Banks face profit squeeze as payments landscape shifts

South Africa's major banks have long been known globally for their exceptional profitability, with return on equity being a common measure of their success. The country's high net interest income margins, fueled by relatively high interest rates and low deposit rates, have been a key factor contributing to this profitability. However, a shift in the payment landscape is now putting pressure on banks' non-interest income, particularly in the form of declining average fees from transactions. Daan Steenkamp, CEO of Codera Analytics, shed light on this issue in a recent interview with CNBC Africa. Steenkamp highlighted that the reduced usage of cash in South Africa, especially in comparison to other forms of payment, has been a significant driver behind the decline in average fees from transactions for banks. Additionally, factors such as increased competition among payment service providers, industry innovations, and regulatory pressure to lower interchange fees have further impacted banks' non-interest income. Despite these challenges, Steenkamp pointed out that there are opportunities for South African banks to adapt and thrive in the evolving payment landscape. By embracing digital payment streams and focusing on growing their customer base, banks can offset the decline in average fees and benefit from the rise in transaction volumes. This shift towards digitization presents banks with a chance to enhance their revenue streams and improve customer insights through data analytics. Moreover, Steenkamp emphasized the importance of leveraging client data to better understand and cater to the needs of customers. By harnessing data analytics and partnering with fintech companies, banks can offer value-added services and personalized solutions, ultimately creating a more tailored and efficient banking experience for clients. As South African banks navigate these changes, the key to maintaining profitability lies in their ability to adapt to digital advancements, enhance their payment infrastructure, and collaborate with innovative partners. By embracing innovation and customer-centric strategies, banks can not only mitigate the challenges posed by the shifting payments landscape but also unlock new growth opportunities in the competitive financial sector.