Reshaping the financial services industry by “removing market inefficiencies” sounds suspiciously like trying to eradicate human error. This raises the very serious question about the function of the financial advisor in the future. The latest RDR update made mention of research to categorise adviser functions, and to coordinate this with remuneration. We need to watch developments in the fintech space very carefully. It is bound to have a substantial impact on our future.
“The fintech phenomenon has the potential to reshape the financial services industry by removing market inefficiencies” was the viewpoint of the Intergovernmental Fintech Working Group (IFWG) in a post-workshop report of 2018.
In recognising this potential, the Financial Intelligence Centre (FIC), Financial Sector Conduct Authority (FSCA), the South African Reserve Bank (SARB) and National Treasury (NT) collaborated to ensure that the “fintech potential” can be fully leveraged. As a result, a further six workshops were hosted by the IFWG in September 2019.
“Whilst we were not able to deal with all fintech issues (at the workshops) we selected those that we believe to be a priority in terms of their potential to reshape the financial services industry by removing market inefficiencies,” the IFWG comments in its latest report.
It points out that the workshops aimed to provide clarity on the priority areas on which to focus regulatory responses to emerging fintech innovations, and how regulators and supervisory bodies can develop a coordinated, holistic, and enabling regulatory framework.
The following themes were covered:
| 1. | Innovation for economic growth in the digital future |
| 2. | Digital identity |
| 3. | Harnessing Artificial Intelligence (AI) for economic growth |
| 4. | Cybersecurity |
| 5. | Central Bank Digital Currency (CBDC |
| 6. | Open banking |
What is happening globally?
According to a study by Accenture, global investment in fintech ventures more than doubled from 2017 to 2018. While governments globally have made an effort to introduce policies and regulations to respond to the increase in fintech innovation, legislative changes have been unable to keep up with the pace of change in the fintech industry. However, in China, the overwhelming pace of change in fintech innovation has since prompted a more proactive approach which is likely to happen here too.
The current South African fintech space
Currently, there are an estimated 218 active fintech companies operational in South Africa, across eight market segments. These segments include: payments, lending, savings and deposits, insurtech, investments, financial planning and advisory, capital raising, and business-to-business tech providers. The payments segment is the most mature of these segments, with 30% of the active fintechs operating in this market segment.
According to a fintech scoping study by The World Bank, some of the key challenges experienced by fintechs include:
| ● | limited communication avenues with regulators; |
| ● | a challenging environment to test and scale fintech ideas; |
| ● | limited peer-to-peer collaboration; |
| ● | the lack of support structures; and |
| ● | challenging licencing requirements. |
SA regulatory constraints
As a result of South Africa’s complex regulatory framework, it is challenging for new and small innovative players to enter the sector, which ultimately exacerbates frustrations toward regulators. Delegates argued that government should strike a better balance between protecting consumers and regulations that ultimately embed incumbents and set up barriers to entry for new, innovative businesses.
“The state must understand the leadership necessary in each context, and how to crowd in relevant stakeholders. Then, like playing music in an orchestra, the state should determine how the actors can play off the same sheet, and be the conductor indicating when to make the music required of them. The entrepreneurial state is the conductor of innovative and entrepreneurial activity, “a comment shared in the report.”
Outputs of the workshop
Key outputs of the Innovation workshop therefore were that while South Africa has a world class financial sector, fintechs struggle to navigate the complex regulatory environment. To support fintechs and enable innovation, South Africa is developing a multi-regulator Innovation Hub which aims to facilitate innovation and will include a Regulatory Guidance Unit, an Innovation Accelerator, as well as a Regulatory Sandbox.
However, other barriers remain, including limited skills and financing for innovation. Delegates at the workshop agreed that stakeholders need to coordinate and leverage resources to facilitate innovation in South Africa.
Ultimately, all these mechanisms aim to bring regulatory clarity and appropriately regulated financial services enabled by innovative technologies.
Each of the other aspects will be discussed in future articles. Watch the Technology Speaking space for more about Cybersecurity.
Please share your views with us.
Click here to download the latest detailed report.
Click here to download the 2018 report.
