South Africa seems to be headed to a thriving FinTech industry to bring financial inclusion, finance minister Tito Mboweni surprisingly announced FinTech plans on Wednesday.
“South Africa is moving with the fourth industrial revolution,” said Mboweni.
“We are determined not to be left behind. We are relaxing regulations to help our flourishing FinTech sector.”
What is FinTech?
FinTech (Financial technology) is used to describe new tech that seeks to improve and automate the delivery and use of financial services, according to Investopedia.
At its core, fintech is utilized to help companies, business owners and consumers better manage their financial operations, processes, and lives by utilizing specialized software and algorithms that are used on computers and, increasingly, smartphones. FinTech, the word, is a combination of “financial technology”.
When FinTech emerged in the 21st Century, the term was initially applied to the technology employed at the back-end systems of established financial institutions. Since then, however, there has been a shift to more consumer-oriented services and therefore a more consumer-oriented definition. FinTech now includes different sectors and industries such as education, retail banking, fundraising and nonprofit, and investment management to name a few
Most of the FinTech activity comes from the major urban business centres of Gauteng and Western Cape, which suggests that the South African FinTechs are not necessarily targeting the unbanked and underbanked as conventional wisdom would suggest.
FinTech start-ups have transformed the market for consumer lending in the United States and other mature credit markets, by giving people an alternative way of borrowing money without having to go through a bank or a traditional lending institution. We see a similar trend happening in South Africa, however, some of the drivers and market dynamics are very different to other markets.
FinTech lenders provide a platform for investors to lend money directly to consumers and businesses. The application and approval processes are quick, as risk is assessed almost instantly using data and technology.
Fintech also includes the development and use of crypto-currencies such as bitcoin. That segment of fintech may see the most headlines, the big money still lies in the traditional global banking industry and its multi-trillion-dollar market capitalization.
As with most new technologies, though, there’s a lot of fear, uncertainty and doubt around FinTech lending.
What’s interesting is that when you review some of the most popular perceptions, it’s clear how dramatically different South Africa’s fledgling FinTech lending industry is compared to its more-established US counterpart.
FinTech lending is a millennial phenomenon; older consumers are more likely to engage in traditional lender relationships.
True – In South African, the FinTech lender consumer profile is almost exclusively younger, with millennials and the Gen Z population making up 70% of consumers taking loans. This is in stark contrast to the U.S. where less than 15% of consumers borrowing from FinTechs are under 30, and more than 60% of these loans are taken by people 40 and older.
Within the South African market, there is a real opportunity for further penetration of the older consumer market. FinTechs have successfully created solutions that resonate with younger generations and now need to extend their offering if they are to gain market share outside of their core customer base.
FinTech lenders cater largely to the ‘unbanked’ and ‘underbanked’
False – In fact, South African and U.S. FinTechs have some of the most credit-active consumers in the market. 67% of U.S. consumers have more than six credit lines open at any time, and half of those have more than 11. They use multiple types of credit products – credit cards, vehicle and asset finance and home loans. In South Africa, TransUnion analysed over 15 million FinTech originated personal loans and statistics revealed that 65% of these consumers already had a home loan, 37% of them had a vehicle financed and 19% of them had Home Loans. This clearly shows that these consumers are not new to credit, they have existing relationships with traditional financial institutions, yet used a FinTech to get a personal loan.
Most of the FinTech activity comes from the major urban business centres of Gauteng and Western Cape, which suggests that the South African FinTechs are not necessarily targeting the unbanked and underbanked as conventional wisdom would suggest. For more read: Myths and Realities of FinTech Lending