The South African Intergovernmental Fintech Working Group (IFWG) has published its first report on the country’s landscape for technological developments within the financial services sector.
The Fintech Scoping in South Africa report found that the bulk of fintech solutions were in payments (30%) and B2B tech support (20%) last year; however, insurtech solutions accounted for 9% and financial planning and advisory for 7%.
The insurance sector saw 22 active companies in the space, many of which focus on providing traditional insurance products via digital distribution.
Recent technological developments mean that the insurtech space is relatively young and still developing.
But more traditional sectors, such as financial advisory firms, are not resting on their laurels and are actively embracing fintech.
Newcomers vs traditionals
The IFWG found there were 16 advice firms using technology as part of their offering.
The majority (six) provide robo-advice, followed by five companies rolling out digital personal finance management and four focusing on small business finance management.
According to the report, however, there is a lack of newcomers in the sector as most of the fintech adopters are established players.
“South Africa’s traditional financial advisory firms still enjoy substantial scale and market share, however, the entry of advisory fintechs has forced them to improve their business models and adopt better technology to improve effectiveness,” the IFWG said.
“Firms using robo-advice are required to register as a financial services provider (FSP) with the Financial Sector Conduct Authority (FSCA).
“In March 2018, the FSB (now FSCA) had 10,139 registered category I FSPs, less than 0.2% of them being fintechs.
“The small number of fintechs in this space signals that, although artificial intelligence and robo-advisory technologies are gaining traction in the market, these technologies are being used by existing traditional financial planning and advisory firms to enhance their customer journeys and not being used by new, smaller players to enter the market.”
Bringing access and education together
A technological revolution could radically change the way people interact with financial services in South Africa, especially considering that internet penetration has been increasing in the country – from 46% in 2015 to 52% in 2017.
But this could be limited by a general lack of both financial and digital skills.
“Financial literacy is critical to an individual’s ability to access and make meaningful use of the right kinds of financial services for their context,” the working group said.
“This includes accessing financial services through digital channels.
“According to the Organisation for Economic Cooperation and Development (OECD), the level of financial literacy in South Africa is relatively low.
“South Africans lack the ability to set financial goals and knowledge to use available financial products, both of which are important for demanding and successfully choosing more sophisticated financial products.”
But digitalisation could bridge the gap between literacy and access, making products and services available to a wider group of people.
Regulators must rise to the occasion
Another issue the fintech sector is facing is regulation, or the lack thereof.
Current regulatory frameworks are broad enough to potentially encompass digital channels, but they provide favourable ground for fraud and cyber crime to hit the expanding range of financial products and services.
The report found that the way the Financial Advisory and Intermediary Act (Fais) applies to the fintech sector needs to be clarified.
Additionally, challenges arise for taking either an active or passive regulatory approach to fintech.
The risks facing an active framework could include:
- Authorities being overloaded and unable to meet policy mandates;
- Danger of setting companies’ interests before those of the general public;
- Using sandboxes to lure in investors and customers, instead of setting them up as a test environment; and
- Authorities’ reputation could be on the line if trials fail to achieve objectives.
Similarly, a passive approach can be just as problematic because:
- Regulators may not have a comprehensive understanding of the technological tools used and their impact on the wider market; and,
- Consumers could be hurt by a more proactive framework within financial markets and stifle the fintech space.
Planting seeds
The IFWG said that it will introduce an online portal “consisting of a fintech innovation hub and a fintech database”.
The hub will host a regulatory guidance unit, a regulatory sandbox and an innovation accelerator tool.
The guidance unit will provide clarity on the regulatory framework fintech firms are required to comply with.
At that point, companies will be able to test their products and services through the sandbox, which provides regulatory relief, to make sure they respect existing rules.
Lastly, the accelerator will show how firms can improve their compliance, customer experience and access.
The working group said it plans to roll out the portal in the first quarter of 2020.
