Digitalisation and the rising rate of unemployment in the banking sector

The banking sector and retrenchments

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The banking sector and retrenchments: what is really happening in South Africa? Is it an opportunity for new positions or redundancies across businesses?

The South African Banking Sector is becoming increasingly competitive as more people across the globe adopt the smartphone trend. According to PWC’s Analysis of Major Banks, software trends are in charge of directing the financial services landscape.

2019 is likely to be heralded as the year of the customer in South African banking, with so many viable options to choose from, digitally savvy entrants are the future of banking. What does this mean for the major banks in South Africa like the Absa Group and Standard bank, who have been on top using the more traditional systems and are not as digitally savvy?

In 2017, Vikram Pandit, the former CEO of City Group, forecast that robots would take over 30% of global banking jobs within five years. At that time, this amounted to about 1 million jobs in Europe and 770 000 in the United States, meaning it was only a matter of time before this wave hit Africa and South Africa. Job losses have escalated in Europe and now the South African banking retail sector is confronted with the same predicament.

The competition is higher than it has ever been in the South African financial services sector. With another new rival, TymeBank, being launched in February and two more expected to follow this year, Discovery Bank and Bank Zero, the pressure is on for major banks like Absa Group and Standard Bank South Africa. These new banks are introducing new technology that is growing revenue while cutting operational costs. Research from South African Major Banks Analysis indicated the extent to which automation has affected the banking sector.

Three of the country’s five largest banks have been quietly cutting staff, particularly in retail units, to drive down stubbornly high cost-to-income ratios. In the past year, Absa, Standard Bank and Nedbank have cut over 2 200 staff in their South African operations—across retail, corporate and investment banking and wealth units. In 2018, Absa reduced its headcount by 830 (net) to 30 819, Nedbank by 726 (net) to 28 260 and Standard Bank by 680 (net) to 31 662 in South Africa. The 2 236 decline equates to 2.4% of the total staff complement in the country across the three banks. These reductions are not surprising as efforts to reduce the number of branches (and total physical space occupied) ramp up and digitisation becomes entrenched.

Absa Group is restructuring its South African retail and business banking units. This comes after just reducing the division management team and rolling out a new strategy. The group commenced its new strategy, which came as a result of slow economic growth and a consumer base that has been battered by tax hikes, rising fuel and utility expenses. This shakeup entailed job cuts in its top management, further working its way across the corporation as it cuts costs and reorganises to compete aggressively with other established banks that are digitally savvy.

The banks thriving because of being digitally savvy include FirstRand and Capitec. In contrast to Absa, they are actually adding staff. FirstRand says group headcount increased by 5% to over 47 000, although this number now includes the UK’s Aldermore branch, which they acquired last year.

Absa’s new strategy will affect about 15 retail banking executives. It entered into section 189 negotiations with the South African Society of Bank Officials (SASBO), with 827 jobs on the line. Absa’s CEO, Arrie Rautenbach, after being appointed a year ago, is focusing on boosting mortgage lending money, lowering costs and expanding the number of products the bank sells to its clients. More than half of Absa’s profit comes from retail and business accounts. The UK-based parent, Barclays sold down its controlling stake to below 15%. Their South African group cannot afford to suffer the same fate. The determination the bank has to regain the leadership position in retail banking has led them to find ways to lower its cost-to-income ratio ahead of the market from next year. Successfully achieving this will lower the cost-to-income ratio to the 50s by 2021 from the current level of 58.7.

As part of restructuring its unit discussions between the bank, employees and union, SASBO revealed that 827 jobs are potentially at risk. On the other hand, 340 people might reportedly be employed through this process.

In comments to the media earlier this year, a representative of Absa noted, “Once the realignment is complete and the total number of people who have either been appointed to new roles or have left the organisation is known with certainty the changes will result in both new opportunities and redundancies across the business”. He also described the moves as; “not a retrenchment exercise, but a realignment effort aimed at enabling their new strategy.”

Standard Bank says the net headcount for the group declined by approximately 900 people, “it is a combination of natural attrition, digital efficiencies and management actions”. In Standard Bank South Africa, the headcount reduced from 680 to 31 662. The group notes the increase in staff costs of 4% in 2018 and this was attributed to annual salary increases and separation costs in the information technology business

The strategy to grow earnings while reducing headcount (actively or passively) is firmly embedded among most players in the local banking environment. They will use earnings to measure efficiency headway generated per employee. Standard Bank said it would cut around 1 200 jobs and close 91 branches as “part of efforts to digitise its retail and business bank”.

The bank says this has not been an easy decision to make. Standard Bank South Africa added that it would implement a “comprehensive exit package” that goes beyond the legal requirements. Sadly, this comes at a time where job cuts are sensitive in South Africa, as unemployment stands at 27%.

Unlike Absa and Standard Bank, Nedbank initially reduced headcount by 698 last year, largely through natural attrition. Towards the end of December, their unit had 19 545 employees within its retail and business banking units. It further reduced its total headcount by 1 469 (mainly through natural attrition) and optimised its staff points of presence by closing 18 branches while maintaining their coverage of the bankable population at 84%.

As part of an ambitious plan to reduce its efficiency (cost-to-income) ratio, it is implementing a “target operating model” that will achieve R1 billion in cumulative savings this year. It has already achieved savings of R680 million. The cuts aren’t only coming in the area of frontline staff, or even in the retail bank, but point to ongoing headcount reduction in back-and middle-office optimisation.

The bank previously said that software robots could replace up to 3 000 jobs through natural attrition. “With about 32 000 staff, our natural attrition rate is about 3 000 per year. When we look at a three-year period, we don’t think that robotics will take up more than one year of that natural attrition,” explained CIO, Fred Swanepoel, at the end of 2018. Nedbank’s model is effectively reducing the cost-to-income ratio while maintaining its bank population.

This all serves as evidence that banks are on the path to evolving their strategies because of heightened competition. Using different models to achieve the same objective, which is to digitally transform their already existing systems, ultimately, the ultimate goal is increasing revenue while lowering the cost-to-income ratio. This poses as both an opportunity for those who are willing to upskill to beat their competition and redundancy to those who are not willing to digitise at a pace that is fast enough for their consumers.

The most unfortunate thing is the extent to which these new strategies are adding to the already high unemployment rate in South Africa. But it is a necessary evil for banks that want to remain competitive. Being digitally savvy is the only way to stay ahead of your competition.

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