SA financial regulations are still caught in a time-warp
Financial system stifles migration into digital age and suffocates growth of digital-led economy
Access to finance is fundamental to society’s prosperity and development. According to the UN, more than 2-billion people are currently excluded from mainstream financial services.
Microsoft co-founder Bill Gates once said people did not need banks, they needed banking services, and predicted that banks would soon cease to exist.
Traditional banks are failing to close the financial exclusion gap — many people do not trust banks and find their financial products unaffordable. As a result, many poor people choose to keep their money at home and get credit informally.
In SA more than 70% of the adult population have transactional bank accounts. However, this masks reality as most people withdraw their money as soon as it is deposited into their accounts. Even though SA has one of the most robust and sophisticated banking sectors in the world, most transactions are still done through cash.
Financial inclusion requires the availability and adoption of financial products (transactional, payments, savings, credit and insurance). SA has a high rate of adoption of transactional accounts but poor usage of financial products. Boston Consulting Group (BCG) reported that less than 20% of South Africans have life insurance.
The challenge of financial exclusion is not going to be solved by large banks but by innovative fintech players. For the past year, after meeting multiple bankers, I concluded that large banks are either not interested in, or are incapable of, serving those at the bottom of the pyramid because of low margins.
Harvard professor Clay Christensen observed that large incumbents do not have commercial incentives to serve the underserved. It makes business sense for banks to focus only on clients who can pay, but unfortunately, this perpetuates poverty and inequality.
Having niche banks would allow many new players into the sector, especially black entrepreneurs.
Even though banks are failing to meet the needs of the underserved, the barriers to entry for fintechplayers are very high. This is critical to maintain the integrity of the national payment system and protect people’s money.
However, this stringent regulatory framework makes it hard for innovative players to enter the sector. SA’s unemployment challenge will not be solved if millions still struggle to get affordable financial products. The SA Reserve Bank needs to act urgently to create a regulatory framework that lowers the barriers to entry for new players, increases competition and lowers the cost of financial products.
The Bank should learn from the innovative Reserve Bank of India (RBI) and create niche banks, commercial banks that are created to serve a particular section of the population, such as regional banks or small business banks. These would be restrictive by design, allowing the relaxation of know-your-customer ethos, customer due diligence and antimoney- laundering requirements to reduce compliance costs.
Having niche banks would allow many new players into the sector, especially black entrepreneurs. There is widespread support for a black bank in SA, but the VBS Mutual Bank heist shows that just having black ownership does not necessarily imply inclusive services. There is no guarantee that a black bank would offer better affordable services — it could act like existing banks with a black face. What we need is a new category of banks or a new system. Insanity is doing the same thing over again and expecting different results.
The RBI also introduced a unified payment interface (UPI) designed to lower transaction costs, make systems interoperable and be available 24/7. This technology is a game-changer because it is built with mobile in mind and makes moving money as easy as sending a text message. The SA Reserve Bank, serving the most unequal society in the world, needs to adopt similar technology to make moving money easy and free for the poor.
MasterCard released a report stating that more than R25bn is lost annually due to cash transactions and that lower income earners lose 4% of their total income to bank charges and money transfer fees. It is shocking that in SA only banks are allowed to issue e-money. Any entity or entrepreneur that wants to issue an independent wallet in SA has to partner with an existing bank, as per the National Payment System position paper of 2009. This is like forcing all aspiring spaza shop owners to first get permission from a large retailer before operating.
The world is rapidly moving into a digital economy — smartphone penetration in SA will soon reach 100%. Disruptive, innovative players are leveraging smartphones and creating low-cost digital financial solutions. Without a new approach and mobile-friendly banking platform the inequality gap will worsen.
Many jobs in the fourth industrial era will be gig jobs — having millions of young people excluded from the digital economy is one of the biggest threats to the future of this country.
• Tshikomba is founder and CEO of Things Technologies.