Fintech in South Africa is a true goldmine of the Financial sector in the 21st century. It’s not just a walking bank but it’s also your go-to for all financial matters. Recently, fintech startups are on the high side as humans are finding new stress-free ways to do things.
So, in this article, we will be talking about the fintech industry, the common challenges fintech companies face, and what the future holds for fintech in South Africa.
The Rise of Fintech in South Africa
The rise of fintech in South Africa is creating a number of new dynamics, and it should be intriguing to see how things play out.
In the banking sector, challenger banks have been launching with zero fees – a dramatic step in a market where fees had been universal even for basic banking. Whether traditional banks will begin to lower or remove their fees remains to be seen.
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The fintech sector of South Africa is playing a strong role not only for the country but the African continent as a whole. The country is a major trade and investment commercial hub for the African continent to do business globally. The fact that it has two global cities, Johannesburg and Cape Town, makes the country unique.
The Fintech Times’s Fintech: the Middle East & Africa 2021 Report highlighted the importance of South Africa in the wider Middle East & Africa (MEA) landscape.
Fintech Startups in South Africa
South Africa has a relatively high fintech penetration rate in Africa. As of June 2022, the country had about 980 registered fintech startups. This is probably due to the fact that a large percentage of the country’s population has access to the internet, and an equally high percentage of people own bank accounts.
However, players in the fintech industry are mainly focused on five key banking functions: payments, deposits and lending, capital raising, investment management, and market provisioning.
In the peer-to-peer lending space, South Africa is one of the leading African markets for both consumer and business loans. Notable players in this space include RainFin, an online lending marketplace for corporate institutions, and PeerFin, a peer-to-peer lending platform.
In 2015, South African online alternative finance platforms raised US$15 million. Most of the amount (US$13.8 million) came from peer-to-peer consumer and business lending while the remaining US$1.2 million was spread across microfinance, donation-based, and reward-based crowdfunding.
South Africa has also seen the establishment of digital and challenger banks looking to serve the digitally-savvy populations in recent years. These include Discovery Bank, TymeDigital, and Bank Zero by Commonwealth Bank South Africa. TymeDigital started out as a domestic digital remittance service provider but evolved into a challenger bank.
In the area of investing, asset, and wealth management, activity has been minimal.
Many financial services providers have invested in developing investment advice platforms driven by AI. Itransact, an authorized financial services provider, launched its computerized investment platform ItransactGO in May 2017. A robo-advisor platform Advicement, went live in June 2017, and Absa, one of the largest banks in South Africa, unveiled its robo-advisory service Virtual Investor in August 2017.
Another area that’s been growing rapidly in fintech in South Africa is a blockchain with significant industry-based activity around DLT, cryptocurrencies and other related technologies.
Various startups have been established in recent years, including Luno, a cryptocurrency exchange platform and digital wallet, Ice3x, another exchange platform, and BitFund, a cryptocurrency investment platform.
Custos Media Technologies was founded in 2014 with the sole purpose of fighting online media piracy using blockchain. Bankymoon is a blockchain consultancy firm and blockchain-based solutions provider, and GeoPay is a platform that offers blockchain-based international money transfer services.
Presently, cryptocurrencies are not regulated but South African regulators have had a positive attitude towards these sorts of technologies.
In July 2017, SARB began to work with Bankymoon to test out a number of new cryptocurrency regulations in the country. And earlier this month, the South African Revenue Service (SARS) released a statement on the tax treatment of cryptocurrency gains.
Common Problems Faced by Fintech Companies in South Africa
Despite the promising rise of fintech in South Africa, companies constantly face a member of difficulties. These difficulties and challenges affect their total revenue and growth one way or the other.
One of these problems is the shortage of talent. It’s a common saying that a great team makes a successful startup. However, finding the right people to make up their team can be difficult for a startup. Most times, the best people are already employed in larger institutions and are unwilling to risk joining a startup.
The unavailability of a big market in the continent as a whole poses another challenge to startups, especially those looking to expand their services outside the shores of South Africa.
You would think it ends here until you realize lack of funding can also hinder the growth of a fintech startup.
Regulations also contribute to the growth of fintech in South Africa. They determine how big and how fast a company grows and ensures fraud is kept to a minimum. In situations where the regulation of fintech is poor, startups and companies start to suffer.
Regulation of Fintech in South Africa
Key Regulatory Bodies That Control Fintech Products and Services
- Financial Sector Conduct Authority (FSCA): The FSCA is the market conduct regulator overseeing financial services providers, insurers, funds and find managers, asset management, stock exchanges and stock brokers, retirement funds, central securities depositories, and central securities depository participants, among others.
- South African Reserve Bank (SARB): The SARB is the main regulator for banking and payment services in South Africa. It is primarily responsible for the maintenance of price stability in the interest of sustainable economic growth in the country. It ensures the safety of the national payment system, which is the backbone of South Africa’s modern financial system. Recently, its mandate has been extended to cover the regulation of prudential requirements for all financial services.
- Prudential Authority (PA): The PA is responsible for regulating and supervising, financial institutions that provide financial products and securities services as well as market infrastructures (MIs) in South Africa. The PA was established by the Financial Sector Regulator Act 2017. They consist of the following four departments:
- Financial Conglomerate Supervision Division
- Banking, Insurance and FMI Supervision Division
- Risk Support Department
- Policy, Statistics and Industry Support Department
- Financial Intelligence Centre (FIC): The FIC is responsible for protecting South Africa’s financial system by regulating money laundering. It also counters the financing of terrorism and financing of proliferation of weapons of mass destruction.
Activities that Trigger Licensing Requirements
According to the Financial Advisory and Intermediary Services Act 2002 (FAIS), any person who seeks to proactively market or provide financial services to clients or investors, whether from within South Africa or on a cross-border basis from offshore, as a regular feature of such person’s business, must be appropriately authorized under FAIS.
The term ‘financial services’, for the purposes of FAIS, comprises ‘advice’ and ‘intermediary services’.
However, ‘financial products’ is broadly defined to include, shares, derivatives, money-market instruments, bonds, participatory interests in collective investment schemes, and deposits, among others.
Services that are currently subject to licensing as intermediary services under FAIS include arranging investment deals; making arrangements with a view to investment transactions; and dealing in investments as agents.
Acting as an agent or intermediary to forex investments by local clients or investors is also licensable under FAIS. Currently, dealing in investments or financial products as principal is not licensable under FAIS.
Services that are subject to licensing as advice under FAIS include advising on investments and forex trades.
The Future of Fintech in South Africa
South Africa’s fintech adoption rate is expected to experience a major leap over the next few years. EY’s annual FinTech Adoption Index Report 2017 predicted 71 per cent growth, with the country ranking third in future growth behind only China and India.
There is a greater number of technology hubs in South Africa than in any other country on the continent, and the country enjoys a more significant amount of both national and international investment in the fintech sector.
As Microsoft CEO Satya Nadella rightly put it: “Longevity in business lies in the ability of the business to reinvent itself or invent the future”.
As it applies to the corporate world or business so it is to every economy.Because the growth of every economy and the strength of their currencies are hinged on their innovated and invented values.
The market’s largest segment will be Digital Payments with a total transaction value of US$14,340.00m in 2022.
The average transaction value per user in the Alternative Financing segment is projected to amount to US$83.51k in 2022.
The Alternative Financing segment is expected to show a revenue growth of 91.6% in 2023.
In the Digital Payments segment, the number of users is expected to amount to 37.42m users by 2027.
Total Transaction Value in the Digital Payments segment is projected to US$14,340.00m in 2022.
Due to the major differences in the KPIs of FinTech products, e.g. different nature of loan origination volume in Alternative Lending in comparison to Assets under Management in Robo-Advisors, no total transaction value for all segments can be calculated.
Fintech in South Africa is a very promising industry. Despite the challenges and difficulties startups face, they still manage to thrive in the ecosystem.