Technological innovation is taking place at unprecedented speed.
It is disrupting almost every industry in every country around the world. This is the fourth industrial revolution, where technological advancements like artificial intelligence and the “Internet of Things” mean that human and digital systems can interact more profoundly than ever before.
In all these innovation, the role of government is to define the social contract that regulates our lives. The need for regulation is real and it is an important responsibility of government but sometimes it has unintended consequences.
In South Africa, the state turns to be more reactive in implementing regulations and this has a tendency of stifling growth.
South Africa’s large and sophisticated financial sector is accentuated by a small but growing financial technology (FinTech) industry, with two emerging FinTech hubs in Johannesburg and Cape Town.
According to Lesetja Kganyago, the Governor South African Reserve Bank, the mantra of FinTech is ‘cheaper, faster, better, simpler, easier-to-access, and on-demand services delivered through a combination of mobile and online platforms.
“For the South African community, these real and practical considerations are important in order to deliver improved access to savings, credit, insurance, payment, and investment products and services. New and innovative ways of delivering these financial services can bring significant benefits to our citizens, many of whom remain unaware of how some of these may transform their lives,” argues Kganyago.
But it seems South Africa’s regulations are stifling the growth of the FinTech industry.
The Impact of the 4th Industrial Revolution on the South African Financial Services report by The Centre of Excellence in Financial Services, concludes that the country’s current financial regulation has not created an enabling environment for FinTech development.
The report highlighted the fact that there is a lack of clarity and guidance on how FinTechs fit into existing regulation, which means South Africa’s comprehensive regulatory environment is daunting for FinTech start-ups and generates significant compliance risk.
“As the pace of technological innovation in the fourth industrial revolution increases, the infusion of technology into financial services is presenting new risks to consumers and to the stability of the financial system,” according to the research.
The research report added that regulators, therefore, have the difficult position of protecting the system from these risks while allowing innovation to drive the industry forward.
“While the regulatory approach taken thus far in South Africa has protected consumers, it has not focused on encouraging innovation within the sector. This represents a missed opportunity for South Africa as a thriving FinTech sector has the potential to contribute to employment, and improve access to a sophisticated suite of financial services among a broader set of consumers.”
That said, there is hope that South African regulators may embrace FinTech innovators.
The report says that regulators in South Africa have already indicated interest in shifting to a more proactive regulatory stance.
However, the report warns that financial regulators can only do so much to “future proof” the industry against the changes the fourth industrial revolution brings.
“Much of how the transformation of production and consumption will play out rests on the state of the broader digital ecosystem. Policymakers should therefore consider investments in broad digital infrastructure and develop the skillsets required by employees in this new world of work. This will ensure broad access to digital innovations and keep the value creation from technological innovation in the country.”
The report also says that Fintech innovators are also negatively impacted by South Africa’s funding environment, which is not well suited to supporting high-risk start-ups. “FinTechs may struggle to attract international investment due to South Africa’s lacklustre ratings against classic investment considerations,” it concluded.
The findings are based on Genesis Analytics research that focussed on key players in the market, including financial institutions, innovators, regulators, and policymakers.
South African FinTechs have Failed to Disrupt, but there is Hope
Unlike other African countries, South African FinTechs are competing in a highly banked market with sophisticated banking infrastructure.
The report added that South Africa’s FinTech industry is small and growing, but this growth is being impeded by several factors.
“The FinTech industry has therefore not been as disruptive to the structure of South Africa’s financial market as has been seen in other countries, and much of the impact of digital disruption is being felt by incumbent financial institutions transforming their operations.”
“The bulk of innovation has been concentrated in the payments space increasing the efficiencies of card and online payment channels.”
With a few exceptions in the alternative lending space, much of the FinTech innovation thus far has originated from within banks or through bank/FinTech collaboration rather than through standalone FinTech businesses.
The research report concluded that this has resulted in the digital and Fintech innovation in South Africa largely catering to a niche, relatively affluent and financially-savvy consumer market.
“Not supporting financial innovation would be a missed opportunity for South Africa. A thriving local FinTech industry and innovative financial sector has the potential to contribute to employment and improve access to a sophisticated suite of financial services among a broader set of consumers.”
Also read: SA’s Top 10 FinTech Firms to Keep an Eye on