Analysts argue that the influx of innovative new financial technology companies into the African market will challenge banks and erode their profit margins. Accenture estimates that over one-third of mainstream financial services’ revenue is at risk due to disruption in the industry from fintech. In a global survey by PwC, 88% of banks, insurers and asset managers view fintech as a threat, with the number rising among African respondents.
However, the real opportunity is for the traditional banking sector to partner with and leverage the highly specialised solutions and on-the-ground work being done by the fintech start-ups. This will allow them to bring new products to previously underserved or inaccessible markets quickly.
Frost & Sullivan estimates that as much as 60% of the adult population in Africa is unbanked, holding back economic growth: according to a study by the International Monetary Fund and MIT, driving financial inclusion has a direct impact on GDP growth across several indicators.
In South Africa, where the banking system is more sophisticated, the percentage of people with some form of financial account is 89%, according to the latest FinScope survey. However, financial services companies wishing to access the country’s diverse consumer and business market must have deep insight into the on-the-ground realities.
As we’ve seen with the failure of M-Pesa in South Africa, assuming a fintech solution that is successful elsewhere will also work in the local market is unwise. Despite Vodacom’s predictions that it will sign up 10m M-Pesa users within three years of launch, total active users were a meagre 76 000 in 2015. The service was eventually shut down in 2016.
However, where fintechs have done the necessary groundwork to understand the needs and complexities of the markets in which they operate, success has almost inevitably followed.
According to Statistics South Africa’s most recent data, there are 1.5m people running an informal business in South Africa. More than half of these have a monthly turnover of less than R1 500, with a meagre 14.6% showing sales of more than R6 000. This is a critical driver of South Africa’s economy: half of the country’s GDP stems from small and medium enterprises.
Through on-the-ground research among informal traders in the KwaMashu township north of Durban, iKhokha discovered that many traders were losing customers because they could not provide cashless payment facilities. iKhokha found that as many as 95% of shoppers in informal areas have a card, but very few traders offer card payment facilities.
Many shoppers would therefore head to an ATM at the beginning of the month to withdraw all their funds, which they would then use to buy food and other essentials. This puts them at enormous risk of theft, with potentially devastating consequences for themselves and their dependents.
iKhokha collaborated with Mastercard to increase access to cashless payment technology for KwaMashu’s informal traders. The solution enables debit or credit card payments via iKhokha’s mobile point-of-sale device, as well as mobile payments via Mastercard’s MasterPass, minimising the amount of cash a trader is forced to keep at hand. Of the trial base, 80% had never accepted cards or any digital payments before.
Following a highly successful trial period during which merchants increased their revenue by 15-30% simply by accepting cards, the solution is now being rolled out to other informal areas around the country.
Mobile rewards platform TuYu is currently facilitating a pilot project with a major bank that is struggling with debt repayments from its customers, mainly in the lower end of the market. The bank wanted to decrease its book and increase collections without having to discount the outstanding amounts.
The bank uses TuYu to incentivise clients to pay their instalment early or on time, and rewards them with a monetary amount that is sent to their mobile phones. The amount — R50, for example — is then redeemed at any of 70 000 retail till lanes nationwide. The freedom to choose where the reward is redeemed has proven significantly more valuable than a product or retailer-specific voucher, and redemption rates consequently outperform industry benchmarks.
In a separate project, TuYu is assisting a medical provider with incentivising members to collect medicine and conduct their biannual check-ups on time. There’s a strong commercial imperative to this: if members fall sick and have to visit doctors or hospitals, the cost to the provider escalates. Through TuYu, the medical provider can reward members with a small incentive to stay up to date with their treatment and medical check-ups, which can then be redeemed at any of the company’s integrated retailers.
It is this ability to adapt financial technology to suit South Africa’s diverse formal and informal markets that will ultimately determine the success of the sector.
- Anton Gaylard is co-founder of CrossFin Technology Holdings