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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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Samsung in lock-step with its rivals?

Tonight Samsung will kick off the next round in the smartphone wars with the S10 range, writes ARTHUR GOLDSTUCK.

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When Samsung unveils the new S10 smartphone at an event in San Francisco today, it will mark the beginning of the 2019 round of World War S. That stands for smartphone wars, although Samsung would like it to be all about the S.

Ever since the launch of the Samsung Galaxy S4 in 2013, Samsung has held both technology and thought leadership in the handset world. Back then, Apple’s iPhone 5 was the last device from the American manufacturer that could lay claim to being the best smartphone in the world. With the 2013 launch of the iPhone 5s, Apple entered an era of incremental improvement, playing catch-up, and succumbing to market trends driven by its competitors.

Six years later, Samsung is fighting off the same threat. Its Chinese rival, Huawei, suddenly wrested away leadership in the past year, with the P20 Pro and Mate 20 Pro regarded as at last equal to the Samsung Galaxy S9 Plus and Galaxy Note 9 – if not superior. Certainly, from a cost perspective, Huawei took the lead with its more competitive prices, and therefore more value for money.

Huawei also succeeded where Apple failed: introducing more economical versions of its flagship phones. The iPhone 5c, SE and XR have all been disappointments in the sales department, mainly because the price difference was not massive enough to attract lower-income users. In contrast, the Lite editions of the Huawei P9, P10 and P20 have been huge successes, especially in South Africa.

Today, for the first time in half a decade, Samsung goes into battle on a field laid out by its competitors. It is expected to launch the Galaxy S10 Plus, S10 and S10 e, with the latter being the Samsung answer to the strategy of the iPhone XR and Huawei P20 Lite.

Does this mean Samsung is now in lock-step with its rivals, focused on matching their strategies rather than running ahead of them?

It may seem that way, but Samsung has a few tricks up its electronic sleeve. For example, it is possible it will use the S10 launch to announce its coming range of foldable phones, expected to be called the Galaxy X, Galaxy F, Galaxy Fold or Galaxy Flex. It previewed the technology at a developer conference in San Francisco last November, and this will be the ideal moment to reclaim technology leadership by going into production with foldables – even if the S10 range itself does not shoot out the lights.

However, the S10 handsets will look very different to their predecessors. First, before switching on the phone, they will be notable by the introduction of what is being called the punch-hole display, which breaks away from the current trend of having a notch at the top of the phone to house front-facing cameras and speakers. Instead, the punch-hole is a single round cut-out that will contain the front camera. It is the key element of Samsung’s “Infinity O” display – the O represents the punchhole – which will be the first truly edge-to-edge display, on the sides and top.

The S10 range will use the new Samsung user interface, One UI, also unveiled at the developer conference. It replaces the previous “skin”, unimaginatively called the Samsung Experience, to introduce a strong new interface brand.

One UI went live on the Note 8 last month, giving us a foretaste, and giving Samsung a chance to iron out the bugs in the field. It is a less cluttered interface, addressing one of the biggest complaints about most manufacturer skins. Only Nokia and Google Pixel handsets offer pure Android in the local market, but One UI is Samsung’s best compromise yet.

It introduces a new interaction area, in the bottom half, reachable with the thumb, with a viewing area at the top, allowing the user to work one-handed on the bottom area while still having apps or related content visible above. One UI also improves gesture navigation – the phone picks up hand movements without being touched – and notification management.

The S10 range will be the first phones to feature the latest Qualcomm Snapdragon 855 chip, at least for the South African and American markets. That makes it 5G compatible, for when this next generation of mobile broadband becomes available in these markets.

They will also be the first phones to feature Wi-Fi 6, the next generation of the Wi-Fi mobile wireless standard. It will perform better in congested areas, and data transfer will be up to 40% faster than the previous generation.

The phones will be the first to use ultrasound for fingerprint detection. If Samsung gets it right, this will make it the fastest in-screen fingerprint sensor on the market, and allows for a little leeway if one pushes the finger down slightly outside the fingerprint reader surface. It does mean, however, that screen protectors will have to be redesigned to avoid blocking the detection.

Not enough firsts? There are a few more.

Most notably, it will be the first phone range to feature 1 Terabyte (TB) storage – that’s a thousand Gigabytes (GB) – at least for the top-of-the-range devices. Samsung last month announced that it would be the first manufacturer to make 1TB built-in onboard flash storage. Today, it will deploy this massive advantage as it once again weaponises its technology in the fight for smartphone domination.

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

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IoT set to improve authentication

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By Sherry Zameer, Senior Vice President, Internet of Things Solutions for CISMEA region at Gemalto

As it rapidly approaches maturity, the Internet of Things (IoT) is set to continue a transformational trajectory, introducing new efficiencies in multiple fields by allowing measurement and analysis on a scale that has never been possible before. From agriculture to logistics, from retail to hospitality, from traffic to health, from the home to the office, the applications for monitoring ”things” are limited only by the imagination.

And South African (and African) businesses are showing abundant imagination in their practical deployments of IoT solutions in multiple settings, creating a better tomorrow through almost universal measurement and the introduction of new levels of convenience – including how to access locations, devices and services securely.

Any company, whether South African or international, should bear in mind that understanding consumer expectations can be the key to unlocking the full potential of IoT devices and related smart services.

According to Gemalto’s latest Connected Living study, improving the way consumers authenticate themselves to services is one of the most anticipated benefits of IoT, highlighting a desire for a more seamless and secure IoT experience.

Consumers are interested in advanced ways of authenticating themselves through automatic (based on behavioral patterns) or biometric techniques, lessening the need to have to intervene manually, all in the name of a much more streamlined authentication process. Smartphone manufacturers like Apple and Samsung have already placed fingerprint and facial recognition high on the agenda. There is also a widespread positive sentiment towards IoT’s potential for improving the quality of home life through connected, smart appliances.

Personalised services is something else that wins consumers over. In fact, a fluid, personalised and unified experience with continuity of services, together with security and privacy, is critical for the successful implementation of any technology.

And those types of services are today quite possible. With everything being connected – from small gadgets to digital solutions for large enterprises – IoT is no longer just a buzzword. That much is clear in a piece from Vodacom IoT managing executive Deon Liebenberg. Writing for IOL Online, Liebenberg provides insight into the sheer range of applications for IoT: the 20 use cases he cites range from the obvious, like transport and logistics, to the connected home and wearables; he even suggests tagging pets with IoT transmitters, for those who always need to know the whereabouts of the family cat.

Low-cost tags fitted to cats, dogs, lamp posts, shipping containers or other items are just one part of the puzzle, however. There are other two pieces; arguably the most complex part is the availability of communication networks in areas where there aren’t any WiFi networks, or indeed, anything else.

And that’s where the bigger takeaway from Liebenberg’s piece and other IoT trends articles becomes apparent. The communication networks are there, as are those tags: dedicated IoT networks (like LoraWAN, SigFox and narrowband IoT) are all available in South Africa.

So, too, is the third and final essential component. Software which is able to process the data generated by the tag and transmitted over the IoT network and into the internet. In this regard, there’s no shortage of solutions available from cloud providers like AWS and Azure; electronics giant Siemens, too, is in on the action, having recently launched a new cloud-based IoT operating system to develop applications and services for process industries, including oil and gas and water management.

This combination means it is quite possible right now to enable just about any use case. Business owners, who will know best how IoT can add value in their organisation, can now see their ideas becoming reality. Most crucial of all, IoT solutions delivering new levels of efficiency and convenience are not only possible, they are able to be offered with the simple and effective security that will drive consumer acceptance.

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