There are no less than 220 active and operational fintechs in South Africa – and the number is expected to grow as technology adoption increases.
This is one of the startling findings of an Intergovernmental Fintech Working Group (IFWG) study of the market, released last week.
The findings were gathered from the IFWG together with the FSCA’s 2020 Non-Traditional Data Research Report, co-authored by Kagiso Mothibi, department head of fintech at the Financial Sector Conduct Authority (FSCA).
He discussed the findings in a virtual panel discussion hosted by the FSCA on key fintech learnings from 2020, along with Gerhard Van Deventer, senior fintech analyst at the South African Reserve Bank, Garth Rossiter, chief risk officer at Lulalend, and Riyaadh Hanslo, head of risk and regulation at Yoco.
“In payments, fintechs are using non-traditional data with their transaction data to enhance the mobile payments user experience,” says Mothibi. “Payments is the largest and most mature segment, making up 30% of the overall fintech activity in SA – which is in line with global trends. This is mostly due to the large need for migrant workers in the country to send money to their countries of origin in southern and other parts of sub-Saharan Africa.
“The second-largest segment is B2B Tech, such as Blockchain and Robotic Process Automation (RPA), making up 48% of the fintech sector. In lending, fintechs are building more accurate scorecards, improving customer profiles, making better credit decisions, and managing overall credit risk. Insurtechs are using alternative data to offer policyholders better premiums and to better manage risk.”
The pace of change and innovation in the fintech space in South Africa is rapid and has become even more so in the last year as the effects of the global coronavirus pandemic drove widespread digital adoption and catapulted upstart fintech firms into the mainstream. This has meant that fintechs have had to innovate to differentiate themselves, and find new and better ways to serve their customers.
Increasingly, that means using data – and non-traditional or alternative data sourced from external sources used to supplement core internal organisational data, specifically – to capture value, particularly in the payments, lending and insurance technology (insurtech) segments.
Key benefits of the use of non-traditional data include financial inclusion, personalisation, affordability, and enhanced customer experience. The main risks are data privacy, data protection, decision bias, fairness and transparency.
However, fintechs that are able to overcome these challenges by focusing on greater levels of transparency and informed consent, data security, data privacy and the prevention of misuse or biases, are unlocking these benefits for their customers.
For example, African payment service provider Yoco, a technology company that builds tools and services to help small businesses get paid and run their business better, uses data to offer value-added services to customers on its mobile card reader solution. These services include a breakdown of sales, data on forms of payment, and tracking of revenue using Yoco’s business intelligence (BI) tool. Yoco also uses data around a business’s sales history and monthly turnover to offer merchants a cash advance.
“With the introduction of Covid-19, many small businesses were thrown an unexpected curveball,” says Hanslo. “But, for our business model, it extended the trajectory we were on in terms of the move towards cashless. During the period, Yoco also launched new offerings to facilitate the move online by many of our SMEs.
“South Africa is mainly a cash economy, but businesses started moving online and with that, it increased the amount of data being processed that now becomes available through the online stores. This introduced greater risks into the system – making mitigation an imperative. From a consumer perspective, greater attention on data-protection and governance has been a focus.”
Although just one example, it shows the value data can add to fintechs and how it acts as a driver of innovation.
Critically, says van Deventer, many of these firms won’t necessarily wait for regulations to catch up.
“Regulators are at risk of being left behind as innovation outpaces the rate of change of regulations – and regulations are essential to mitigate the risks that non-traditional data poses to the provision of financial services.”