Are banks killing innovation in South Africa?
Bureaucracy and rigid regulations in South Africa’s banking industry create incredibly high barriers to entry for innovative entrepreneurs. Designed to secure consumers and the financial services sector against systemic risk, these regulatory frameworks also maintain an exclusive, low-competition environment among the big banks.
Nadir Khamissa, founder and CEO of the Hello Group – “a leading innovator in integrated consumer and business services”, has warned that the high-entry costs and restrictive banking regulations could be detrimental to innovation in the banking industry, in the long term. It could also affect access to financial services by the large portion of the population that remains unbanked.
High entry costs to an exclusive club
To obtain a banking license in South Africa, you would need to fork out R250 million in upfront capital. In the UK, the equivalent license would cost an entrant only 2% of that amount (R5 million). This is but one of the hurdles facing prospective entrepreneurs wanting to innovate within the local electronic money industry.
Khamissa has previously described the banking and regulatory framework in South Africa as “…incentivised to maintain the dominance of the large banks and to exclude new entrants”. Identifying large banks as the gatekeepers of the industry.
In the past decade, however, technological advances have created opportunities for banking transactions to be completed at a fraction of what it would normally cost. Yudhvir Seetharam, head of Analytics at FNB Business, told Banker SA that the banking services industry is increasingly moving away from tangible products and solutions to digital channels.
South Africa was the first country in the world to set up a Faster Payments system and, in 2015, the Brookings Financial and Digital Inclusion Project (FDIP) ranked SA second overall, when evaluated against a number of criteria relevant to financial inclusion.
It would seem the local banking industry is ripe for innovation. But, Khamissa reports that, because of the high barriers to entry, larger banks have very little incentive to truly transform their business models. This is due to the fact that it’s not in their interest to allow innovative entrepreneurs whose technological solutions provide customers with much better service at a fraction of the cost.
All of the five major national banks, as an example, now incorporate a banking app. But, solutions are limited by a lack of interoperability between them. Vodacom and MTN, two of South Africa’s biggest telecommunications companies, have already introduced mobile financial services to a significant share of the previously unbanked population through real-time, person-to-person (P2P) payment capabilities.
The Brookings Institution reported that Millennials, the generation earmarked to become the largest generation in history, promised to cause ‘seismic shifts’ in the financial sector due to their value of peer-to-peer services. According to Seetharam, a Millennial choosing their banking partner was more a question of what additional value they could derive from that banking partner over-and-above the basic cheque account.
Big fish in little ponds
But, the South African banking industry’s restrictive regulations are threatening to backfire as international, online competitors are not subject to local regulation. Khamissa warned that
“That means local innovators, as well as the established banks, will get shut out of the market as consumers turn to online applications that are easy to access and much cheaper to use,” Khamissa told Disrupt Africa. He added that this would result in a closed market where consumers pay more than they should for a service that is not as good as it would have been if South Africa’s banking industry had a more level playing field for new entrants.
Andy Baldwin, managing partner for financial services at EY (formerly Ernst & Young) told bankingtech.com that the financial services industry is facing a significant business model disruption driven by digital innovation from the emerging FinTech industry.
Already, financial transactions are little more than database entries. This is where Khamissa predicts the future of banking is moving globally. Namely, transaction accounts for consumers that carry zero costs, and banks maintaining relevance through value-added services, and providing mortgage loans, savings products, and car finance.
