The future of financial inclusion in South Africa
Financial inclusion has become a hot topic. Banks and businesses within the fintech space are avidly looking for solutions and developing products to raise the percentage of individuals within South Africa, and worldwide, that become part of the formal banking community.
Johan Gellatly, MD of Altron FinTech, shares the following opinion on the subject of financial inclusion: “South Africa still has a large portion of the population that only have access to cash and only use cash when making purchases. That in itself carries tremendous risk. If the industry can provide a tailor-made solution to this segment of the population , we can go a long way in getting financial inclusion started and introducing our fellow South Africans to the formal electronic banking sector of South Africa. That would significantly reduce the risk of fraud and theft within the whole value chain of transacting in the country.”
Businesses and individuals within the informal retail space, for example, require a cost-friendly solution that allows them to purchase the products they want to sell, and to be able to sell these products to their customers in turn without either party having to carry cash to complete the transaction.
“This requires that all the parties, within the value chain, ensure this transaction is completed securely and that all the parties are receiving what they are expecting. This is where fintech companies come into the picture and can assist in making this happen. Speaking as someone within the market, this is where fintech companies need to penetrate the market segment with more secure, cost-friendly innovative payment methods over and above what is currently available in the market.”
Developing more innovative payment methods in isolation is not enough. “It is necessary to not only think of your customers but also their customers. For example, we started a journey to improve the financial inclusivity of the customers of our customer base by providing them with a PIN-based debit card solution. This type of product can be used in both the retail space at a payment terminal by swiping, dipping or tapping their card or at an ATM, should the customer require cash. This is just a starting point in the journey of developing relevant, value-added products. Ultimately, you want these individuals to be able to buy airtime, settle their prepaid electricity bill, or even pay their DSTV account. The sky is truly the limit.”
Despite the excitement of new, innovative products, fintech companies still face some stumbling blocks and reservations, especially from the informal sector, that hinder financial inclusion. “It comes down to trust. People feel very confident that if they hand over cash for a transaction it is the most secure type of transaction. Businesses within the market are required to overcome this notion, especially within the informal sector. We need to prove that the card and or mobile wallet transaction is a safe and secure manner of transacting between parties and that both parties will be satisfied with the outcome of the transaction. This is currently one of the biggest stumbling blocks when it comes to driving financial inclusion deeper into our communities,” says Gellatly.
He goes on to suggest perhaps introducing a SASSA wallet which people could use to securely transact with the informal sector at a fee that is far cheaper than the formal banking system’s card fees. “That would go a long way in enticing people to transact with these wallets in the informal sector.”
Expanding on the informal sector and the impact they have on the economy and ultimately financial inclusion, Gellatly shares his thoughts: “If you have a look at the AFSCI index that was recently launched, the knock-on effect of unsecured credit within the various aspects of the economy is very insightful, and it gives you an idea of how this market segment of unsecured credit is contributing to the growth of the economy. Imagine if we could include the informal sector in our measurement and analyse this sector’s impact on the economic growth of our country.
"Unfortunately, there is very little measured data available for this sector. Thus, it is difficult to make informed policy and regulation decisions on what products and services they would require and what their contribution could be to the economy. We are trying very hard with the two indices that we recently launched to get a sense of the informal sector’s contribution because I believe that their contribution to the South African economy is considerably larger than we think.
"Take the severe impact that COVID has had on the SME market segment, for example. These businesses employ three to 10 people in their retail outlets. Some retailers have closed their doors forever. We can measure that on a very small scale, but no one has been able to measure the effect on the informal sector. I believe that this sector is rapidly growing and going from strength to strength. Unfortunately, businesses are not focusing on this market segment. At Altron FinTech, we are looking at how we can assist this sector with innovative transacting products that give them the peace of mind that their business is supported by a reputable service provider.”
The role of technology in financial inclusion has been much debated and is a vital consideration for banks and fintech companies when developing products. When pulsed about his take on the role of technology in the future success of financial inclusion, Gellatly responds by saying: “Technology is and will continue to be crucial. We indeed face several systemic infrastructural challenges in South Africa, like Eskom and people not having access to products and services close to where they live.
"A vast majority of our population in South Africa spends a large portion of their monthly income on transport. I believe we can, through technology, bring that closer into their environments to provide them with access, right on their doorsteps. The possibilities are endless.
"Imagine having an e-commerce platform where people no longer have to allow for extra transport costs to do their monthly shopping but can simply order products and have them delivered by the time they get home from work the same afternoon.”
We are very fortunate in African countries like South Africa, Botswana, Namibia, Lesotho, Swaziland and Mozambique to have an institution like BankServ. Other African countries are still somewhat behind where this is concerned. Gellatly believes this is an advantage we should leverage more. “Having a central interbank settlement service provider provides people with secure transacting access to any device from any issuing bank at any retailer or ATM.”
As advantageous as technology can be to aid financial inclusion, we need to also make provisions for people who do not have access to technology or have a bank account. “Research shows that we have a significant amount of people within the country with bank accounts, and who can transact with electronic devices. However, there is still a large portion of our population that do not have accounts, and I believe we should provide cost-friendly products that can be accessed by this segment of our people.”
Using his earlier example of SASSA, Gellatly suggests introducing an alternative type of system. “It can be a closed-loop system that still sits within the government or our regulator’s environment. For example, if a SASSA card or wallet is used at a retailer there could be a special transacting fee for people who utilise SASSA payment products. The government may even decide to implement a zero rate on these purchases and subsidise these fees for all the role players that make this transaction a reality. This will allow the SASSA recipients to spend the full amount of the grant, as no card fees are charged,” he says.
Concluding our discussion, we touch on international projects that aim to expand financial inclusion among SMEs on the African continent, like the one recently launched with the support of the German Federal Government through the Deutsche Gesellschaft für Internationale Zusammenarbeit.
Gellatly begins by mentioning the M-Pesa payment platform that was launched some years ago by Vodacom in Kenya: “This was a closed-loop system in that M-Pesa account holders could only transact with fellow M-Pesa account holders. This system flourished in Kenya due to the lack of a regulator oversight and an interbank settlement service provider within the country. This has since expanded, and more regulations have been introduced around it. Vodacom and MTN tried to introduce M-Pesa in South Africa with less success because we have more people with bank accounts that are considered 'banked people' and virtually all retailers and ATMs accept any issued card for transacting.
"We enjoy the luxury of a forward-thinking banking system in South Africa that has followed the European standards closely and that plays a significant role in encouraging international tourists to visit our country and pay with their issued products for goods and services. My opinion is that these types of initiatives should be encouraged in neighboring and African countries that do not have proper regulatory bodies and interbank settlement infrastructures that are as advanced as ours, so that they can also benefit from tourism. It is brilliant for Africa that they can leapfrog their old technologies and embrace new technologies that can facilitate international payments.”