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Tech takes finance sector by storm

With its high cost structures, the financial services sector, and banking in particular, is ripe for disruption by technology. These changes will be brought about by so-called “fintech start-ups”.

“Huge, fixed-cost infrastructure and 50% cost-to-income ratios leave the industry wide open for low-cost entrants, if they can offer a competitive depth and breadth of banking products and services,” says Peter Alkema, chief information officer at FNB Business.

Abroad, fintech is presently on the rise – non-traditional telecoms and technology players are now actively acquiring banking licences. “Nearly 30 new banking licences were awarded in the UK over the last decade and Google already has banking licences for close to 30 US states,” says Alkema.

He predicts full fintech disruption in South Africa to be delayed for at least another five years. This is because fintech companies only provide mono-line product offerings and not a single, digitised, end-to-end service covering a wide range of products like the larger banks, Alkema says. “When they eventually consolidate, the disruption will move exponentially.” 

Stephan Lamprecht, owner of Venture Solutions, an innovation management and commercialisation operation, agrees. “Although fintech companies have the advantage of new innovation, the banks still have the upper hand in terms of scale,” he says.

Success stories

Despite all the hype around the emergence of fintech abroad, local banks are far from becoming extinct and pretty much still run the show, Lamprecht says, with most successful fintech start-ups evolving out of the banks’ very own incubators.

Lamprecht, who conducts research around early-stage venture capital and angel investments for the SA Venture Capital Association, says strong deal flow only exists for transactions closely linked with the banks. “The incubator deal flows are technically the banks building their future supply chains,” he adds.

In the beginning of the year Rand Merchant Bank launched an incubator for financial services start-ups called AlphaCode. A collaboration between Barclays Africa and Think Rise Africa, for fintech and health tech start-ups, and Standard Bank’s business and technical incubator were both launched in 2015.

Probably the most renowned bank-incubated fintech in South Africa is Snapscan, which is backed by Standard Bank. Snapscan provides a simplified way for consumers to pay for items at various retail outlets by using their mobile phones and QR payment codes.

Rainfin, supported by Barclays, is another example. The Cape Town-based peer-to-peer lender provides more than R1m a day to the local small business sector. 

Mobile transaction solutions company Wigroup boasts Investec Asset Management as one of its biggest investors. Wigroup provides a point-of-sale-integrated, open and interoperable mobile transaction platform and has processed close to R5bn in transactions up to now.

The banks are more than aware that they have to refresh their business models constantly to ensure they remain relevant, Alkema says. FNB has funded and supported a number of programmes, including Codefest, WeThinkCode, Alpha Code, Foundery and the annual devOps IT conference.

But not everything will be replaced by technology. Alkema says that while the way banks relate to customers is changing, and although converting services onto e-channels offers convenient, cheaper banking, there are some processes FNB wouldn’t digitise, like relationship banking.

However, it has become more than just about the banks trying to protect their turfs and developing their own products as big non-bank technology companies are entering the fray in an attempt to exploit the mismatch in banking’s business model. New competitors include mobile operators (e.g. Vodafone’s mobile phone-based payment system M-Pesa, which is hugely successful in East Africa).

In June, MTN announced that it had appointed Rob Shuter, who has extensive experience in both the banking and telecommunications sectors, as its next CEO. This forms part of MTN’s aim to transform itself into a fintech company by foraying into mobile money, e-insurance and e-commerce. One major opportunity for MTN is to tap into the $21bn-a-year remittances market in Nigeria, where it is the biggest telecommunications player.

This is a shortened version of an article that originally appeared in the 4 August edition of finweek. Buy and download the magazine here

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