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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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Online retail gets real

After decades of experience in selling online, retailers still seek out the secret of reaching the digital consumer, writes ARTHUR GOLDSTUCK.

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It’s been 23 years since the first pizza and the first bunch of flowers was sold online. One would think, after all this time, that retailers would know exactly what works, and exactly how the digital consumer thinks.

Yet, in shopping-mad South Africa, only 4% of adults regularly shop online. One could blame high data costs, low levels of tech-savviness, or lack of trust. However, that doesn’t explain why a population where more than a quarter of people have a debit or credit card and almost 40% of people use the Internet is staying away.

The new Online Retail in South Africa 2019 study, conducted by World Wide Worx with the support of Visa and Platinum Seed, reveals that growth is in fact healthy, but is still coming off a low base. This year, the total sale of retail products online is expected to pass the R14-billion mark, making up 1.4% of total retail.

This figure represents 25% growth over 2017, and comes after the same rate of growth was seen in 2017. At this rate, it is clear that online retail is going mainstream, driven by aggressive marketing, and new shopping channels like mobile shopping. 

But it is equally clear that not all retailers are getting it right. According to the study, the unwillingness of business to reinvest revenue in developing their online presence is one of the main barriers to long-term success. Only one in five companies surveyed invested more than 20% of their online turnover back into their online store. Over half invested less than 10% back.

On the surface, the industry looks healthy, as a surprisingly high 71% of online retailers surveyed say they are profitable. But this brings to mind the early days of Amazon.com, in 1996, when founder Jeff Bezos was asked when it would become profitable.

He declared that it would not be profitable for at least another five years. And if it did, he said, it would be in big trouble. He meant that it was so important for long-term sustainability that Amazon reinvest all its revenues in customer systems, that it could not afford to look for short-term profits.

According to the South African study, the single most critical factor in the success of online retail activities is customer service. A vast majority, 98% of respondents, regarded it as important. This positions customer service as the very heart of online retail. For Amazon, investment back into systems that would streamline customer service became the key to the world’s digital wallets.

In South Africa online still make up a small proportion of overall retail, but for the first time we see the promise of a broader range of businesses in terms of category, size, turnover and employee numbers. This is a sign that our local market is beginning to mature. 

Clothing and apparel is the fastest growing sector, but is also the sector with the highest turnover of businesses. It illustrates the dangers of a low barrier to entry: the survival rate of online stores in this sector is probably directly opposite to the ease of setting up an online apparel store.

A fast-growing category that was fairly low on the agenda in the past, alcohol, tobacco and vaping, has benefited from the increased online supply of vapes, juices and accessories. It also suggests that smoking bans, and the change in the legal status of marijuana during the survey, may have boosted demand. 

In the coming weeks, we can expect online retail to fall under the spotlight as never before. Black Friday, a shopping tradition imported “wholesale” from the United States, is expected to become the biggest online shopping day of the year in South Africa, as it is in the USA.

Initially, it was just a gimmick in South Africa, attempting to cash in on what was a purely American tradition of insane sales on the Friday after Thanksgiving Day, which occurs on the third Thursday of November every year. It is followed by Cyber Monday, making the entire weekend one of major promotions and great bargains.

It has grown every year in South Africa since its first introduction about six years ago, and last year it broke into the mainstream, with numerous high profile retailers embracing it, and many consumers experiencing it for the first time. 

It is now positioned as the prime bargain day of the year for consumers, and many wait in anticipation for it, as they do in the USA. Along with Cyber Monday, it provides an excuse for retailers to go all out in their marketing, and for consumers to storm the display shelves or web pages. South African shoppers, clearly, are easily enticed by bargains.

Word of mouth around Black Friday has also grown massively in the past two years, driven by both media and shoppers who have found ridiculous bargains. As news spreads that the most ridiculous of the bargains are to be had online, even those who were reticent of digital shopping will be tempted to convert.

The Online Retail in SA 2019 report has shown over the years that, as people become more experienced in using the Internet, their propensity to shop online increases. This is part of the World Wide Worx model known as the Digital Participation Curve. The key missing factor in the Curve is that most retailers do not know how to convert that propensity into actual online shopping behaviour. Black Friday will be one of the keys to conversion.

Carry on reading to find out about the online retailers of the year.

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Reliable satellite Internet?

MzansiSat, a satellite-Internet business, aims to beam Internet connections to places in South Africa which don’t have access to cabled and mobile network infrastructure, writes BRYAN TURNER.

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Stellenbosch-based MzansiSat promises to provide cheap wholesale Internet to Internet Service Providers for as little as R25 per Gigabyte. Providers who offer more expensive Internet services could benefit greatly from partnering with MzansiSat, says the company. 

“Using MzansiSat, we hope that we can carry over cost-savings benefits to the consumer,” says Victor Stephanopoli, MzansiSat chief operating officer.

The company, which has been spun off from StellSat, has been looking to increase its investor portfolio while it waits for spectrum approval. The additional investment will allow MzansiSat’s satellite to operate in more regions across Africa.

The MzansiSat satellite is being built by Thales Alenia Space, a French company which is also acting as technical partner to MzansiSat. In addition to building the satellite, Thales Alenia Space will also be assisting MzansiSat in coordinating the launch. The company intends to launch the satellite into the 56°E orbital slot in a geostationary orbit, which enables communication almost anywhere in Africa. The launch is expected to happen in 2022. 

The satellite will have 76 transponders, 48 of which will be Ku-band and 28 C-band. Ku-band is all about high-speed performance, while C-band deals with weather-resistance. The design intention is for customers of MzansiSat to choose between very cheap, reliable data and very fast, power-efficient data. 

C-band is an older technology, which makes bandwidth cheaper and almost never affected by rain but requires bigger dishes and slower bandwidth compared to Ku-band connections. On the other hand, Ku-band is faster, experiences less microwave interference, and requires less power to run – but is less reliable with bad weather conditions.

MzansiSat’s potential military applications are significant, due to the nature of the military being mobile and possibly in remote areas without connectivity.  Connectivity everywhere would be potentially be life-saving.

Consumers in remote areas will benefit, even though satellite is higher in latency than fibre and LTE connections. While this level of latency is high (a fifth of a second in theory), satellite connections are still adequate for browsing the Internet and watching online content. 

The Internet of Things (IoT) may see the benefits of satellite Internet before consumers do. The applications of IoT in agriculture are vast, from hydration sensors to soil nutrient testers, and can be realised with an Internet connection which is available in a remote area.

Stephanopoli says that e-learning in remote areas can also benefit from MzansiSat’s presence, as many school resources are becoming readily available online. 

“Through our network, the learning experience can be beamed into classrooms across the country to substitute or complement local resources within the South African schooling system.”

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