The South African economy has struggled in the last decade. Gross domestic product (GDP) growth has failed to surpass 4 percent, with unemployment hovering above 27 percent. These market conditions may not seem ripe for FinTech innovation, but where there are challenges, there are opportunities.
The nation's unique history and current economic challenges may actually present a prime moment for innovators in the small business (SMB) financial services (FinServ) space, particularly as the Fourth Industrial Revolution ushers in continued digitization across the globe — South Africa included.
Michael Sassoon, CEO of banking and technology firm Sasfin, recently told PYMNTS about some of the country's biggest hurdles in small business FinServ — and what technology innovators hope to do about them.
Like many markets around the globe, a generational divide has created a rift between what younger entrepreneurs are seeking from their financial services providers and what the legacy banking sector has to offer. Unlike other markets, however, South Africa's history of apartheid has deepened that rift, Sassoon said.
"On one hand, our banking system is over 100 years old, and was really developed during the apartheid years," he said. "Most small businesses operating in South Africa today are relatively new, and emerged post-apartheid."
The traditional banking sector has failed to keep pace with the changing demands of a younger market, he added, while entrepreneurs lack the kind of financial literacy one may need to interact with a legacy financial services system. The result is that small business owners are continually forced into physical bank branches, waiting to speak to a representative.
At the same time, high unemployment and a regulatory environment that Sassoon said "effects small businesses heavily" have combined for an even more challenging environment in which small businesses are operating. In short, it's difficult for an SMB to obtain basic-level financial services, particularly financing, let alone the digital-first services they crave.
Challenge Breeds Opportunity
Challenges like these are a breeding ground for technological innovation, and Sassoon pointed to Industry 4.0 as an accelerant of change in South Africa today — and investors are taking note.
"The Naspers Foundry aims to both encourage and back South African entrepreneurs to create businesses which ensure South Africa benefits from this technology innovation," said Naspers Chief Executive Bob van Dijk at the time.
While this is good news for technological innovation, the effort also means the introduction of even more small businesses on the South African market, and even greater need for digital disruption of SMB financial services. According to Sassoon, the market is well on its way.
"With the Fourth Industrial Revolution, there are FinTech entrants," he said. "Banks are innovating, and a combination of digital engagement, Big Data and, ultimately, [artificial intelligence (AI)] — which is still immature in South Africa — are all creating easier ways of making local and foreign payments, accessing finance and banking in general."
What that means for small businesses is a chance to introduce new financial services that solve problems and meet demand for digital services at the same time. South Africa's high mobile phone penetration rate is a key example of this, Sassoon said, presenting an easy platform to connect to entrepreneurs, and opening doors to information sharing and digital transacting (GSMA Intelligence ranked South Africa's mobile phone penetration rate as the second-highest in Africa).
In addition to AI and mobile technology, Sassoon pointed to other rising technological trends, like Big Data and blockchain, as potential disruptors in South Africa's small business banking industry. Collaboration with third parties, like alternative lenders, will also be key for the banking sector, he noted.
However, one of the biggest global banking trends that Sassoon said could be a massive fuel for change in South Africa is Open Banking and an API ecosystem, which he described as "critical" for supporting small businesses. Open Banking, he noted, will put an end to the concept of a bank owning its client, and will instead place customer data at the ownership of a small business.
"Clients should be able to leverage their own data to generate more value for themselves," he explained, adding that this kind of data sharing can enable significant increases in efficiency for small firms in areas like payroll, accounting and lending.
While this may irk some traditional incumbents, Sassoon said the value in this market stems from banks' ability to embrace change, whether that be through opening up data, connecting to entrepreneurs via mobile device or collaborating with emerging FinTech firms — all while retaining the intrinsic value of a legacy institution.
"Real value can be created for clients by appropriately combining traditional banking values with 21st century innovation and disruption," he said.