A significant number of African banks see the rise of financial technology, challenger banks and telecom companies entering financial services market as ‘high threat’ to their operations, a new study shows.

The third edition of The African Digital Banking Transformation Report produced by African Banker magazine and engagement banking platform, Backbase, says as competition heats up between the different players, Artificial Intelligence (AI) is identified as key technological trend shaping the future of the banking ecosystem in Africa

The report explores major trends shaping the future of the banking industry and financial inclusion on the continent. The year’s report attracted the participation of a record 153 banks from across the continent.

According to the report, the rise of fintech, digital first banks, mobile money and agency banking is transforming the industry. 

It says, this transformation, not only has it created a vast array of new players in the sector, but the technology on offer has forced traditional banks to change the ways they do business and engage with their customers. 

Therefore, it’s not a surprise that 40% of banks surveyed regard fintechs and telcos as high threats, says the report. 

Further, the African Digital Transformation report says against an adverse macro-economic environment, African banks remain resilient and committed to invest in digitisation to remain relevant in today’s competitive landscape.

To this end, it says most African banks understand the importance of the key technological shifts with over 50% of surveyed banks considering it the most important factor for their business.

Moreover, the report notes 19% of banks considered identify themselves as “digital native”, further stressing the importance of digital transformation going forward.

On the threat posed by the telcos, the study says, as telcos race to make up for lost revenue from voice calls, they have been making in-roads in financial services, exploiting their large customers bases to expand existing mobile money services.

A case in point, the report cites Orange Telecom, which garnered over 5 million baking customers worldwide in just the first two months after launching a digital bank during the COVID-19 pandemic.

Besides the threats from telcos and fintechs, all 153 banks surveyed believe that the rising cost of doing business is another threat – with 47% regarding it as a high threat.

Also, the report shows that last year 74% of banks held cyber security as the most important trend in the industry. But this has shifted, with 69% of banks believing AI will be the next big thing in the industry this year.

Discussions in the industry, the report say, are expected to focus on how to boost productivity through digitisation and adopting AI, including cognitive agent, digital assistant and advanced analytics driven coaching and robotic process automation.

The need for digital transformation appears to be important and pressing at this time, the study says.

In 2021, at least 157 of the world’s 310 mobile money services in were in Sub-Saharan Africa, according to the Global System for Mobile Communications Association.

Africa processed $495 billion of the $767 billion handled by mobile money worldwide in 2020.

Still on digital transformation, the report says, all banks surveyed consider card management, digital onboarding, internet banking, self-service customer support, digital lending and digital payment mobile app/mobile wallet app as top priorities to build in 2023 and 2024.

At least 63 of the banks consider the development of digital payment mobile app/mobile wallet app as “critical priority”.

As a result of this, 56% of banks spent at least $1 million in 2022 as annual budget for digital transformation and innovation, and 28% of banks will spend over $3 million for the same purpose this year.

Further, the report notes that on a continent where banking penetration rates are still below 50%, African banks reaffirmed the importance of driving greater financial inclusion across the whole continent.

It says roughly 50% of banks surveys named retail banking as their top priority for 2023/2024, whilst also referring to mobile wallet apps and digital payment systems as the most critical product development priority for the next two years.

Matthijs Eijpe, regional vice president for EMEA at Backbase, said the report depicts promising advances and challenges ahead in the industry.

“The ability to personalise banking experiences is a key expectation among bank customers today and banks have understood that. At Backbase, we reckon that barriers to digital banking are falling but that traditional lenders are still left behind by extremely nimble and agile fintech competitors.”