NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

The African banking sector is going through dynamic changes driven by a technological revolution, competitive pressure and changes in culture. Fintech firms, mobile money operators and other non-traditional players now provide services that had hitherto been reserved for banks. These players are nimble, customer-centric and are raising large investments. In 2019 alone, according to Weetracker, African fintech startups attracted a record high of $679 million in venture capital.

Amidst this increased competition, regulators and market forces are driving down bank fees and reducing interest margins. In December 2019, the Central Bank of Nigeria announced a reduction in several bank charges, such as ATM withdrawal and transfer fees. African banks are closely examining their service models, as they seek to remain profitable and relevant to their customers amidst this technological disruption and reduction in fee incomes. This presents a great opportunity to explore how strategic partnerships may help banks achieve their business objectives.

Strategic Alliances Across Industries

Other industries, from tech to big pharma, already have a long history of strategic alliances, forged in response to the shifting industry dynamics they faced. For instance, in the high-stakes and hyper-competitive technology services market, major tech players such as Amazon, Google and Microsoft have developed partnership capabilities to increase their market access and penetration – as well as to provide clients with a one-stop shopping experience across the value chain. Large pharmaceutical companies also face unique challenges, including the high costs of drug development (which may average up to US $2.6 billion per new drug), the long development time for viable drugs (up to 12 years), and pricing pressure from HMO networks and generic brands. These companies have responded by developing strong partnership competencies, allowing them to enter into licensing, manufacturing and co-marketing agreements with other firms. For example, pharmaceutical giant Eli Lilly and Company entered a strategic alliance with contract research organization Covance Inc. a decade ago, which has enabled Eli Lilly to expedite the flow of innovation within its pipeline.

Banks seeking a competitive advantage in today’s fast-changing environment could benefit from developing a dedicated strategic partnership function, as this can be an important source of resources, learning and improved returns. A study published in the Strategic Management Journal found that companies that had a dedicated alliance function had stock market gains that were over seven times greater than those that did not, and also had a greater success rate for strategic partnerships than those without such a function. While the stock markets in sub-Saharan Africa may not respond in a similar manner, there is tremendous value that may be created by smart alliances with partners across the region.

The Benefits of Fintech/Telco – Bank Partnerships

For fintech firms, banks are natural partners for a mutually beneficial relationship, through which they can offer banking products without having to meet banking regulatory requirements. Banks also benefit from these partnerships, enjoying increased low-cost deposits and fee income. Particularly in markets like sub-Saharan Africa, where there is a very large unbanked population, telcos and banks can enter into value-added partnerships that provide clear benefits to both parties. Mobile network operators can increase “stickiness” on their platform, maintaining customer engagement by offering regulated financial services such as digital loans, while banks can expand the reach of their products by providing these services to mobile money wallet holders.

The availability of open banking platforms and APIs has made it easier to embed banking services such as loans, remittances and payments into mobile platforms. This is creating new opportunities for banking through the development of new ecosystems. Indeed, in the U.S., there has been a boom in bank partnerships with fintech firms in the past few years, and a recent survey of these partner banks shows that many are two or three times more profitable than the average bank.

Generally, banks enter into strategic partnerships to improve their product offering, access partner technology or networks, increase efficiency and enter new markets. There have been several successful partnerships which banks have established with mobile network operators, fintech firms and organizations in various industries over the past decade. To take a few notable examples, in Kenya in 2011, Commercial Bank of Africa launched M-Shwari, a partnership with Safaricom that offered its mobile money wallet holders savings accounts and microloans: Since inception they have grown their customer base by 40 million customers across five countries and disbursed US $4 billion in microloans. And in Singapore, DBS Bank entered into a payment service partnership with GOJEK, an Indonesian on-demand multi-service platform, integrating their PayLah! service into GOJEK’s ride-hailing app. There are now over 1 million DBS PayLah! users, and GOJEK recently completed its 10 millionth trip in Singapore.

The Keys to a Successful Strategic Alliance

Successful strategic partnerships need three core capabilities – coordination, communication and bonding. There are many moving parts in complex strategic alliances, which require skilful coordination to ensure that plans are executed and value is derived by all. Companies can avoid confusion by ensuring clear and transparent communication with their partners. Additionally, when leaders in the partnering organizations invest in getting to know each other better on a personal level, there is more likely to be good communication and collaboration. A McKinsey study of joint ventures discovered that many fail because, in a rush to completion, even seasoned alliance managers may omit key stages in the development process. The importance of having a deliberate and methodological approach to partnerships cannot be overemphasized. The signing of an agreement is just one step in the process, just like the opening of a bank account is only one stage in the relationship with a client. Alliances need to be nurtured and monitored with regular partnership health checks. A distinct set of skills are required for managing successful partnerships, and these may need to be developed or acquired.

We are entering a new age in the financial services industry. Business models are evolving, service models are changing and the importance of strategic alliances has increased. Having a dedicated partnerships function could provide the competitive advantage which allows a bank to thrive in this new normal.

By Osahon Akpata is COO, Group Consumer Bank at Ecobank Transnational Incorporated.

Photo courtesy of Cytonn Photography.