The African Banking Landscape
As traditional brick-and-mortar banks face increasingly high operating costs, a decline in the use of their branches and competition from new digital financial service providers, they are being forced to look at new and innovative to retain and even grow their market share.
Despite experiencing a partial recovery and surpassing pre-pandemic revenue levels, banking profitability has witnessed a decline of an average of -2.6 percentage points since 2016. Throughout the last six years, the five largest banking markets in Africa (Egypt, Kenya, Morocco, Nigeria, and South Africa) have consistently faced diminishing profitability, with an average decrease of two percentage points.
African banks are costly to run, with an average cost-to-asset ratio of between 4 and 5 percent, almost twice as high as the global average. Additionally, the economic conditions in many African countries are not as developed and diverse compared to other regions. This means that the revenue generated by these banks is relatively small, especially when interest rates are declining. As a result, banks may need to reevaluate their costs and operating methods if they want to make banking more accessible and cost-effective, which is essential for achieving much-needed financial inclusion.
However, with half of the continent’s population unbanked and the growth of fintech in the region, there are plenty of growth opportunities for both legacy banks and new entrants in the market to provide new operating models aligned with the demands of new customers and the changing habits of existing clients.
Digital transformation has had an enormous impact on the financial services sector. Banks that do not evolve with the times will be left behind. But not all have the capacity to transition their operations onto digital platforms and rely on their established reputations and traditional offerings to remain viable.
Enter Banking as a Service (BaaS)
The dynamic African banking environment has seen the emergence of a new generation of fintech companies that are exploiting the gaps in traditional banks’ core expertise. BaaS enables banks to extend their capabilities beyond traditional banking channels and leverage the infrastructure, technology, and expertise of the BaaS provider.
White-labelled Banking as a Service (BaaS) is basically a business model in which banks can offer financial products and services under their own brand using application programming interfaces (APIs) provided by a third party.
By using a BaaS provider, banks avoid research and development costs, buying a ready-made suite of services that can also be customised to meet their specific needs. Whilst the BaaS provider takes care of all the operational and ‘back end’ functionality of the platforms, the bank can maintain its relationship with its customer, who only see the bank’s branding.
In the context of a bank, BaaS works by integrating the bank's systems with the BaaS platform, which acts as a middleware. The bank retains control over its customer relationships, branding, and compliance, while the BaaS provider handles the technical aspects of delivering the services. Through BaaS, banks can offer a wide range of digital banking services, including account opening, payments, card issuance, transaction processing, risk management, and more. The BaaS platform provides pre-built modules and APIs that enable seamless integration with the bank's systems, allowing customers to access these services through various channels such as mobile apps, websites, or third-party applications.
The bank can customize and white-label the user interface and experience, ensuring a consistent brand presence. The BaaS platform takes care of the underlying infrastructure, security, scalability, and ongoing maintenance, enabling the bank to focus on its core competencies and customer relationships. By utilizing a BaaS platform, banks can enhance customer experience by offering modern, user-friendly interfaces, personalized services, and access to advanced digital banking features. They can improve operational efficiency through streamlined processes, automation, and data analytics provided by the BaaS platform.
Furthermore, BaaS enables banks to address the challenges of digital transformation in a cost-effective manner. They can leverage shared infrastructure, reducing capital and operational expenses. BaaS platforms also provide compliance tools and features to help banks adhere to regulatory requirements, ensuring data security and privacy.
BaaS empowers banks to expand their digital banking capabilities, enhance customer experiences, drive innovation, and improve operational efficiency. It enables them to leverage the infrastructure and expertise of a specialized provider, allowing them to focus on their core competencies and customer relationships while adapting to the rapidly evolving digital landscape.
The relationship between banks and BaaS providers is a symbiotic one. Banks can diversify their business model and offer B2B services to fintechs, MNOs, and tech providers while accelerating their digital transformation efforts. For the BaaS provider, they benefit from the ability to enter and expand into new markets, drive revenue generation, increased the utilisation of their platform and expand their customer base. It's a win-win situation.
Ukheshe's White Labelled Banking as a Service solution
White label banking is a term used to describe the practice of non-banking businesses, for example, fintechs and telcos, to offer their products under their own brand by utilising a BaaS provider.
Digitising a bank can be complex, but it doesn’t have to be. Ukheshe banking as a service platform solution enables banks to offer more comprehensive digital banking services without altering their infrastructure or core banking systems. Ukheshe’s Eclipse API provides a flexible, digital overlay on top of the banks’ existing technological infrastructure which makes digital banking services accessible and in real-time. In this way, the traditional bank remains customer-facing while offering improved and innovative financial services to new players such as fintechs and MNOs.
Why is this attractive to African Banks?
Banks can offer more comprehensive digital banking services and solutions
No changes to the bank's infrastructure or core banking systems
Real-time boarding for customers and businesses
Banks can bring innovative products and services to market, faster
Banks can onboard fintechs and launch new digital value propositions
Why BaaS is worth implementing as an African Bank
In a difficult banking environment with high operating costs and low margins, legacy banks can leverage BaaS to take advantage of the massive opportunities for growth in Africa, where only 50% of people have bank accounts and fintechs struggle to obtain the necessary licences to operate. The advent of new entrants into the market, offering agile and innovative digital-only financial services means that legacy banks must keep up with technological developments and include digital offerings in their services.
By adopting BaaS technology, legacy banks can:
Expand reach and increase customer acquisition
By enabling and providing a BaaS platform, banks can extend their services beyond their existing customer base. Fintech partners can leverage the bank’s infrastructure and offer core banking services (payments, lending, fraud management and compliance, and account management) - that are typically buried in banks’ core systems - to their own customers. This allows the bank to reach new market segments and acquire new customers without having to build their own digital infrastructure.
Diversify their revenue streams
Fintechs, MNOs and tech providers pay for utilising the bank's infrastructure
Charging a transaction-based fee for every transaction conducted through the BaaS platform.
Charging fees for licencing and white labelling
Exploiting cross-selling opportunities between themselves and fintech/BaaS partners.
Offering value-added services through the BaaS platform including risk assessment, compliance management and other services to enhance the capabilities of customers and partners.
Technology advancement and innovation
Collaborating with fintech companies in a BaaS model can foster technology advancement and innovation within a bank. Fintechs often bring cutting-edge technologies, user-centric designs, and agile development processes to the partnership. This collaboration can drive the bank’s digital transformation efforts, helping them stay competitive in a rapidly evolving financial landscape.
Accelerate time to market
By leveraging a BaaS platform, banks can accelerate the development and deployment of new digital banking products and services. According to Mckinsey, launching a new product in traditional structures can take several weeks to months and involve at least six different departments before it goes to market. Instead of developing everything in-house, the bank can leverage Ukheshe’s existing infrastructure and APIs, significantly reducing the time and costs associated with building and launching new digital solutions.
Improved customer experience
By leveraging the expertise of fintech partners, banks can provide their customers with seamless, user-friendly interfaces, personalized financial solutions, and innovative features that may not have been possible with their traditional infrastructure alone. Banks also have access to valuable customer data which can be utilized to create seamless and tailored experiences.
Flexibility and agility
BaaS platforms provide banks with the flexibility to adapt and evolve in response to changing market demands and customer expectations. They can quickly integrate new services, products, or features into their existing offerings, allowing them to stay agile and responsive to market trends. Banks can easily scale their digital banking services up or down without significant infrastructure changes. The modular nature of BaaS platforms allows banks to add or remove features, integrate new technologies, and quickly respond to evolving customer needs.