Fintech fails the fairness test

The future of financial services is digitalisation, but South Africa’s regulatory framework was designed for traditional in-person, brick and mortar financial services. As financial technology evolves, regulators will intensify their efforts to adapt the South African regulatory framework.

South Africa’s financial sector policy framework is the Twins Peak model.  This model is categorised by two regulators for the financial sector: a prudential regulator and a market conduct regulator. The Prudential Authority (PA) is responsible for the prudential peak and the Financial Sector Conduct Authority (FSCA) is responsible for the conduct pillar.

As part of the FSCA’s mandate, it rolled out the policy of Treating Customers Fairly (TCF) in 2011 through its predecessor, the Financial Services Board. TCF is a regulatory framework for the business conduct of financial institutions, ensuring that financial institutions deliver specific and clearly spelt out fairness outcomes for financial customers. TCF has six principles and takes an outcomes-based regulatory and supervisory approach.  Financial institutions must ensure certain outcomes in complying with TCF.

The six pillars are:

• Culture and governance – “deliver specific, clearly set out fairness outcomes for financial customers”.
• Product Design – “Products & services marketed and sold in the retail market are designed to meet the needs of identified customer groups and are targeted accordingly”.
• Clear Communication – “Customers are provided with clear information and kept appropriately informed before, during and after point of sale”.
• Suitable Advice – “Where advice is given, it is suitable and takes account of customer circumstances”.
• Performance and Standards – “Products perform as firms have led customers to expect, and service is of an acceptable standard and as they have been led to expect”.
• Claims, Complaints and Changes – “Customers do not face unreasonable post-sale barriers imposed by firms to change product, switch providers, submit a claim or make a complaint”.

The FSCA published its inaugural study on financial customer behaviour and sentiment in August 2023. The study sought to establish how customers engage with and view the domestic financial sector, and whether their use of financial products and services indicates that financial institutions are upholding the TCF outcomes. The key findings highlighted were that:

• Customers generally see financial institutions in a positive light. 33% indicated that “financial institutions always treat me really well”, and 42% felt that financial institutions “mostly treat me really well”;
• Mobile money providers were found to be amongst the least trusted providers;
• Those surveyed about channel engagements prefer in-person engagement. Mobile app channels attract mixed social media sentiments, while call centres and ATMs elicit mostly negative sentiment.

In applying TCF in a digitisation environment, it is critical that financial technology (fintech) businesses ensure that their products and services produce the desired TCF outcomes. Most fintechs provide their services through a mobile app or website and promise customers convenient, instant financial services.  As more financial customers adopt digitised financial services, financial institutions should not completely eliminate human interaction. Human contact and interaction is still required when the client needs more specific assistance or when things go wrong.

In designing digitised products which often have pre-populated options for customers to select, fintech businesses should give careful thought to how a customer can contact the business if their query is not in the pre-populated selection menu. Consideration should also be given to the time a customer has to wait before being able to access human interaction and assistance. The duration of the wait impacts whether a financial institution is considered to be delivering the desired TCF outcomes.

Another consideration for fintech businesses should be how the digital divide impacts the TCF outcomes. The digital divide is the gap between those who have access to the internet (or access to information and communication technology) and those who do not.  In South Africa some of the factors which influence the digital divide are financial literacy, digital literacy, access to reliable mobile devices and access to affordable data.  Successful fintech businesses recognize these challenges and navigate the landscape to provide solutions to customers who would normally be excluded from access to financial services.

Fintech is often advocated as a solution to financial inclusion.  In delivering products and services that meet the TCF outcomes, fintech businesses can ensure that their offerings are specific, clear, and ensure the customers that need to be included in the financial system are treated fairly.

The tension between the digital environment and in-person environment will have to be navigated by both the financial sector regulators and financial institutions in the coming years.  The adaptation of the regulatory environment should be done in a collaborative manner, ensuring that regulation does not stifle innovation.