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Changing the rules of fintech

A whirlwind of investment is swirling around fintech startups in South Africa, as innovation in banking and payments changes the rules of the financial game. By ARTHUR GOLDSTUCK.

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A new story, laced with cliffhangers, drama and intrigue, is being written across the pages of the world’s financial newspapers. The plot does not include gangsters, espionage or murder – yet – but it has its readers riveted.

The story begins with the well-worn premise of how technology is changing the world of financial services. But it quickly hurtles into the heady world of startups that are rewriting the rules of this nascent industry called fintech, for financial technology. It then charges across the balance sheets of venture capital firms transfixed by unprecedented opportunity to return untold multiples on investments.

Depending who does the counting, anywhere from $17-billion to $25-billion in venture capital went to fintech firms globally in 2016. According to CBInsights, 2017 was the biggest year ever in fintech VC.

In South Africa, startups seem to pick up million-rand cheques on the basis of little more than PowerPoint presentations. Relatively young businesses that have already proven themselves are pulling in hundreds of millions.

Three examples from the past year encapsulate the scope of fintech and the scale of investment:

  • Prodigy Finance, a company started by a South African in the United Kiingdom before being brought back to South Africa, offers loans to postgraduate students accepted into leading universities around the world. This “borderless credit” provider has accumulated funding of R4,2-billion, with R3,19-billion raised in 2017. One of the participants in the latest funding round, AlphaCode, the fintech investment arm of Rand Merchant Bank, is becoming a familiar brand behind much of the fintech VC in South Africa. It recently hosted an event where R1-million was handed to each of four winners of a fintech competition for black-owned startups.
  • Luno, a trading platform for cryptocurrencies like Bitcoin and Ethereum, announced a R120-million funding round, led by UK-based Balderton Capital, and also including AlphaCode. An earlier R60-million investment came from Naspers.
  • Synthesis Software Technologies, an established fintech company that approaches innovation like a startup, was acquired by JSE-listed Capital Appreciation for R132,1-million. While it provides software development and integration services to financial institutions like Investec, Absa, Standard Bank, Capitec and Nedbank, it has also become a leading player in the rapidly evolving cloud computing space. Last year it became the first company in Africa and the Middle East to be named an Advanced Partner by Amazon Web Services (AWS), the fastest growing division of Amazon.

The last is the most intriguing of the three, given that it’s value and potential are not grounded in a specific trend or marketplace. With the cloud as backdrop, its innovation plays out in the fields of financial channels, blockchain, big data and artificial intelligence.

“We constantly review current technology trends and formulate products and solutions based on common industry needs using current and available technologies,” said Synthesis MD Michael Shapiro. “This is where our focus on cloud technologies was incubated and formulated five years ago.”

The combination of a 20-year track record and a fresh, startup-like approach to cloud computing, gave Synthesis a head-start in an environment where the starting point is often not clear. It assists financial institutions in “becoming cloud ready, to execute mass migrations, to harness the benefits of big-data analytics and to extract the cost savings and regulatory benefits of the cloud platforms,” said Shapiro.

“In the world of fintech, technical innovation and business innovation are often interchangeable – and we have to unlock this value. We translate the institution’s business strategy into solutions with real, measurable impact.”

Shapiro pointed to a fascinating twist in the plot, however: financial services companies that plan to disrupt themselves with their own, internal fintech start-ups.

“Cloud platforms such as AWS give new startups the opportunity to disrupt. That is why our customer base of established players is seriously evaluating and using the same technologies to up their game and provide better banking, insurance and investment solutions to the market.”

A striking example was First National Bank (FNB) last November awarding R10,5-million to employees in a contest to come up with innovations that would create radical disruption in the financial industry. The programme has been running since 2004, and has awarded a total of R54.5-million.

Last year FNB was named Most Innovative African Bank at the 2017 African FinTech Awards, for the second year in a row, as well as being named Master Innovator in the 2017 Accenture Innovation Awards.

FNB Business CIO Peter Alkema put the strategy simply: “Our aim is to disrupt rather than be disrupted. A new way of thinking is needed to demystify banking within the financial services industry.  Fintech helps grow, educate and enrich the market. We find that businesses are incorporating innovation in their business models which encourages us to think and act differently. This radical disruption is necessary for cross industry collaboration and is crucial for future value generation.”

However, investing in a fintech start-up is a very different process from incubating an idea in-house. For one thing, the team behind a startup hasn’t been recruited by the parent company. Yet, it has to fit in with the ethos and goals of the investor.

“The cultural fit of the team is critical,” said Bradley Sacks, joint CEO of Capital Appreciation. “A large component of any fintech company is its people, their entrepreneurial drive, their innovation and their understanding of the market opportunity their product or solution is trying to address. Ideological differences, be it in terms of architecture or otherwise, can be quite disruptive, and it is important to understand this as part of a due-diligence process.”

The bottom line, however, is the bottom line.

“The financial returns of any investment are obviously important, and we place a great deal of emphasis on this, including the benefit the acquisition may afford other initiatives we already have in the group. Our analysis does not only consider the direct impact within the quarter or half-year results, but also a medium-term horizon. Often the impact of innovative solutions is not visible until the solutions have reached critical mass adoption.”

This is probably the biggest conundrum in fintech investments: how to assess the potential of a solution before it has taken off, and before every other investor lines up to fund this potential. It is into this gap that many VC funding rounds have plunged and many promising fairy tales have ended in financial tragedy.

In many cases, the flaw in the story has been the belief in a good idea rather than a good business. But there is a formula to differentiate the two.

“The distinction between a good opportunity and a good idea is the viable economic application of the good idea,” said Sacks. “If the idea does not have a viable economic business case, it will never evolve into a real opportunity. Where clients derive value from an idea or application, they are happy to compensate us. Value to a client arises from the more traditional sources such as lower costs or increased revenue, but equally can arise from user experience, customer satisfaction and retention and brand awareness.”

Sacks and Alkema sound like they are reading from the same script. But that is probably because most good, new fintech stories still depend on the same tried and tested plots.

  • Arthur Goldstuck is founder of World Wide Worx and editor-in-chief of Gadget.co.za. Follow him on Twitter on @art2gee and on YouTube

 

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Seedstars seeks tech to reverse land degradation in Africa

A new partnership is offering prizes to young entrepreneurs for coming up with innovations that tackle the loss of arable land in Africa.

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The DOEN Foundation has joined forces with Seedstars, an emerging market startup community, to launch the DOEN Land Restoration Prize, which showcases solutions to environmental, social and financial challenges that focus on land restoration activities in Africa. Stichting DOEN is a Dutch fund that supports green, socially-inclusive and creative initiatives that contribute to a better and cleaner world.

While land degradation and deforestation date back millennia, industrialization and a rising population have dramatically accelerated the process. Today we are seeing unprecedented land degradation, and the loss of arable land at 30 to 35 times the historical rate.

Currently, nearly two-thirds of Africa’s land is degraded, which hinders sustainable economic development and resilience to climate change. As a result, Africa has the largest restoration opportunity of any continent: more than 700 million hectares (1.7 billion acres) of degraded forest landscapes that can be restored. The potential benefits include improved food and water security, biodiversity protection, climate change resilience, and economic growth. Recognizing this opportunity, the African Union set an ambitious target to restore 100 million hectares of degraded land by 2030.

Land restoration is an urgent response to the poor management of land. Forest and landscape restoration is the process of reversing the degradation of soils, agricultural areas, forests, and watersheds thereby regaining their ecological functionality. According to the World Resources Institute, for every $1 invested in land restoration it can yield $7-$30 in benefits, and now is the time to prove it.

The winner of the challenge will be awarded 9 months access to the Seedstars Investment Readiness Program, the hybrid program challenging traditional acceleration models by creating a unique mix to improve startup performance and get them ready to secure investment. They will also access a 10K USD grant.

“Our current economic system does not meet the growing need to improve our society ecologically and socially,” says Saskia Werther, Program Manager at the DOEN Foundation. “The problems arising from this can be tackled only if a different economic system is considered. DOEN sees opportunities to contribute to this necessary change. After all, the world is changing rapidly and the outlines of a new economy are becoming increasingly clear. This new economy is circular and regenerative. Landscape restoration is a vital part of this regenerative economy and social entrepreneurs play an important role to establish innovative business models to counter land degradation and deforestation. Through this challenge, DOEN wants to highlight the work of early-stage restoration enterprises and inspire other frontrunners to follow suit.”

Applications are open now and will be accepted until October 15th. Startups can apply here: http://seedsta.rs/doen

To enter the competition, startups should meet the following criteria:

  • Existing startups/young companies with less than 4 years of existence
  • Startups that can adapt their current solution to the land restoration space
  • The startup must have a demonstrable product or service (Minimum Viable Product, MVP)
  • The startup needs to be scalable or have the potential to reach scalability in low resource areas.
  • The startup can show clear environmental impact (either by reducing a negative impact or creating a positive one)
  • The startup can show a clear social impact
  • Technology startups, tech-enabled startups and/or businesses that can show a clear innovation component (e.g. in their business model)

Also, a specific emphasis is laid, but not limited to: Finance the restoration of degraded land for production and/or conservation purposes; big data and technology to reverse land degradation; resource efficiency optimization technologies, ecosystems impacts reduction and lower carbon emissions; water-saving soil technologies; technologies focused on improving livelihoods and communities ; planning, management and education tools for land restoration; agriculture (with a focus on precision conservation) and agroforestry; clean Energy solutions that aid in the combat of land degradation; and responsible ecotourism that aids in the support of land restoration.

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The dark side of apps

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Mobile device security threats are on the rise and it’s not hard to see why. In 2019 the number of worldwide mobile phone users is forecast to reach 4.68 billion of which 2.7 billion are smartphone users. So, if you are looking for a target, it certainly makes sense to go where the numbers are. Think about it, unsecured Wi-Fi connections, network spoofing, phishing attacks, ransomware, spyware and improper session handling – mobile devices make for the perfect easy target. In fact, according to Kaspersky, mobile apps are often the cause of unintentional data leakage.

“Apps pose a real problem for mobile users, who give them sweeping permissions, but don’t always check security,” says Riaan Badenhorst, General Manager for Kaspersky in Africa. “These are typically free apps found in official app stores that perform as advertised, but also send personal – and potentially corporate – data to a remote server, where it is mined by advertisers or even cybercriminals. Data leakage can also happen through hostile enterprise-signed mobile apps. Here, mobile malware uses distribution code native to popular mobile operating systems like iOS and Android to spread valuable data across corporate networks without raising red flags.”

In fact, according to recent reports, 6 Android apps that were downloaded a staggering 90 million times from the Google Play Store were found to have been loaded with the PreAMo malware, while another recent threat saw 50 malware-filled apps on the Google Play Store infect over 30 million Android devices. Surveillance malware was also loaded onto fake versions of Android apps such as Evernote, Google Play and Skype.

Considering that as of 2019, Android users were able to choose between 2.46 million apps, while Apple users have almost 1.96 million app options to select from, and that the average person has 60-90 apps installed on their phone, using around 30 of them each month and launching 9 per day – it’s easy to see how viral apps take several social media channels by storm.

“In this age where users jump onto a bandwagon because it’s fun or trendy, the Fear of Missing Out (FOMO) can overshadow basic security habits – like being vigilant on granting app permissions,” says Bethwel Opil, Enterprise Sales Manager at Kaspersky in Africa. “In fact, accordingly to a previous Kaspersky study, the majority (63%) of consumers do not read license agreements and 43% just tick all privacy permissions when they are installing new apps on their phone. And this is exactly where the danger lies – as there is certainly ‘no harm’ in joining online challenges or installing new apps.”

However, it is dangerous when users just grant these apps limitless permissions into their contacts, photos, private messages, and more. “Doing so allows the app makers possible, and even legal, access to what should remain confidential data. When this sensitive data is hacked or misused, a viral app can turn a source into a loophole which hackers can exploit to spread malicious viruses or ransomware,” adds Badenhorst. 

As such, online users should always have their thinking caps on and be more careful when it comes to the internet and their app habits including:

  • Only download apps from trusted sources. Read the reviews and ratings of the apps as well
  • Select apps you wish to install on your devices wisely
  • Read the license agreement carefully
  • Pay attention to the list of permissions your apps are requesting. Only give apps permissions they absolutely insist on, and forgo any programme that asks for more than necessary
  • Avoid simply clicking “next” during an app installation
  • For an additional security layer, be sure to have a security solution installed on your device

“While the app market shows no signs of slowing down, it is changing,” says Opil. “Consumers download the apps they love on their devices which in turn gives them access to content that is relevant and useful. The future of apps will be in real-world attribution, influenced by local content and this type of tailored in-app experience will lead consumers to share their data more willing in a trusted, premium app environment in exchange for more personalised experiences. But until then, proceed with caution.”

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