SA fintech start-ups redesigning financial services

Samuel Mungadze
By Samuel Mungadze, Africa editor
Johannesburg, 07 Feb 2020
Meerkat founder David O'Brien.
Meerkat founder David O'Brien.

Nimble and innovative, South African fintech start-ups are redesigning the financial sector with their enterprising technological expertise.

Two such start-ups, which are internationally recognised fintech players, Meerkat and Spoon Money, say there is still room for more products in the sector but fintech firms in SA need to address South African problems.

The start-ups were recently included in a $15 million global fintech Catalyst Fund accelerator programme.

Last month, Catalyst Fund, managed by BFA Global and Rockefeller Philanthropy Advisors, announced a new $15 million commitment from UK aid and J.P. Morgan to advance financial inclusion for underserved people across the world.

Over the next three years, the inclusive fintech accelerator will support the growth of 30 additional start-ups across five key emerging markets for fintech innovation in Kenya, Nigeria, SA, India and Mexico.

Meerkat offers debt counselling and savings products, while Spoon offers savings and credit products for women-owned, subsistence enterprises.

Fintech investment in Africa is likely to be valued at $3 billion by 2020, with SA and Nigeria receiving a significant portion of these investments. This is according PwC’s 2019 Global Fintech Report, released in November last year.

“SA’s financial services sector is undergoing a process of unprecedented change brought about by the disruptive impact of fintech challengers and the emerging technologies powering their business models,” says PwC.

“Fintechs are redrawing the competitive landscape and blurring the lines that define players in the financial services landscape.”

Resourcing start-ups

Commenting on SA’s fintech space, Meerkat founder David O’Brien says: “South Africa has a very vibrant fintech sector, but we are addressing different market needs to the rest of Africa. Payments and micro-loan providers have been the mainstay of Africa fintechs ex-South Africa. But, those needs are well met by the traditional banking sector in SA.

“Resourcing start-ups in SA is tough, as the major tech players locate their African offices in SA, and then recruit from the university pool. As an example, Amazon Web Services in Cape Town has created a big demand for engineers. In the medium-term, these will return to the market as experienced resources, but in the short-term, the cost of engineers rises.”

Lorna McLaren, COO of Spoon Money, says: “South Africa has many advantages; for example, in terms of infrastructure. But we think that markets from Nigeria to East Africa will increase in importance for South African start-ups and we certainly would love to see the ecosystems more integrated.”

She says despite SA’s highly-established financial systems, there is still room for fintech start-ups.

“We see innovation in markets across the globe. The needs of each market and the opportunities for fintech start-ups might differ, but we think the need for innovation is universal.”

Furthermore, McLaren notes: “We find that our segment (female, informal traders) is underserved by the established financial system. The formal sector has struggled to design products for and build grassroots infrastructure to service this difficult-to-reach segment.

“In fact, part of our mission is to facilitate access to the formal sector for our clients. One way is by building a positive track record. We hope our customers will be able to access more sophisticated financial products along the spectrum. So we certainly see opportunities for both start-ups and established players, and also for partnerships between the two.”

Similarly, O’Brien says: “The opportunity for SA is for fintechs that operate in the more mature services higher up the financial services food chain. Meerkat interfaces with the banking system, and we require banks to deliver our offering.”

According to O’Brien, the success of the credit industry in SA has also created a customer base that needs assistance with debt and basic financial advice.

“The cost of face-to-face insurance distribution offers fintech opportunities, but we are able to operate in a mature well-regulated insurance market. Fintechs in SA will win by innovating and improving the customer experience, while utilising the security of the traditional industry players,” O’Brien explains.

Legal headache

Despite all the potential in the space, SA’s regulatory framework has been a point of debate when it comes to fintech start-ups.

According to McLaren, the regulatory environment can be complex and costly to navigate. “Potentially, this gives an advantage to incumbents.”

McLaren explains: “There is a need for clear and transparent regulations and for consistency between the multiple different regulators that come into play. We do think that regulators themselves will need to become more and more dynamic as innovations are introduced into the market. Regulators open to engaging with start-ups, understanding their business models and challenges would be useful to the eco-system, as is the idea of regulatory sandboxes.

“We do think the move towards outcomes-based regulation is positive. Ultimately, it’s positive for start-ups, as typically they’ve spotted a market opportunity to improve outcomes for clients.”

O’Brien, however, feels the Financial Services Conduct Authority has been proactive in the space and has produced a number of papers on the matter.

“But, most importantly, the regulations are written from first principles, which allow a well-architected fintech to be compliant. Regulation is generally there to govern the financial product rather than the fintech itself, although with the launch of the intergovernmental fintech working group, the regulators have taken note of the importance of innovation in financial services.

“The intention is to foster responsible innovation to ensure financial stability and safeguard consumers’ interest. The presence of strong regulation leads to customer confidence, which allows fintechs to flourish. Equally, where scams, Ponzi and pyramid schemes have damaged customer trust, the fintech sector has higher barriers to overcome to attract these customers. This manifests in higher marketing costs.”