Leadership and Democracy LabWestern Social Science

A Tale of Four Companies: Profiling Fintech Startups in South Africa

Primary Analyst: Sigma Khan
FinTech Team Leader: Jake MacDonnell


    The South African economy is currently stagnant and as the new generation of post-secondary graduates search for employment, the financial technology (fintech) sector is an industry that looks relatively promising. Fintech start-ups in Africa have been disrupting the banking world and affecting the way ordinary South Africans manage and use money.  These fintech startups have emerged as an innovative platform connecting job seekers and employers. Additionally, they leverage the power of communities and social media to make financial services more relevant and utilize technology to deliver more expressive financial services on an ongoing basis. Fintech startups are representation of the future of a new generation of South Africans.  South Africa’s financial technology industry, specifically the many startups are expected to boost the African economy and result in prosperity. These are the current profiles of 4 South African based fintech startup companies that are expected to take the South African economy by storm:

1.)    Merchant Capital

This startup was established in 2012 by CEO Dov Girnun and CFO Daniel Moritz and is based in Johannesburg, South Africa. It was launched an alternative provider of working capital, designed specifically for small and medium enterprises in South Africa. In early 2013, Merchant Capital worked closely with cash advance providers in the US, and later on, both the Capricorn Capital Group and RMI holdings invested in Merchant Capital. RMI holdings currently own 25.1% of stakes in this startup. The company follows a unique pay-as-you-trade system, targeted at business owners who have a monthly average of over ZAR 30,000 (South African rand) in card sales, and have been operating for 6-12 months. This financial technology startup aims to disrupt the way other startups in the business and finance industries bank, and organize their funds.

2.)     SnapScan

This business is based in Cape Town, and it provides a cashless and cardless payment app to desiring customers. Consumers can use this app at over 30,000 merchants across South Africa, and it is backed by Standard Bank. This startup targets everyday South African consumers that are looking for convenient ways to pay in a digitalized world. SnapScan disrupts banking, retail and individual consumers changing the way currency is utilized.

3.)    Rainfin
Co-founded by Sean Emery and Hannes van der Merwe in 2012, Rainfin is a Cape Town based peer-to-peer platform which is the largest in South Africa. Rainfin focuses on small and medium enterprises. The company is currently lending more than one million South African rand per day, and it is backed by the successful investment group Barclays. Emery and Hannes state that they “shared the belief that marketplace lending has the potential to fundamentally transform the financial services industry”, and thus, Rainfin was created as an attempt to do just that. Barclays Africa acquired a 49% of equity stake in Rainfin in 2014, resulting in a major boost to the emerging sector of marketplace lending and fintech in South Africa.

4.)    Tyme

TYME, an acronym for ‘take your money everywhere’ is a South African based technology company that designs, builds and operates digital banking ecosystems. TYME aims to bring together partners to create a digital banking ecosystem and it is developed innovative KYC accreditation solutions that allow customers to open a simple bank account over their mobile phone, and open an unrestricted bank account from a remote location instead of having to enter a bank branch. This innovation is expected to change the world of banking both in South Africa, and globally. This startup aims to completely disrupt traditional banking and finance industries and currently has one million customers. It is one of the top 10 mobile money deployment companies globally, and was acquired by the Commonwealth Bank of Australia in 2015.

      While startups are predicted to lead to the betterment of the current economy, they are relatively new business ventures which ultimately means that they are subjected to a number of risks. From lacking finances to uncooperative government policies, fintech startups have obstacles to navigate through before ‘revolutionizing’ the economy as expected. According to business insider and finance reports, some key risk factors companies may face are:

Alternative Lending: Reports regarding alternative lending warn that consumers could face losses from companies such as Rainfin which uses a peer-to-peer lending method. This method allows individuals to lend their money directly to businesses and other individuals. Consumers and average investors utilizing this technique supported by fintech startups face risks of sizeable losses, as they may not fully understand the product or its associated risks when peer-to-peer lending. There are also legal implications as this sort of money lending, performed on an individual level, is difficult to monitor.

Saturation: Investors investing in fintech startups have participated in surveys stating the risk of saturation is worrisome. The industry is fast growing. However, since new technology is being developed at a rapid rate, this industry has a future risk of saturation. Too many fintech startups that attempt to disrupt the same financial industries within a region will result in investment losses. KPMG reports have discovered that global investment in fintech companies totaled US $19.1 billion in 2015, but to top this, “the sector needs to constantly evolve, reinvent and innovate. “Without startup companies building new technology at the rate that investors expect, the industry saturates and downturns. SnapScan for example, uses similar technology to many other mobile paying apps, (scanning or photographing a barcode and transferring funds to pay for the item). Without further revolutionizing this basic technology, companies with this platform will risk losing the interest of global investors.

Data Security: Businesses that rely heavily on technology and continue to amass larger stores of data such as fintech, risk failing to ensure resilient systems to safeguard information and finances. Cybercrime targeting funds and theft of large sums worry individual consumers, making it difficult for fintech to disrupt traditional banking systems. For companies such as TYME that allow customers to open bank accounts from remote locations without entering a branch, risk the lack of in-person security traditional banking promises.

Difficulty in Regionalizing: Outside of South Africa, the African continent is still extremely destitute, meaning a large number of the population do not have access to the technology needed to participate in the fintech industry. This creates challenges when expanding outside of South Africa. For example, Merchant Capital can only work with enterprises that have access to trade and a sizable monetary fund.

     Along with finance risks, there is also a need for government policies in South Africa to accommodate and regulate this new industry and these startups. For the startup companies to achieve maximum success, government policies need to be cooperative. Government regulation of fintech is harming investments in South Africa’s online startups. Startups require capital to fuel growth, and the capital comes from both local-in country investors as well as from international investors. Fifth Era commissioned a report to study the effects on these local and foreign investors. South African legislators are trying to introduce a raft of new regulations on financial technology ranging from online regulations and cybercrime to taxation and copyright. The Fifth Era report surveyed 475 investors in 15 countries regarding this legislation and while most governments understand the importance of tight regulation around startup technology, investors state that they tend to look somewhere else with less ambiguous policies. Thirty-one investors in South Africa that were surveyed reported that the current legislative/policy environment in the sector has a negative impact on their investment activities. Reducing these barriers with further stimulate growth within this industry. Although fintech is a growing industry that’s expected to have a positive impact on the South African economy, there are risks associated with the financial industry.