South Africa has been acknowledged for years for our 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 start-ups 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. The announcement shows the Regulator understands the importance of a growing role for fintechs in financial services.
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.
However, 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 South Africa’s financial services market is bank-fintech collaboration. Technology such as Application Programming Interfaces (APIs) allow outside start-ups to leverage the underlying banking systems and data to develop applications that improve the consumer experience.
This takes a certain level of trust. 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. Besides this, established banks have such deep pockets, they are able to buy up any start-up with a good idea before it can become a threat.
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!
This happens against a background of regulatory facilitation and an innovation-lab mindset that allows tech product development the space to create.
There are lessons from these markets for South Africa, but we face our own unique challenges. We are also engaged in a process to create a more inclusive banking system for the benefit of all South Africans.
The digital revolution can provide opportunities to facilitate this, by offering more relevant banking products to the mass market, giving those living in rural areas better access to banking services, improving financial education or by encouraging greater use of digital transactions over cash.
Ultimately, we would want to have a hand in developing our own technology solutions for our financial services sector. Without a sufficiently innovation-friendly policy, we are more likely to have solutions imposed upon us from outside. Regulation needs to ensure that innovation is not stifled so that we can reap the benefits of new ideas, but the pace of digital innovation also introduces and exaggerates risk that could threaten the stability of the financial sector. For this reason, regulators need to ensure they keep up with the pace of innovation.
There is a sense that we are becoming more open to fintech innovation, but only gradually. It must be noted that fintech is not the silver bullet that will unleash an avalanche of disruptive innovation and automatically improve financial inclusion.
There is a need to forge a social compact between policy makers and regulators, the banking sector and the tech community. We need to formulate a plan to invest in the digital ecosystem and use the resources we have to make society better for all of us. And then we must run with it.
By Mark Brits is a Director of the Centre of Excellence in Financial Services