Better banking through technology
SOUTH Africa has been acknowledged for years for its sound, advanced banking system. However, at the onset of the fourth industrial revolution, with humans and technology interacting like never before, we face an interesting balancing act.
Disruptive financial services innovation is afoot worldwide. Against this background, this country’s policymakers must find ways to preserve our sound financial system, while enabling disruptive innovation. To understand what policy and regulatory approaches would best suit the South African financial sector, it is helpful to know where we stand relative to our global peers.
This is the goal of a recent research report by the Centre of Excellence in Financial Services. Titled “The impact of the 4th industrial revolution on the South African financial services market”, it benchmarks our technological innovation against international trends.
The centre is a non-profit organisation that encourages public dialogue around policy and regulation in the financial services industry. The report was compiled with Genesis Analytics, and the findings are fascinating.
South Africa has a small but healthy fintech industry and a regulatory environment that is more reactive than proactive.
Reactive regulators do not take an active role in supporting the fintech industry. This approach can prove limiting, as startups are subject to the same rules as big banks, but lack the resources and compliance experience to negotiate the stringent regulatory requirements.
This contrasts with countries like the UK, which have taken a proactive regulatory approach. In this model, tools such as regulatory sandboxes are created, where innovators are provided with less restrictive regulatory obligations for a period to test their products. It is only after testing that regulators decide whether to either adapt the regulation used or to specify the need to comply with full regulations. Recently, the SA Reserve Bank has indicated that it will introduce regulatory sandboxes in South Africa. It shows the regulator understands the importance of a growing role for fintechs in financial services.
Necessary regulations
Despite perceptions of an onerous regulatory burden, regulations applying to big, deposit-taking banks are indeed necessary. They are there to protect the savings of all South Africans. However, that said, there is certainly scope to enable disruption by smaller fintech start-ups through regulatory accommodation.
The growth of innovation requires more complex solutions than just better regulation. Besides a good idea, successful fintechs need entrepreneurial skills, technical skills and funding.
South Africa ranks a middling 57 on the Global Innovation Index. Our entrepreneurs lack the business savvy required to convince local investors to take a risk. South African investors also generally have a low risk appetite when it comes to potential new business. Given the size and hegemony of the established banks in South Africa, the most common innovation scenario in its financial services market is bank-fintech collaboration.
Banks must be able to trust third parties, as the bank is ultimately responsible and accountable to the regulator. Customers must also trust the banks with their data. Future innovation will likely occur in this space, where fintechs collaborate on solutions after being granted access to rich banking data.
This type of collaboration is not likely to be disruptive innovation. The South African banking sector is efficient and increasingly competitive, which makes disruption by the fintech industry exceptionally difficult. Established banks have such deep pockets, they are able to buy up any start-up with a good idea.
In South Africa, the fourth industrial revolution is seeing incumbent banks leveraging new technology to make things fast, smarter and less expensive for their customers, to enhance their existing offering.
In Europe, larger banks have solved this problem by encouraging their innovation labs to leave their premises and set up as independents without the restrictive layers of authority that kill creative execution. “Come back when you have a solution,” they are told. And they do!