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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.

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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Cybercrooks eye smart buildings

In countries like the United States, the growth of smart buildings is estimated to reach 16.6% by 2020 compared to 2014, although this expansion is not limited to the US but rather is taking place on a global scale.  This growth is largely due to the fact we live in a world increasingly permeated by technology, in which process automation and the search for energy efficiency contribute not only to sustainability, but also to cost reduction – a goal pursued in all industries, public and private alike. Naturally, the construction industry is no exception, says Carey van Vlaanderen, CEO at ESET South Africa.

Smart buildings use technology to control a wide range of variables within their respective environments with the aim of providing more comfort and contributing to the health and productivity of the people inside them. To do so, they use so-called Building Automation Systems (BAS).  With the arrival of the Internet of Things (IoT), smart buildings have redefined themselves. With the information they obtain from smart sensors, their technological equipment is used to analyse, predict, diagnose and maintain the various environments within them, as well as to automate processes and monitor numerous operational variables in real time. Ambient temperature, lighting, security cameras, elevators, parking and water management are just some of the automatable services currently supported by the technology.

To put the possibilities of this smart infrastructure into perspective, is the example of a smart building in Las Vegas where, two years ago, they decided to install a sophisticated automation system to control the use of the air conditioning (keeping in mind Las Vegas has a hot desert climate and very little rain), so it is turned on only when there are people present. This decision led to a saving of US$2 million during the first year after the smart system was installed, due to the reduction in energy consumption achieved by automating the process. Marriott Hotels implemented a similar system across the entire chain that is expected to generate an estimated US$9.9 million in energy savings.

Another example of automation through smart devices is that of a supermarket in the United Kingdom. The store installed a smart system in its parking lot that generates a kinetic energy from the movement of cars passing through it, and then uses that energy to power the checkouts.

At first glance, we may not see any security risk in these smart buildings.  It is likely, however, that at some point the entire smart network is connected to a single database, and that is where the risk is. Particularly if we consider that many IoT devices are manufactured by different suppliers, who may not have paid due attention to security considerations during their design and manufacturing process.

Possibility of a smart building being attacked

The risk of a security incident taking place in an intelligent building is linked to the motivations of cybercriminals, who mainly seek to achieve economic gain through their actions, as well as to impact and spread fear.

There are already some tools such as Shodan that allow anybody to discover vulnerable and/or unsecured IoT devices connected publicly to the internet. If you run a search using the tool, you can find thousands of building automation systems in its lists, complete with information that could be used by an attacker to compromise a device. In February 2019, around 35,000 building automation systems worldwide appeared in Shodan within public reach via the internet.

This means that someone could take control of a BAS after finding it through a search.  If, for example, a criminal used Shodan for building automation systems to attack, they will find IP addresses. If they copy those IP addresses into the address bar of a web browser, in many cases this will bring up an interface for gaining access, where they need to enter a username and password. If the password is a default password of if it can be cracked easily through a brute force attack, the attacker will gain access to the system monitoring panel, which contains information similar to the companies located in the smart building.

Once the attackers have access to this public information and can monitor, for example, how the air conditioning works, they could make a phone call pretending to be from the maintenance company and say they are going to send a technician. At the same time, the attackers could request remote access, which would give them access to the server and allow them to control the building. Once they have control, they could alter the building’s heating or air conditioning or adjust the way any of the other automated systems operate and then demand payment of a ransom in using a system that allow them to remain anonymous, such as cryptocurrency, in exchange for not shutting the building down.

Siegeware: a very real threat

Cybercriminals are already carrying out such attacks when they have the opportunity. This kind of attack is siegeware, or “the code-enabled ability to make a credible extortion demand based on digitally impaired building functionality”

In conclusion, the low cost of IoT devices for buildings and the advances of technology for building automation systems is leading to changes with an impact on security. This drive toward automation and the use of smart devices to gather data – in order to give a building’s users more comfort and to make more efficient use of resources such as energy – is also leading to increased security risks. As a result, the possibility of a cybercriminal launching a ransomware attack on asmart building is already a reality.

Considerations to keep in mind

There are a number of security considerations and requirements to keep in mind:

  • Review the devices’ security specifications and work on the basis of the ‘security by design’ concept
  • Set a suitable budget for security
  • Choose partners that have knowledge of security issues
  • Install software for managing vulnerabilities
  • Ensure cooperation between the different areas and/or departments

For operational issues:

  • Update the devices regularly
  • Implement a replacement plan for when devices’ support life cycles end
  • Exercise a precaution in respect of connected devices
  • Monitor connected devices

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How we can break out of the productivity/technology trap

The tyre industry is a microcosm of the dilemma in which South African manufacturers find themselves, writes JACQUES RIKHOTSO, MD at Bridgestone

Many of South Africa’s industries have been built on the back of abundant cheap labour. Mining is the obvious example, but the manufacturing sector has also been shaped by thefact of cheap labour. For many years, cheap labour was arguably a huge advantage, enabling us to become a world-leading mining country and also to create significant agricultural and manufacturing capabilities. But, in the end, it has had the unintended consequence stifling investment in equipment and masking a skills deficit that will be very hard to overcome.

To understand the dynamics, it’s as well to begin by reminding ourselves that productivity is, at the crudest level, the relationship between output and input. Humans are still the most important input contributors, and so labour costs are a significant factor in the productivityequation.

In South Africa and other developing economies, labour costs are low whereas in thedeveloped world, they are high. South African manufacturers (and miners and farmers) have thus typically used more people to produce the same amount of units than a European or American manufacturer would do, while still managing to compete on price and often on quality. However, the much more expensive labour costs in the developed world, while causing short-term pain, have always meant that the business case for investing in the latest technology to make those expensive humans even more productive has always been strong.

By contrast, the business case for investing in up-to-date equipment has been weak in South Africa. If more output was required, more people was typically a cheaper answer than better equipment. We have therefore remained a fairly labour-intensive market, which is good given our unemployment issues, but raises two specific and daunting challenges:

We need to make major investments in equipment. In my industry, I would venture to say we are 15-20 years behind developed countries when it comes to the deployment ofequipment. This was not too much of a problem for a long while because the old equipment was still cost-effective and could turn out the products needed at the right quality and price. However, tyre technology has now moved on to such an extent that the old machines simply are not capable of producing the new generation of products. Radiallised Agricultural/Underground Mining Sector Tyres and light weighted tyres for electric cars, for example, represent significant advances in tyre design. Current machinery cannot be adapted to produce either them; a substantial investment in new equipment will be necessary.

Another factor is that the industry dynamics have changed over the past few years. Theadvent of cheap, mass-produced tyres from the Far East means that in many instances, fleet owners are not retreading existing tyres but rather purchasing these cheap ones new. To compete, local tyre manufacturers need to move upwards on the Technology Cost Curve by investing in technology is less electricity-intensive, deploys minimum labour and requires maintenance in order to compete with high-volume producers.

The other consequence of competing with lower cost producers is the need to write down older retreading capacity and invest in more modern equipment.

Because our investment in equipment has been so low for so long, we are not talking about incremental investment but something much more significant in many areas at once.

This massive new wave of investment will not be restricted to manufacturing equipment. High-tech data-driven modern equipment associated with the Fourth Industrial Revolution will also require factory layouts to be revamped in order to accommodate new IT infrastructure and robotic capacity, as is already being used in the developed world.

This is essential if we are able to compete in the longer term.

We need to make major investments in skills, both at the corporate and national levels. Investments in new technology will create a need for a new generation of skilled operators. The new machines require totally different skills—hard-won dexterity with gears and levers is making way for skills on touchscreens, the ability to type and, crucially, to read and action screen-based instructions quickly. Sadly, many of the cadre of experienced operators will not be able to reskill and companies will need to give serious thought to their future.

However, in Bridgestone’s experience, the younger generation of operators often has thepotential for reskilling on modern machines, and we are already busy with that process.

Being part of a global group is a massive advantage, because our regions are all at different stages of industrial development, and some have undertaken a similar journey into the modern era. Our Japanese factories, in particular are industry leaders in tyre manufacture. We can therefore rely on previous experience and, most important of all, cansend key employees to acquire the necessary training and experience at one of our sister facilities. Such a person can then be used as a champion within the company, to train colleagues and promote new ways of working. In our experience, such an approach does work, but it takes time and effort.

South Africa’s status as a manufacturing country has been in the balance for some years thanks to our lack of investment in new technology, but there is no doubt that a strong manufacturing sector is critical in rebuilding in the economy. To re-ignite our manufacturing, we have to escape the technology/ production trap.

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