accenture on financial services in africa

7/31/2019 Accenture on Financial Services in Africa

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At the tipping point: Financial

services in Africa comes of age

How financial institutions can capitalise onthe growth opportunities in Africa


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Executive Summary


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Africa: a region whosetime has comeAfter decades outside the globalfinancial mainstream, Africa isnow becoming one of the worldsfastest-growing emerging marketsand an increasingly sought-after investment destination.

There are clear reasons for thisdramatic reassessment. Africaneconomies are expanding on the

back of increasing commodity prices,trade and foreign investment, whileincreasing consumer affluence ishelping to drive demand for goodsand services.

What is more, the progress to dateis dwarfed by Africas massivepotential for economic growth,fuelled by ongoing improvement inbusiness conditions and increasingglobalisation. Also, while many Africannations continue to be held back

by issues such as political and civilinstability, poverty, poor infrastructureand concerns over governance, moreand more African countries are nowovercoming these barriers.

A bright outlook forfinancial servicesIn countries across the world,experience shows that economicdevelopment is inextricably linkedto a strong banking sector. Banking,through its inherently dynamic rolein financing an economy, boostseconomic activity. Other financialservices companies also have animportant role to play, as providers ofservices and developers of financial

infrastructure. To deliver these benefitsmore effectively in Africa, majorbanks and insurers are now activelyinvestigating how best to expand theirfootprint there.

To help them make the right choices,Accenture has conducted a studyto identify the key growth drivers,opportunities, and market-entry andoperating-model options for banksand insurers in Africa. This paperpresents the principal findings of this

study, and analyses their implicationsfor financial services companieseither seeking to enter Africa for thefirst time, or looking to expand theiroperations there.

Reaching the tipping-pointGiven Africas current pace ofchange and future growth potential,Accenture believes that most financialservices analysis still underestimatesthe opportunities it presents. Ourresearch shows that the financialservices markets in several countriesacross Africa are either already well-established, or nearing the tippingpoint of rapid growth. The firms

that seize the emerging opportunitiesnow will build a lasting competitiveadvantage in these promising markets.

To measure these opportunities,Accenture has developed a TippingPoint Index (TPI) that benchmarks thereadiness of financial markets to takeoff. The index does this by assessinga combination of 29 criteria groupedinto three categories:

The stage of development of

financial infrastructures, such asfinancial markets sophistication andequity capital markets


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The existing depth of consumer

markets, through measures such aspenetration of banking services andinsurance density

Economic development factorssuch as the regulatory environmentand market openness

Beyond South Africa and Mauritius,which already have established andrelatively mature financial servicesmarkets, the first release of theAccenture TPI analysis identifies:

Five markets that are forgingahead and have attractive growthpotential

Eight markets that are next moversand approaching a tipping point forrapid development

Several further markets thathave hidden potential, which canbe unlocked quickly through somestructural reforms.

New growth triggersand business modelsThe Accenture research study alsohighlights new growth triggersfor financial services, pointingto rapid market development insome countries. While the paths togrowth vary, these triggers ofteninclude innovation through (very)low-cost offerings and distribution,dramatically opening up access tofinancial services; investment in

physical infrastructure and financialinfrastructure development throughmore sophisticated regulations, andinstitution building; strong economicgrowth and inward investment inthe economy, including by financialinstitutions following their clientsinto new countries; and growthin consumer markets driven bydemographic change, including therise of the urban middle class, and thegrowth in microfinance-supportedbusinesses in rural areas.

In Accentures view, banks and insurers

will not achieve sustained success inAfricas fast-developing markets simplyby replicating traditional businessmodels from developed countries.New strategies are needed includingadapting retail banking models tolocal cultural needs, and finding newways to serve low-income customersprofitably. Contributing to nation-building and the development of localcommunities is a further prerequisitein many countries. And attempts toroll out standardised models musttake into account differences in localbusiness and regulatory environments.


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Emerging growthstrategiesIn response to these factors, financialservices companies are adopting avariety of strategies to drive theirexpansion in Africa. These strategiesinclude:

Using one major local market as abase to expand their market presenceand roll out the model across Africa.

Following corporate clients into new

countries across Africa Deepening localisation by acquiringa local giant and integrating it intotheir global network.

Meanwhile, telecommunicationscompanies are transforming accessto financial services through low-cost mobile payments services,many of which are likely to extendinto the provision of simple bankingofferings. For retail banks, low-cost

mobile banking capabilities andalliances with telecom companiesare a must have, since accessibility,customer experience and scalabilityare critical in taking bankingto the previously unbanked.

Time to actOur research underlines the factthat now is the time for financialservices companies to re-evaluatetheir positioning in Africas economicgrowth story, and to secure apotentially decisive role in developingthe regions financial services markets.

To define the role they will play,organisations first need to askthemselves a number of fundamentalquestions:

Which countries offer the mostattractive opportunities?

Which markets should they be in?

What are the natural connectionswith their home markets or globalstrategy?

How great are the ambitions of theirclients?

What is the natural route to entry?

Are they willing to adapt to localmarket needs and differences in thebusiness environment?

The opportunity for financial services

players in Africa is here now andit is growing by the day, fuelled byincreasingly intense interest frominstitutions based in mature andemerging markets, and by the riseof large domestic players. Currenttrends suggest that a major newfinancial services market on theworld stage will be establishedacross the major countries of Africaover the next few years. The stepsthat banks and insurers take todaywill determine whether they canparticipate in this exciting stepforward for Africa and its people.


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The opportunity:Why Africa? And why now?


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A diverse butexpanding landscapeThe past decade has seen stronggrowth in national GDPs across mostof Africa, fuelled by a combination ofcommodity booms reflecting Africasrich reserves of raw materials andincreasing trade and investment. Therecent rapid growth has been furtherfostered by a background of improvinggovernance throughout the region.

These factors are expected to sustainthe dramatic gains of the past decade.And while the pace of growth willvary widely in countries across thecontinent, the largest economies areset to continue to deliver very stronggrowth rates (see Figure 1).

Business environments across Africaare diverse, but have undergone asignificant improvement in recentyears, thanks to a widespreadreform process that has accelerated

since 2007. The pace of progresshas not slowed down, despite theuncertainty springing from theglobal economic slowdown and

in some cases, such as Nigeria, the

crisis has had the effect of spurringon a far-reaching reform process.

As well as varying widely, the ease ofdoing business in each country haslittle correlation to the potential sizeof its market, with the comparativelysmall markets of Tunisia, Mauritiusand Namibia being among the mostopen business environments (seeFigure 2). However, despite the generalimprovement in business conditions,many African countries remain

among the worlds most challengingenvironments in which to do business.

Forces for growthWe believe the development offinancial services markets in Africa willnot follow the same path as developedmarkets or other emerging markets.Instead, four forces will combine inAfrica to drive a new form of financialmarket development, distinct from

that seen anywhere else.

These four forces are:

Leap-frogging the developmentof new financial services marketsbased on new infrastructure, tools andprocesses. In many cases, this freshstart is the only viable approachbecause of the limited legacy in termsof distribution, payments and capitalmarkets. Examples include the rapidand widespread adoption of mobilephone-based financial services inmany African countries.

Industry convergence. The lackof legacy is also helping to createattractive opportunities for non-financial services companies especially retailers andcommunications operators toprovide financial services throughtheir networks, as a way of boostingrevenues from their customer base.This development is being facilitatedin many countries by the regulatoryenvironment. Examples of these cross-sector entrants include the telcosSafaricom, MTN, Zain and Airtel.

Figure 1: GDP growth of leading African economies (CAGR), 2000-2008 and 2009-20141


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Business model innovation. New

low-cost and technology-basedapproaches to service provision anddistribution are emerging, such asAfrican Banks in-store distribution,and growing use of mobile phone-based services and innovations suchas biometric ATMs. Specially-tailoredservice offerings culturally attuned toAfrica are also gaining ground.

The development agenda. Internationaland regional development organisations including the World Bank, CGAP,

and African Development Bank arecontinuing to show strong commitmentto the development of financialservices, and encouraging commonstandards, processes and markets. Thereis also a high level of private sectorinterest in the development agenda,with examples including Barclayspartnership with Plan International,and Rabobanks investment in bankswith strong microfinance offerings.

offset by limitingfactorsThese four positive forces for growthare partially offset by a set of factorsthat may continue to restrict the speedand shape of market development.These include:

Small-scale markets. Some marketsare too small to be attractive to largeplayers on their own

Large, low-income populations.

This is driving the widespread focus onaccess-based offerings and low-costretail financial services

Lack of existing marketinfrastructure requiring thedevelopment of alternativedistribution, risk and payment methods

Large informal economy. Thisdemands new and different riskmodels, credit processes andrelationship management

Lack of regional integration

limiting the opportunities to buildcross-border scale

Business risk includingchallenging business environments,with endemic corruption and limitedinstitutional development

A short window ofopportunityOn our view, the balance of positiveand negative factors is strongly

weighted towards the upside,creating major opportunitiesfor banks and insurers to gaina foothold in Africa and buildrevenues and market share quickly.

However, while the growth potentialis large, financial services businessesmay need to move quickly to harnessits benefits. Current trends in fourkey characteristics of the Africanmarketplace growth, development,

risk and opportunity mean the

Figure 2: Leading African economies: business environment and market potential2


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window for entrants may be short-

lived. The trends in each of theseareas can be summarised as follows:

Rapid growth. A combinationof strong economic growth andincreasing participation in theglobal economy through trade andinvestment is boosting income levels,and driving rapid growth in financialassets and needs.

Rapid development. Many Africancountries are at a relatively early

stage of financial development, butrising incomes and innovative waysof providing financial products andservices are creating new demandfor them.

Improving risk environment. ManyAfrican nations are making progress ongovernance and development issues,thereby improving competitiveness,reducing business risk, and improvingtheir performance on many social

indicators ranging from poverty topublic health.

Narrowing window of opportunity.

A significant number of Africanand foreign financial servicescompanies are already developingtheir positioning across Africa,with a view to seizing emergingopportunities and taking advantageof under-provided markets.

Put simply, financial servicescompanies that hang back fromentering Africa now may find thatothers have stepped in to seize theopportunity and have thereby

gained an unassailable lead at adefining moment in the developmentof Africas potentially huge financialservices market.


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The Tipping Point Index: Whichmarkets are most conducive tofinancial services growth?


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Four levels of marketdevelopmentWhile the overall growth story forthe African continent is positive,key factors such as the levels ofdevelopment, business environment,financial depth and market scale allvary considerably between countries.

To provide a comparative lens foranalysing and benchmarking differentcountries, Accenture's Tipping

Point Index assesses the financialmarket readiness of 23 of the largesteconomies in Africa by comparing arange of key factors. These factors canbe grouped into three categories.

Based on our analysis of thecriteria in the three catergories ofFinancial infrastructure, Consumerfinancial services and Economicdevelopment factors (see page 3),we have divided African nationsinto four distinct groups:

Established Financial Services

Markets that are relatively deep andmature, with an existing diverse andthriving financial sector

Forging Ahead economies, whichtend to be larger, wealthier or moreinstitutionally developed marketsand are undertaking reforms aimedat creating more attractive financialservices markets

Next Movers, consisting of alarger set of economies that havehigh potential and are in the processof overcoming entrenched barriersof low income, financial access,and institutional or governancedeficiencies

Transitional Economies, wherethe market potential is currentlyconstrained by problems suchas poverty, lack of financialinclusion, difficult business andcivil environments, and a lackof financial infrastructure.

Country rankingsTurning to the individual TPI rankingsby country, our full findings basedon relative performance across thecountries in the analysis are shownin Figure 3. This ranking is based onunweighted performance againstunderlying variables.

As the table shows, the developmentof financial services in South Africaand Mauritius is well ahead of all theother African countries, positioning

these as established markets, followedat some distance by the forgingahead economies. The next moversand transitional economies arein some cases impacted by a lackof available data, or the absence ofexisting market infrastructure inkey areas, such as having limited orno equity capital markets. It is alsoimportant to note that some of thetransitional or unrated economies such as Angola, Mozambique and

Zimbabwe may have significanthidden potential that could be releasedthrough institutional development.

Figure 3: The Tipping-Point Index country rankings3


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The TPI Dual FactorIndexTo gain further insight into the relativegrowth potential of African countriesfor banking and insurance entrants, wehave further analysed the TPI findingsto produce a Dual Factor Indexexamining the business environmentand market attractiveness indicatorsseparately. The results are shown inFigure 4.

As the chart shows, while a numberof economies have a sound businessenvironment for financial servicesmarket development, relativelyfew combine this with the existingsize of population and depth offinancial market assets to make themimmediately attractive. Accordingto our analysis, the most attractivecountries for financial servicesinvestment aside from clear marketleader South Africa are the forgingahead economies of Egypt, Nigeria

and Morocco.

Unlocking financialsector growthDepending on the context of eachcountry, a key set of steps could beundertaken that would improve theunderlying factors impacting financialmarket performance. This would havethe effect of improving the marketsTPI rankings and unlocking its pent-upgrowth potential. These steps shouldfocus on three key areas:

Building and strengthening financialsector infrastructure. Actions couldbe taken to support lending to realeconomy and SME sectors, establishsound oversight and financialmarket institutions, and facilitatethe development of market liquidityand pricing for bond and equitymarkets. Further steps might includethe development of robust paymentssystems and facilitating movestowards regional harmonisation. Inparallel, growth potential could be

boosted by actions to ensure sufficientcapitalisation of banks and otherfinancial services institutions, and topromote the development of private

credit bureau and credit information.

Going forward, all participating marketscould benefit from the establishmentof pan-African links to capital markets,banks and payment systems to facilitateregional trade and capital flows.

Ensuring a strong businessenvironment. Positive actions herewould include utilising internationalnorms where applicable in areas such asregulatory standards, governance, andaccounting and reporting. Regulatoryframeworks should be established

to promote wider and more diverseparticipation in the financial markets,including by microfinance institutionsand mobile payments providers. Thesesteps could be supported by the furtheractive development of legal frameworks including commercial courts,contract enforcement and collections and continued efforts to increasetransparency and fight corruption andconnected lending. Actions may alsobe undertaken to encourage foreign

investment and participation, includingskills and capability transfer to underpinfuture growth and development.

Figure 4: The TPI Dual Factor Index4


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Facilitate financial services access.

As we noted earlier, efforts are alreadywell under way in many markets toimprove access to financial services.These initiatives could be supportedby further actions to lower the costsof consumer banking and insuranceservices in cases where these remainhigh, and by wider-adoption financialinclusion programmes, such as thenorms promoted by the ConsultativeGroup to Assist the Poorest (CGAP),in areas such as financial education,consumer protection and savingspromotion. Low-cost distributionchannels for financial services suchas mobile handsets, post offices, andbank branches in retail outlets couldbe encouraged and facilitated. Andsteps could be taken to minimise thebureaucracy involved in accessingfinancial services for both consumersand businesses.

Tipping PointIndex: summary ofmethodologyThe Tipping Point Index is basedon an assessment of 29 variablesin each country across threemain categories:

Financial infrastructure

Consumer financial services

Economic development factors

The underlying variables includeindicators of existing financialmarket assets, economicgrowth rates and incomeslevels, business environmentand infrastructure. The data foreach variable is then comparedacross the country peer set, with

a score of 1.0 being given to

the highest-performing country,ranging down to 0.0 for thelowest performer. The totalscore for each country is thendetermined by a simple averageacross all the variables.

A more detailed description ofthe TPI methodology can befound on page 31.


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Growth triggers: What is drivingfinancial services market growth indifferent African economies?


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Breaking from the packThe attractiveness of the financialmarkets in many countries in Africais undergoing rapid change, driven bystrong growth and ongoing efforts totackle traditional barriers to growth.

In particular, a strong leading groupof African economies have brokenfrom the pack. They have done this bypresenting a set of attractive growthdrivers, while simultaneously tacklingthe fundamental barriers that have

historically held back hyper-growth infinancial services.

The three positive drivers are:

Strong economic growth.Many countries are projected toshow GDP growth in excess of5% compounded annually for thenext five years, and are achievingpositive trade and FDI flows.

Positive demographics,

including population growth,improving per-capita GDP ratios,ongoing urbanisation, andpositive age demographics.

Deepening financial markets. This

driver includes growing bank assets,increasing penetration of financialservices via both traditional and newchannels, and advancing developmentof financial markets infrastructure.

In capitalising on these positive drivers,the four long-standing growth barriersbeing tackled in these markets are:

Political and civil instability.Stability and governance are improvingin many countries.

Business environment. Steps arebeing taken to improve financialservices regulation, the rule of law,and openness to foreign participationand investment.

Poor infrastructure. Significantinvestment in infrastructure iswell under way in some countries,supporting the leapfrog effectand rapid development ofmobile telecoms services.

Under-developed human capital.

Education levels and public healthare still areas of concern in manycountries, but some are seeingsignificant improvements, supportedby increasing involvement in theformal economy.

Varying growthtriggersIn combination with the momentumgenerated by these underlying growth

drivers and the surmounting oftraditional barriers, new triggers offinancial services sector growth areemerging in some countries, pointingto especially rapid development ofthose markets. Significantly, thespecific path to growth varies fromcountry to country. Weve selectedfour countries to show the cross-spectrum of the growth triggersand their pathways to growth.


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Vital Statistics 2009 5yr Historic Growth RatePopulation 152m 2.8%

GDP $169bn 6.3%

GDP per capita PPP $2,274 5.1%

Total Banking Assets $100bn 27%

Loans $51bn 27%

Deposits $49bn 21%

Insurance Premiums % GDP 1% 26%

Banking Penetration 15%

Branches per 100k 0.26

Mobile Penetration 49%

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NigeriaNigeria is becoming increasingly attractive for foreign financialinstitutions, as economic growth and financial reform drive the creationof a large new retail financial services market. However, the size of theopportunity depends on the continued progress of financial reform,

The growth drivers in Nigeria include solid population growth, a large

unbanked population, increasing urbanisation, and expected healthygrowth in banking assets. Through the four pillars of the banking reformprogramme, the central bank is sponsoring banking sector consolidationand encouraging foreign participation. The main challenge is operatingeffectively and at acceptable levels of risk in the countrys difficult businessenvironment. Further opportunities could include mobile payments andproviding Islamic banking services to the large Muslim population.

Figure 5: Nigerias GDP growth outlook and vital statistics5Sources: IMF, World Bank, CGAP, Swiss RE, Pyramid Research


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Vital Statistics 2009 5yr Historic Growth RatePopulation 32.8m 3.4%

GDP $15.8bn 8.3%


Total Banking Assets $5.3bn n.a.

Loans $1.4bn n.a.

Deposits $2.7bn n.a.

Insurance Premiums % GDP n.a.



Mobile Penetration 33% 7%

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UgandaIn Uganda, the ongoing development of low-cost mobile payment andinnovative banking solutions is providing a route to rapid extensionof banking facilities in this relatively low-income economy.

The growth drivers for financial services in Uganda include a positive macro-economic growth outlook, strong asset growth, a large population with

limited access to financial services, and a stable regulatory and businessenvironment. Strong uptake of mobile phones has encouraged the introductionof basic mobile payment and banking services through partnershipsbetween mobile operators and local banks. The main challenge in Ugandais finding ways to serve its large, low-income population profitably.

Figure 6: Ugandas GDP growth outlook and vital statistics6

Sources: IMF, World Bank, CGAP, Swiss RE, Pyramid Research


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GDP $74.5bn 14.4%


Total Banking Assets $11.7bn n.a.

Loans $9bn n.a.

Deposits $12.4bn n.a.

Insurance Premiums % GDP 0.3%




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AngolaHaving emerged from a long civil war, Angola is benefiting from a period ofstability and making significant progress in reconstruction and development.Its wealth of natural resources is driving a wave of inward investment andtrade, creating opportunities for corporate and commercial banks, in particularsupporting the needs of mutlinational companies doing business there.

The growth drivers in Angola include a very strong macro-economic outlookunderpinned by oil and gas revenues. However, the reliance on commoditiesto attract inward investment creates risks going forward, given fluctuations incommodity prices. In the longer term, as infrastructure develops and incomes risein the wider population, a mid-sized retail financial services market is expected todevelop, dependent on the continuation of reforms and the ongoing expansion ofdistribution into village communities.

Figure 7: Angolas GDP growth outlook and vital statistics7



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GDP $188bn 6.0%


Total Banking Assets $209bn 13%

Loans $79bn 12%

Deposits $154bn 13%

Insurance Premiums % GDP 0.2%.




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EgyptIn Egypt, investment in infrastructure is creating a strong growth environment,while longer-term reforms are boosting the financial services market and creatingespecially attractive opportunities in the countrys large medium-income segment.

The country has one of the largest, most sophisticated and most open financialmarkets in Africa, enhanced by progressive market reforms. Economic growth

has historically been restricted by human capital, business environment andinfrastructure constraints, but is forecast to strengthen over the coming years,supported by large-scale public and private investment in infrastructure. The largeand growing population is highly urbanised with relatively good access to bankingdistribution, helping to increase the take-up of financial services products goingforward. The main challenges are around the business and regulatory environment,and finding profitable ways to service the countrys large population.

Figure 8: Egypts GDP growth outlook and vital statistics8



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African expansion: How are globalfinancial institutions enteringthe African marketand Africaninstitutions expanding across

borders?


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The growth potential of the African

financial services market is bothreflected in, and increased by, theexpanding number of players activein it. These include entrants fromoutside Africa, whose recent initiativesare summarised in Figure 9, and alsoindigenous African institutions, whichare increasingly looking to competeacross borders on an intra-Africanbasis (see Figure 10).

The first wave of

entrants: spheres ofinfluenceA number of European banks havelong-established presences in Africa.However, the past five years haveseen European banks strengtheningtheir involvement by leading a newwave of overseas investment infinancial services in Sub-SaharanAfrica. The European players are nowbeing challenged by new entrants

from emerging markets, which arehelping to intensify the competitiveand innovative pressure, and boostingmarket growth.

The entry strategies of the European

banks were historically based mainlyon their home countries traditionalareas of economic and politicalinfluence: hence French banks wereactive in French-speaking Westernand North Africa, and British banksEnglish-speaking African countries andSouth Africa.

In these countries, foreign banks offercorporate banking and retail bankingservices for foreign companies,major local companies, and relatively

wealthy local retail consumers.This trend was also reflected toa smaller extent by Portuguesebanks entry into Angola and otherPortuguese-speaking countries

Alongside this general trend, therewere more targeted entrants. Theseincluded Citibank and StandardChartered Bank, focusing mainly oncorporate banking for major firms.

The second wave:emerging-marketplayersIn recent years, the formerdominante of European banksin the African market has beendisrupted and challenged by theentry of a number of competitorsbased in emerging markets.

Among the most notable are Chinesebanks, which are entering the market

through several channels, includingproviding corporate loans andinfrastructure financing throughoutSub-Saharan Africa, often underarrangements that give Chinaaccess to land and minerals. Furtherentry strategies into Sub-SaharanAfrica have included ICBC buying20% of South Africa's StandardBank and forming a commercialpartnership with it for corporatebanking services, and Bank of China

creating a partnership with EcoBankto finance investment projects.

Figure 9: Non-African entrants to the African financial services market9


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Alongside the Chinese banks, other

entrants to Africa from emergingmarkets include Brazilian banks,aiming as a first step to enterPortuguese-speaking countries suchas Angola, and Indian banks, initiallylooking to enter countries in EasternAfrica with significant trade flowswith India.

Rising intra-Africancompetition

To date, intra-African competitionin financial services has been largelybased on traditional regional andbusiness areas of influence. However,the current transformation of theNigerian market may change the faceof competition among indigenousAfrican banks across the region.

Nigerian banks expansion from West

to East Africa was effectively haltedby the recent domestic and globalfinancial turmoil and the decisionto restructure the local market. Theoutcome of this transformation willhave a lasting impact on the rest ofWestern Africa, and probably someconsequences for Eastern Africa.

Meanwhile, as Figure 10 shows,South African banks are expandingnorthwards across Sub-Saharan Africa,establishing a multi-country retail

presence and sophisticated corporateand investment banking services. AndMoroccan banks are expanding intoseveral countries in Eastern Africa.

Leveraging existingstrengthsAgainst this background, financialservices companies expanding andacquiring in Africa are following anumber of different approaches, aimedat leveraging their existing strengthsand strategies. These include:

Regional hubs

This approach involves establishing acornerstone presence in a key regionalmarket, and then using that as a baseto build operations in neighbouringcountries. This approach has seenStandard Bank and Absa becomedominant regional players in SouthernAfrica, and Ecobank successfully builda large West African network andexpand across Africa.

Figure 10: Recent cross-border expansion activity by indigenous African banks10


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Following trade flows and

existing clientsSome banks have built a focusedpresence in selected countries, wherethe presence of substantial trade flowsbetween Africa and non-Africa nationsand/or services for large multinationalclients creates a core financialservices business. Using this type ofapproach, Standard Bank is developinga specialism in facilitating emergingmarket and China/Africa trade, whileStandard Chartered is leveraging itsMiddle East and Asian network tofacilitate trade and investment.

Leveraging business sectorexpertise

A further approach is to leveragespecialist business-model strengthsand sector insights from overseasoperations to help build and sustaina presence in Africa. For example,Rabobank has used its expertise

in agriculture and co-operativestructures to help it create joint-venture partnerships in microfinanceand with co-operative lenders in the

agricultural sector in East Africa. And

Barclays is leveraging its global retailand commercial, private banking andcapital market expertise to developcollaborative offerings with itsmajority-owned affiliate Absa.

Expanding an Africa-centricbusiness model

Some banks and financial servicescompanies are developing specifically-tailored business models for theAfrican context, and then usingthese to drive regional developmentand roll-out. In many cases, thisapproach involves collaborationwith non-banking partners to createinnovative new service offeringsgeared to African customers.Examples include Safaricoms M-Pesapeerto-peer payment platform,developed in Kenya and rolled outin Tanzania and South Africa, andMTNs Mobile Money, rolled outacross a number of South, Central and

West Africa countries. At the sametime, African Bank has developedstore-based, low-cost financialservices offerings in South Africa.

Gold rush: M&A steps up

The escalating interest and investmentin African financial services isreflected by the rising value of M&Aactivity in the sector. As Figure 11shows, the average annual value ofM&A transactions has increasedstrongly since 2004, rising more thanthreefold from $2.4bn in 2000-2004to $7.4bn in 2005-2009.

Figure 11: The rising value of M&A deals in the African financial services industry11


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Business models: What businessmodels are required for success inthe African environment?


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Given the distinctive dynamics of the

African financial services marketplace,replicating old business models is notenough meaning that innovative anddifferentiated strategies will be neededto harness and sustain future growth.

To formulate the right strategies,companies need to take a number offactors into account. One is that thediversity of the regions economies,regulations and financial systemspresents a major challenge for thedevelopment of networks and standard

operating models. Significantly, fewpan-African or regional networkscurrently exist, and those that doare often already partnered withdeveloped banks.

Another factor is the need to finda way to serve large populationsthat are currently excluded fromtraditional banking services, whichin many African countries haveprimarily focused on more affluent

customers. New and lower-costoperating models will be needed tomeet the needs of the low-incomepopulations who stand to benefit fromtheir first-ever access to financial

services. While many options exist,

providers are still struggling tofind sustainable, profitable modelsto serve these new customers.

At the same time, experience todate in Africa has highlighted theimportance of telecoms-basedservices, to leapfrog the relative lackof legacy infrastructure and enableconsumers to access new offerings.A further aspect is the opportunity tobuild reach and presence quickly byacquiring local giants through M&A

and/or privatisations.

Four basic businessmodelsIn Accentures view, four core businessmodels are likely to dominate companynetworks in African financial services.In many cases, businesses will develophybrids blending elements of two ormore of these models, potentially withdifferent models focused on different

lines of business.

The four models are:

1. Standardised operatingmodel

Topology


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Lowering the cost of

retail banking

For many banks in Africa middleand upper income customershave been the traditional

target customer base, whilebanking services have beentoo expensive for large low-income populations, or even notavailable in their communities. Inrecent years, increasing incomesare pushing more Africans into the earning bracket wherethey can benefit from financialservices and banks have beenactively seeking to increase theircustomer base and penetratelarge unbanked populations.

However, for many banks tryingto take advantage of thesegrowing consumer markets, thechallenge lies in how to serveemerging new customer groupsefficiently and profitably. Onone hand, in urban areas largenumbers of customers are puttingexisting banking infrastructureunder pressure, and on the otherthe cost of extending traditionalbranch banking and other physicalinfrastructure to reach large ruralpopulations is prohibitive.

While mobile financial servicesare growing in popularity insome markets, many of theservice offerings today arelimited to payments. Retailbanks, however, are looking toa number of different strategiesto extend coverage in newways including developingtheir own mobile solutions ofpartnering with mobile operators(see information panel entitledNew opportunities for f inancialaccess on the mobile phone). Anumber of different strategies andinnovations are being deployed,primarily focused on loweringthe cost of distribution, lowering

the cost of banking products andlowering the cost of operations.

Equity Bank: threeapproaches in concert

Equity Bank in Kenya is a leadingexample of a retail-focused bankthat has built a business modelwhere all three approaches workin concert. Launched as EquityBank in 2004, developing outof Equity Building Society, theorganisation has continuedits focus on communities andmicrofinance serving over5.7m account holders. It hasgrown into one of the mostprofitable and most efficientbanks operating in Kenya withprofits growing to Ksh4.2m($56m) in 2009 more than

doubling in the last two years.

Equity Bank operates threedifferent styles of branch tomeet different customer needs; aprestige branch that services thebanks more affluent customers; aregular branch that services themajority of the banks individualand small business customers;typically with separate servicingareas for each group; and

mobile branches on the backof vans that are driven to ruralcommunities, typically for oneday a week, where a permanentbranch is not yet viable. Inaddition, bank representativesgo to the community, setting upbooths in markets and similarlocations, delivering groupdiscussions and financial training.

Equity Bank offers a variety of

traditional banking productsas well as products that arecustomised to lower incomecustomer groups such as micro-business loans, small agriculturalloans, and accounts with smallgoal-saving incentives. Manyproducts are free of accountcharges and minimum balancerequirements that serve astraditional barriers to financial

access. In addition, Equity Bankhas partnered with the highlypopular M-Pesa mobile paymentservice offered in Kenya to

establish a new product M-Kesho.M-Kesho enables users to receivesmall loans through their M-Pesaaccount and make small savings.The partnership extends M-Pesasoffering to customers, whilegiving Equity Bank access to a

new customer base and gives thebank access to M-Pesas largedistribution network and mobilepayment channel.

Furthermore, through a clearfocus on operational performanceand cost control, Equity Bank hasdeveloped an efficient centralisedIT platform and a multi-channeloffering. Many of the operationalimprovements have focused on

efficient branch practices, suchas speeding up transactions andaccount opening, while increasingthe availability of self-serviceoptions. As a result, while steadilygrowing distribution and customernumbers Equity Bank has drivendown its cost income ratio from63% in 2006 to 52% in 2008,although this has been drivenup in the last two years as the

bank has invested in expansion.


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Under this model, multiple countriesare served by common systems,platforms and operations, withshared services centres providingspecialist support across the network,targeting high efficiency, consistentservices and scale economics. Thekey challenge in supporting local

market requirements is to meet thedemands of widely differing customerservice requirements, paymentsinfrastructures and regulation. Thesemodels are likely to be more typicalof corporate and commercial services,investment banking and capitalmarkets businesses.

2. Regional operating model

Topology

In the regional operating model,various regions of Africa are servedby common systems, platforms and

operations, with some degree ofshared services providing specialistsupport, targeting efficiency,consistent services and scaleeconomics tailored to differentregions. The key challenge insupporting local market requirementsis the relative lack of regionalharmonisation. Retail financial servicesare more likely to develop regionalmodels balancing scale efficiency withlocal market demands.

3. Multi-local operating model

Topology

In a multi-local model, each country issupported by local operations, systemsand infrastructure, with some sharedservices providing specialist supportin multi-country groups, targetingresponsiveness to local market needs.The key challenge with this modelis the difficulty of developing and

offering specialised services cost-effectively in smaller-scale markets.These models are most commonly seenin retail offerings, and in countrieswhere regulators require domesticallyhosted systems and processing.

4. Offshore-supportedoperating model

Topology

In this model, a relatively small localpresence in each target market issupported by offshore services,infrastructure and platforms.These provide the majority of eachoperations enterprise and specialistservices from offshore, targetingcustomer acquisition and front-office service, and leveraging globalservicing for efficiency or specialistservices. Local customisation iskept to a minimum, and the focusis typically on providing specialistservices to profitable local marketniches, such as trade, corporateor capital market services.


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New opportunities forfinancial access on

the mobile phoneWhile mobile banking has beenslow to build customer acceptance

in many developed markets, theprovision of financial servicesthrough mobile phones has takenoff in Africa. Across the continentmobile phones are frequentlymore prevalent than bankaccounts, and mobile coveragereaches many regions thatbanking infrastructure does not.Pyramid Research estimates thatby the end of 2010 27m Africanswill subscribe to mobile financialservices, and this grow to 238mby 2015, a growth rate of 55%CAGR12. The phenomenal growthof mobile financial services isproviding access to whole newsegments of the population.

Currently, most service offeringsare focused on peer-to-peerpayments, such as urban workerssending money home to familiesin rural areas, and purchasingairtime. However, additionalservices are rapidly beingdeployed as services mature, suchas bill payments, point-of-salepayments and more traditionalbanking products such assavings and lending accounts.

One of the key features of thedevelopment of mobile financialservices is the relationshipbetween mobile operators andbanks and in many cases thisrelationship is determined byregulators in each country. Insome cases, such as Safaricom,the mobile operator can issueelectronic cash to customer; inother markets such as Ugandaoperators like MTN and Zainwork with banking partners;while in South Africa banksare the predominant operators

of mobile banking servicesworking with mobile operatorsto deliver access and increaseagent distribution points.

M-Pesa and MTN: pushingback boundaries

M-Pesa, the service launched bySafaricom in Kenya in 2007, hasbeen one of the most successfulservice offerings, growing to over12.6m customers in August 2010and giving customers access toover 19,000 agent outlets13. Oneof the first services launched inAfrica, it enabled customers toload and withdraw cash to theirmobile accounts at distributionpoints with much greatercoverage than banks, and to sendmoney much more cheaply thanexisting offerings. Benefitingfrom the largest market share as

a mobile operator and a marketwith a large migrant populationthe new service grew rapidly.

MTN, a South Africa based mobileoperator that provides servicesacross Africa, launched itsMobile Money service in Ugandain March 2009 and is on trackto have 2m customers by theend of 2010. In a low-incomecountry where the majority of the

population can not afford fees orminimum balance requirements ofbasic banking services, providinglow-cost payments that arepriced as small percentages oftransactions offers a new modelfor these services. In addition toworking with their distributionagents, Mobile Money partnerswith additional service providerssuch as Ugandas PostBank and

United Bank of Africa as wellas an large informal network ofpart-time agents who operatein communities and help peopleregister and use the new system.

The challenge of many of the newmobile services is that the lowlevel of transaction fees meanthat the business requires a largescale to become profitable on itsown. For mobile operators the

incentive is to create additionalrevenues alongside airtimereselling, and grow revenuesby moving into additionalservices such as bill payments

and point of sale transactions.For banks these services canprovide a low-cost way toreach new customer groups,and provide additional valueand low cost servicing optionsto their existing operations.

Equity Bank offers a variety oftraditional banking productsas well as products that arecustomised to lower incomecustomer groups such as micro-business loans, small agriculturalloans, and accounts with smallgoal-saving incentives. Manyproducts are free of accountcharges and minimum balancerequirements that serve as

traditional barriers to financialaccess. In addition, Equity Bankhas partnered with the highlypopular M-Pesa mobile paymentservice offered in Kenya toestablish a new product M-Kesho.M-Kesho enables users to receivesmall loans through their M-Pesaaccount and make small savings.The partnership extends M-Pesasoffering to their customers, whilegiving Equity Bank access to anew customer base and givesthe bank access to M-Pesaslarge distribution network andmobile payment channel.

Furthermore, through a clearfocus on operational performanceand cost control, Equity Bank hasdeveloped an efficient centralisedIT platform and a multi-channeloffering. Many of the operationalimprovements have focused onefficient branch practices, suchas speeding up transactions andaccount opening, while increasingthe availability of self-serviceoptions. As a result, while steadilygrowing distribution and customernumbers Equity Bank has drivendown its cost income ratio from63% in 2006 to 52% in 2008,making it among the most

efficient banks in Kenya.


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Conclusion

Next steps: Making the most of

the growth opportunity in Africanfinancial services


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Each bank and insurer seeking tocapitalise on the growth opportunitiesin African financial services facesseveral key decisions on its approachand business model.

The diversity and complexity of thefinancial services environment in

Africa means that there is unlikely tobe a single pan-Africa strategy thatis adopted by most players. Instead,organisations are implementing AfricaAction plans, often consisting of a setof four focused actions:

1. Identify the dominant vector create an Africa Taskforce tounderstand the relative attractivenessof different markets and sectors, andthe specialist skills and competitiveadvantages the firm can bring to its

chosen markets.

2. Establish beachheads takesmall positions or hedges as a basefrom which to seize emerging growthopportunities.

3. Develop local models design,build and operate models that reflect and are focused on meeting specific local market needs.

4. Build ecosystems seek out andestablish partnerships, alliances and

networks to enable and support thechosen strategy going forward.

Growth beyond profitsThe growth potential in Africa istremendous and many of the long-term barriers to growth are receding.As a result, the financial servicessector in Africa now offers banks andinsurers an unparalleled opportunity toparticipate in a growth story that goes

beyond profits

Long-standing limitations in terms offinancial access and financial servicesinfrastructure can create openings forcompanies to bring solutions and bepart of an epoch-making developmentstory. As this story gathers pace, aclear set of countries has emerged thatshould see rapid development in theirfinancial services markets over thenext several years, creating significantopportunities for existing and new

players in those markets.

Many banks and financial institutionsin Africa and from overseas are alreadyestablishing their presence in thisgrowth story often using innovativebusiness models and new technologiesto create the relevant solutionsrequired for the African continent.

As these new entrants move in, thewindow of opportunity is closingrapidly. The decisions that companiestake now with regard to Africa willshape their future ability to participatein the continents rapid expansion overthe coming years. Given the relativelyshort window of opportunity for entry,we believe this is an opportunitythat international financial servicesbusinesses should consider as a matterof urgency.

Tipping Point Index

Research MethodologyAccenture developed the Tipping Point

Index to assess the financial market

readiness of 23 leading economies

across Africa. To do this, a set of

29 variables were assessed acrossthree main categories including

financial infrastructure, consumer

financial services and economic

development factors. The underlying

variables included indicators looking

at existing financial market assets,

economic growth rates and incomes

levels, business environment and

infrastructure. These were sourced

from leading public institutions

including the IMF, World Bank, CGAP,

Bank for International Settlements

and World Economic Forum, and from

leading research and commercial

institutions including Credit Suisse,

Swiss RE, International Telecoms Union

and Pyramid Research. Compiling

data across African countries can be

challenging so in some cases latest

available data or cross-references to

additional sources have been used, or

indeed excluded where no reliable data

was available.

Once compiled the data for eachvariable was compared across the

country peer set, where a score of 1.0

was given to the highest performing

country, and 0.0 for the lowest

performer, with countries performing

between the two scored accordingly

to their relative performance. The

total score for each country was then

determined by a simple average across

all the variables.

We also examined the performance of

countries across the two dimensionsof business environment and market

attractiveness for financial services

entrants. We identified each variable

as being primarily associated with

either business environment or market

attractiveness, and calculated the

performance for each country for

these two indicators for market

attractiveness, however, we weighted

the ranking on the basis of measures

that identified the absolute size of

the financial services market on the

basis that larger economies offer more

potential scale return for financial

services companies.


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Copyright 2011 AccentureAll rights reserved.

Accenture, its logo, andHigh Performance Deliveredare trademarks of Accenture.

Authors

Noel Gordon

Managing DirectorBanking Industry Accenture

[email protected]

Francis HintermannGlobal Financial ServicesResearch Lead

[email protected]

Anton Pichler

Head of Banking ResearchAccenture Research

[email protected]

Juan Pedro Moreno

Managing DirectorAfrican Financial Services

[email protected]

References

1 Sources: GDP current prices, World Data Bank, IMF, 2010

2 IMF, 2010; World Bank, Doing Business 2011 NB: no data for Libya.

3 Source: Accenture Research

4 Source: Accenture Research

5 Sources: IMF, World Bank, CGAP, Swiss RE, Pyramid Research




9 Source: Accenture research

10 Source: Accenture research

11 Source: Accenture research based on Bloomberg

12 Pyramid Research, Mobile Financial Services in Africa, October 2010

13 www.safaricom.co.ke

About AccentureAccenture is a global managementconsulting, technology servicesand outsourcing company, withapproximately 211,000 people servingclients in more than 120 countries.Combining unparalleled experience,comprehensive capabilities across allindustries and business functions,and extensive research on the worldsmost successful companies, Accenturecollaborates with clients to helpthem become high-performance

businesses and governments. Thecompany generated net revenuesof US$21.6 billion for the fiscalyear ended Aug. 31, 2010. Its homepage is www.accenture.com.

accenture on financial services in africa

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