![[Column] Mia Pieterse: Further fintech innovation requires regulation](Images/Key Persons/Mia Pieterse-Partner and Fintech Specialist-Mazars-South Africa-ABC.png)
[Column] Mia Pieterse: Further fintech innovation requires regulation
Traditional banks have monopolised the banking industry for a long time – not just in South Africa, but globally. We have trusted banks as intermediaries with our money and paid their fees – not because we were happy about it, but because there was no real alternative.
Over the last decade, banking customers have switched to digital channels in both their personal and professional capacities – in many cases, demanding that their suppliers follow suit. This has compelled merchants to digitalise the way they do business to better meet demand, or see customers take their business elsewhere.
At the same time, Financial Technology (Fintech) companies have been at the forefront of innovation and disruption, strategically positioning themselves in the market to more deeply analyse customer needs; servicing these clients better, faster and more effectively, at a much lower cost. Particularly across the banking sector, this has had a very positive response.
In the wake of Covid-19, demand for online shopping increased both globally and in South Africa. As the shopping experience digitalised, so did payment methods. Merchants shifted to alternative payment methods, enabling instant, secure payments through the likes of digital wallets, cryptocurrencies, peer-to-peer transfers, mobile money, payments with central bank digital currencies (CBDCs) and stablecoins, to name a few. This has de-cashed our economy and its historical dependence on card payments.
In a world characterised by instant gratification and reward, consumers no longer want to wait for payments to clear via a third party. Fintechs have seized this opportunity to service new customers, often clearing payments within seconds. All this helps the customer reconsider the value of the existing traditional banking business model and prompted the arrival of digital banks such as Tyme Bank, Bank Zero and Discovery Bank (even though these are still based on traditional banking principles).
Digital banks tend to have lower fees compared to their traditional brick-and-mortar peers, which is a step in the right direction. However, whether they are digital or not, banks are still financial intermediaries taking their piece of the fee pie. Fintechs, on the other hand, are challenging the relevance of this entire paradigm and our reliance on a banking intermediary.
Yet there is a pressing need for the regulation of FinTechs in South Africa’s open banking sector, which remains largely unregulated. Examples abroad show that regulating open banking has a positive impact on the economy by driving further innovation. In Europe, legislation called the Payment Services Directory (PSD2) became effective in 2018. It allowed for a more integrated payments industry and better collaboration between Fintechs and traditional banks. Each group of players uses quite different business models in the same space.
Post PSD2, traditional banks in Europe were forced to share their data with certain accredited Fintechs through Application Programming Interfaces (APIs). Historically, banks kept all client transaction data confidential, sharing it only among themselves (for their own advantage) and thus making it difficult for other players to enter the banking sector. This also had the effect of halting innovation. However, Fintechs had the technological means to process data more effectively than banks.
The PSD2 legislation resulted in many benefits for the European economy:
- Consumer protection through regulation
- Greater transparency in the industry, allowing for a more level playing field and audit trail
- Existing fee models were challenged, forcing banks to either relook their existing pricing models or to collaborate with Fintechs to remain relevant or gain a competitive advantage. More attractive fees increased access, driving greater financial inclusion within the banking ecosystem
- Modernising the current banking sector through technology
- Allowing for cross-border payments to be faster, less admin-intensive and cheaper
- Enhancing the security of online payments which resulted in a lower fraud risk
Would such regulation have the same positive impact in South Africa as in Europe? I believe so, with some additional benefits:
- Social and economic growth
- As a developing country with a large unbanked and underserved population, it would allow for greater financial inclusion, aligning with our national transformation objectives
- Currently the open banking sector remains unregulated. With regulation, investors would be better protected from fraudsters
South Africa needs to find the ‘right’ regulations for the banking industry – regulation that will facilitate innovation and collaboration, rather than hamper it. We need to build on existing regulations and what we find to be working in other countries. Regulators should partner with the industry to find appropriate regulations to protect investors and promote innovation. Mazars’ view is that regulators should engage with industry players and allow them to provide input into draft regulations, prior to implementing them.
It is not clear when we can expect to see regulation in South Africa relating to open banking. There exists a concrete effort by both government and the banking sector to partner with industry players, which has led to the implementation of new pilot projects behind the scenes – a welcome step in the right direction.
These efforts acknowledge the importance of modernising the South African banking industry, and the important role that Fintechs play in helping the banking sector to adapt and engage technology to remain relevant and competitive.
Mia Pieterse is a Partner and Fintech Specialist at Mazars, South Africa
