to countries like Nigeria and Ghana, you will find there are large regional corporates that have established themselves over time, and they cannot be ignored.
You need to understand what your client requires in terms of how you approach the market. If you have cautious shareholders, you need to choose the right model segment first, and that probably is the multinational and top-end wholesale market, to see what those returns are like. Some South African banks have done very well in that regard, and some investment banks are still getting used to that. It is a very exciting environment and one that we cannot ignore. Tito Mboweni did not say that Nigeria’s GDP is going to be twice the size of South Africa’s in 20 years’ time for nothing, and we would be remiss to ignore those kinds of statistics and forecasts if we want to play a relevant role in the continent.
Venter: The challenge is bridging the gap between 20 years and now. 60% of African GDP is currently processed in Sub-Saharan Africa and, dependent on the patience of your shareholders, that leads to a couple of quite big investment decisions around expansion and coverage, as we have seen. To what extent do you expand into the four or five major African countries of Egypt, Ghana, Nigeria and Sub-Saharan Africa, or do you just focus on Sub-Saharan Africa and capture the value now? There is quite a challenging conversation around how you capture the value and be locally relevant.
Brand: That is going to be driven by what happens in some of those countries. The number of democracies in Sub-Saharan Africa now compared to 10 years ago has improved positively, so countries are stabilising. There have been a lot of discoveries of resources, as in Sierra Leone, which has the third largest iron ore deposits in the world, and the Jubilee oil field in Ghana. These are incremental steps in closing that 20-year gap.
Those countries are suddenly growing in terms of their GDP. Although Ghana has 9% CPI annual inflation, its GDP growth rate is much higher, and that will incrementally expedite that development. Our shareholders will have to be supportive, because South Africa will not necessarily be the dominant player going forward as countries transform.
Erling: In terms of the earlier comment on corporates now starting to look for growth elsewhere in Africa, that same theme is coming out of all South African banks in terms of the need to look elsewhere in order to achieve significant growth.
The debate about whether it is retail or corporate-led is a different discussion. The First National Bank (FNB) model has been very successful with a retail-led approach. But, I am not entirely sure whether you need to choose between the two approaches or apply both.
Henwood: The research that we have been doing, both regionally and globally, very much points to a need to look at the business model and have a deep understanding of where you are as a service provider.
Banks absolutely need to focus on the areas where they can add individual value, and this will be different per institution; but it is also about ensuring that we are able to reposition ourselves somewhat as value service providers.
The wealth of information that passes through international banking systems on a daily basis has a much higher value than the vast majority of us and our customers realise. There is, in this post-crisis world that we entering into, a great opportunity to steer our business away from pricing on product and determining it as a pricing-to-value proposition, towards information being the key value component, rather than the transfer of funds or the processing of documentation.
The dream of an African economic powerhouse is growing and taking shape.”
Gerakaris: One point to look at is certainly scale and commitment when looking at these markets. You cannot go to a market and hope to be successful just chasing MNC business or, indeed, as South African banks, just following our own corporates in-country.
It is not a sustainable model when moving into a new locale. The strong indigenous businesses at the top end; the big listed companies that we see in East and West Africa, are also being supplemented by a growing proportion of small and medium-sized enterprises moving into regional trade. We are seeing a push and an indigenisation, which is incredibly positive, by governments and policymakers for domestic players to be involved in the value chain, rather than the large MNCs being dominant.
von Fintel: Traditionally, global banks were the only ones offering end-to-end solutions to clients. Now, however, South African banks are looking at that too, saying: “We have your South African piece, but how can we offer a solution at the other end too.” It is about trying to bridge it.
Broom: But how end-to-end and relevant was the global bank solution in respect to the local markets? I would still argue that what was historically on offer were solutions built around the needs of MNCs, as opposed to solutions built around the needs of vibrant domestic economies.
Manders: Intra-African trade has nearly quadrupled in the last 15 years, yet still, only 12% of trade in Africa is intra-regional. How are South African banks increasing their intra-African trade and expanding their Africa-based network of banks?
Brand: Nedbank entered into an alliance with Ecobank. We did so because we needed to understand the challenges and diversity of a pan-African bank that had extensive country coverage compared to ourselves, particularly in West Africa. For us, it was quite important to start that process of travelling to the regions and avoiding the suitcase model, and really understanding the necessity of local knowledge and what those dynamics demand of us.
Gerakaris: FirstRand’s success has certainly been replicating our universal banking model that we use in South Africa in all our regional subsidiaries, and using the technology platform and base from South Africa in these markets, customised for domestic requirements. The expansion drive is key to our ongoing plans, and to change that view from being a South African player to an African player is a significant mind-shift.
Erling: With that comes the smaller initiatives to create presence among the key trading partners; so having a branch in India so that you can position yourself there as the African bank. We also have a representative office in China and a relationship with the China Construction Bank. So it is not only a one-sided approach, but you’re looking at the other end of where you think the trading world is moving to.
Venter: From a Barclays point of view, it is also about really trying to leverage the power of a brand in Africa. We are present in 12 countries, and every day is a learning curve from a banking organisation point of view in terms of being globally relevant, but locally present and making a difference in-country. We have also seen that, generally, fragmented banking services are being frowned upon by locals in-country, and there is increasing pressure to be socially relevant.
The challenge that we face, though, is: how do we not only compete but also collaborate around bringing banking to all and not just doing it for our own selfish purposes. There has always been pressure surrounding banking opportunities in Africa, to also make a difference in terms of raising the standard of living and encouraging flows of travel, entertainment and cross-border investment.
What we still see, however, is very much a centralised business model for corporates, whereby they venture out into Africa and do ad-hoc business, and expect the banks to support them. We also need to encourage cross-border in-country fixed investment, which is a big challenge for us banks.
Brand: Corporates have also realised that they have to be socially relevant, and particularly multinationals, if they want to operate in-country.
They cannot be seen to be there to simply be dividend-stripping and making a profit out of a developing market. They have to substantially invest in that market. To some degree, the South African banks have worked collaboratively when it comes to balance sheet; certainly, we have syndicated transactions together with regional corporates in-country as well as with some of the South African corporates that we follow.
I suppose what we could do is, perhaps, based on our own experience of how we clear payments within South Africa quite successfully, extend that to other countries in terms of switches and clearing processes, which would elevate the continent as a whole to a world-class payments and investment destination for transactions and future investment to take place. That is the one skill that we do have in this country: we clear a lot of payments overnight in the automated clearing bureau (ACB) system. There is no reason why we cannot replicate that.
Erling: South Africa is fairly unique in that we have this very sophisticated financial payments infrastructure coupled with a large unbanked population. The models that are going to be created here – whether competitively or collaboratively – can play a hugely significant role in driving development across Africa
Broom: The rest of the world views South Africa as a country with a tremendously advanced banking infrastructure, and the country has a real potential to be a regional champion in exporting that knowledge. That is real knowledge transfer, and is where, perhaps, the industry – and possibly even global economic thinking – has moved in the course of the last 20 years or so. Rather than knowledge implementation, it is knowledge transfer, and there is a big difference there.
On the collaboration theme, what I find fascinating, sitting a little remotely from the region, is the renewed focus that is now being directed on Southern Africa, and on South African banks in particular, as collaboration partners for institutions and corporations that do not have an active presence in the region. It is that active depth of understanding of those markets that takes us full circle back to knowledge transfer.
Brand: It is not only knowledge transfer, but extracting experience from the countries that we have been with. In terms of the M-PESA money transfer process that has arrived in South Africa from East Africa, if you look at that and how that revolutionised the Kenyan money-transfer market, there is no reason why that cannot be replicated.
There is also no reason why, with certain aspects of what we can come up with, understanding the challenges of what we need to face, there cannot be some unique banking solutions intra-country as opposed to just within country. We have that expertise, and this is one good thing that is coming out of this discussion: an absolute need to drive that.
Gerakaris: Both of those points are certainly very valid, in that it is not a case of South African banks moving into a new market being the great panacea for development. There is a huge amount of regional and pan-African development and expertise by our peers in East and West Africa, who have long been breaking new ground in new jurisdictions.
Broom: There are two thoughts that are so important: participation, and the power of local knowledge. Going back to the study that we undertook about six months ago, it is very clear that so many banking models have been a one-way knowledge transfer set-up, whereas the really valuable models, around which all forms of future collaboration need to be built, are where there is two-way value or knowledge transfer up and down the transactional chain or the mirroring value chain.
It does not take an amazingly capable statistician to look back over the loan losses of the crisis period to work out that the vast majority of them happened when banks ill-advisedly went in and sought to purchase market share in markets that they did not really understand. Had they entered into partnership and settled for a share of dividend or profit, where value was being added throughout the process, it is arguable that the crisis might never have happened. Most certainly, even if there was going to be a crisis, the extent of the losses would not have been as extreme.
Manders: The changes in South Africa’s economic movement have been quite dramatic; the North/South business flows that used to keep the wheels of commerce turning have weakened as the country shifts its focus to East/West opportunities.
How is the region repositioning itself for growth to serve these booming economies, which had previously not been major areas of focus?
Brand: We have had to be pragmatic as a country. We have always relied on a lot of our capital importation of sophisticated goods in South Africa coming from the west, and people have realised that they can get better value if they buy from the east. In terms of utility value, most of what you buy that is branded as a western product is made in the east anyway. And what has made the circle even closer for us is that Africa is a resource-rich continent that supplies raw materials for the manufacturing of those goods. That link has been there to some degree but it has just become stronger. There have been more resource discoveries recently, within the last decade; for example, in Zimbabwe, the discovery of diamonds in 2006 in the Eastern Highlands.
We as a country have to be pragmatic as to what we can and cannot do. Our manufacturing sector is limited and is not competitive – it will not be competitive with the east – but we are a services and a resource-driven economy. We have to take that expertise and position ourselves as a hub, not only for our own country but for neighbouring countries, for the provision of expertise going forward. For us, it creates a great opportunity to service both the West and the East, on both axes.
Gerakaris: What is key in repositioning is moving from purely raw material exporters to beneficiation in-country. It is a trend that we are certainly seeing in a number of markets, be it gold refining capacity coming on stream in Ghana to refining, milling, weaving and textiles in East Africa. It is not just exporting those goods but adding value in-country and retaining a higher value-add of the profit in-country.
Brand: What we need to do as South Africa is to make our labour market more competitive. There is a big debate that is taking place now between business and government as to how we make our labour market more competitive to take advantage of that. As far as countries mentioned earlier are concerned, their labour markets are more competitive, thereby creating an efficient market flow of supply and demand. As long as those countries are competitive, that textile growth will take place in East Africa; if it becomes uncompetitive, that capability will shift.
Gerakaris: That shift will take place only with proper investments from banks to provide the capital to grow this beneficiation.
Venter: It is a question of competitiveness as well as differentiation. We all want to claim to be the gateway to Africa. Why would the east and the west use us as the gateway to Africa? What makes us unique? What makes us special? We have not only the infrastructure but the consistency of delivery, the sustainability to continue in the future and the competitiveness to compel people to have a draw effect into the country. Unless you have the combination of competitiveness and differentiation, the dream of being the gateway to Africa is going to remain moot.
Manders: Africa looks set to cash in on the next predicted commodities super-cycle, which many think is already well underway. But it is one thing to benefit in the short term and quite another to sustain development into the future. Will the commodities boom prompt regional economies to diversify, or do you think that it will be more of the same for the foreseeable future?
Brand: With the discovery of some really great resources, the temptation is there for abuse of the revenue derived from them. Some countries, such as Ghana, have recently taken the trouble to enact legislation to manage their oil revenues. The rest of the world should look on that in a positive light.
As a result of the discovery of gold, and now with the recent discovery of oil, resources are managed responsibly and those revenues should be spent responsibly to uplift the country as a whole.
Using that as a proxy, I do think that it is a positive sign. Going forward, I think that most countries will try to avoid that temptation. The colonial era of the past was a great lesson for everybody in terms of how not to exploit resources irresponsibly. There will be a new generation of people on our continent saying: “This is about sustainability going forward and we need to do what is right, not only for ourselves but also for the future.”
Gerakaris: Being reliant on a single commodity in the previous super-cycle was fantastic, until it ended. The urgent need for diversification and uplift in the economy in countries, and we have seen it in Angola, Nigeria and Zambia, which were monoline-commodity economies, into a service sector and a beneficiation culture is significant.
Venter: The dream of an African economic powerhouse; combining resource-rich African economies into a sustainable regional trade hub, is growing and taking shape, and includes initiatives like the New Partnership for Africa’s Development (NEPAD).
NEPAD aims to provide an overarching vision and policy framework for accelerating economic co-operation and integration among African countries. However, we need to find a balance between a supply and demand-side resource economic framework that creates and incentivise a sustainable economic trade and investment model, whereby we extract value but also plough back resources, such as skills, money, employment, etc.
Henwood: We have such a tendency to look at this continent as being resource-rich, which it undoubtedly is, but it is not only resource-rich in the non-replenishible resources, which has been the focus of investors to date, but also, in terms of its renewable potential; namely agricultural resources.This all links back to the need for decent infrastructure. If a balance can be made by using the one-off boom of these mineral resources and the exploitation of those in the short term to invest in such infrastructure, then, over the longer term, as well as the knowledge-based economies there is also a bright future in the agricultural sector too.
Brand: Because of our land restitution in South Africa, South African farmers have been offered opportunities in other parts of the continent. If you are a farmer with a portfolio of farms, perhaps it is not such a bad idea to be in different climate zones on the continent. If you have a drought in one country, you have sustainability in another. We could provide food security in its broadest sense to the continent as a whole, and to the world. Therein lies another opportunity that follows on from the phase of the commodities boom and takes us to another level of being a sustainable continent in a bigger sense. GTR