Leadership and Democracy LabWestern Social Science

David and Goliath: How a start-up and a bank are responding to an increasingly innovative environment with Fintech

Primary Article Contributor: Matthew Tai

Team Leader: Jake MacDonnell


A start-up disrupting the industry:

Fintech start-ups in South Africa have disrupted the country’s existing financial institutions by changing the way South Africans manage and use money.   One of these start-ups is Rainfin, a South African fintech start-up in the lending and financing space. Rainfin acts as a lending marketplace for lenders, individuals, businesses and corporate borrowers, handling over 1-million ZAR every day. Though peer-to-peer (P2P) lending is still a relatively new concept in South Africa, since its founding in 2012 by Sean Emery and Hannes van der Merwe, Rainfin has popularized and developed the online lending environment in the country.

Rainfin provides a viable alternative for borrowers looking for access to capital with lower interest rates and lower costs, and lenders looking for returns that are higher than fixed deposits or the stock market. Through its lending marketplace, RainFin facilitates direct connections between creditworthy individual borrowers and verified lenders, with the incentive of competitive interest rates and low fees. Borrowers receive loan offers from multiple lenders, who have the flexibility to choose which borrowers they want to lend money to.

Underlying the founding vision of Rainfin was a response to the problem of increasing cost of traditional lending in South Africa, to remove the traditional costs or barriers for borrowers and lenders through innovative technology in order to create a truly transparent and fair marketplace. For Rainfin and other African fintech startups, the ultimate goal and key to success is not just raising revenues, but to drive economic growth by ultimately gaining access to markets and customers through financial inclusion, which is currently one of the core advantages that corporations and larger established financial institutions have and emerging start-ups are looking to disrupt.

The response by a Bank:

To combat the disruption caused by emerging fintech startups, African banks and corporations have not only collaborated and partnered with startups through accelerators and incubators, but have also been on the forefront of beginning to understand the threat and opportunity that fintech poses by embracing innovation. According to a survey conducted by SAP and IDC Financial Insights, one in three (34%) global banks responded that they were open to partnering with fintech companies, while one in four (25%) would be open to an acquisition. In South Africa, we are already seeing the emergence of mobile banking applications with the ability of mobile wallet payments and other banking functions, and the increase of traditional banks turning to fintech to help them remain innovative such as the FNB Banking App created by the First National Bank.

The First National Bank is South Africa’s oldest bank founded in 1838 and one of South Africa's "big four" banks, based in Johannesburg, South Africa, with an additional office in Cape Town, South Africa. It provides financial and credit services including personal loans, credit cards, home loans, personal chequing accounts, student loans, and forex, as well as commercial, industrial, retail, and residential development financing.

The First National Bank Banking App is a first for banking in South Africa, the bank’s mobile app and wallet provides an integration of additional value added services to the traditional banking functions. Mobile banking platforms such as the FNB Banking App, allow users to make/receive payments and send money using its eWallet, provide high growth potential to the South African economy. This is important in a country that is steadily being influenced by an increase in the “digital” demographic and beginning to embracing technological adaptation.

On a larger picture, both Rainfin and the FNB Banking App allude to how fintech is making an impact on economic globalization and the globalization of financial services, bringing forth several advantages. For First National Bank and other banks in South Africa, fintech has most significantly been seen as a driver for financial inclusion across the county, providing access to a variety of financial services to more customers and at the same time, naturally bringing forth a deeper degree of financial integration in the South African market. Though First National Bank has branches in India and Tanzania, mobile banking has enabled efficient long-distance interactions between the bank and customer, reducing the need for brick-and-mortar locations while creating the ability to conduct boundary-less financial transactions in a move toward global interconnectedness. For South Africa, as a country embracing technological adaptation with a growing middle class, this push for financial inclusion has been a significant contribution to the country's economic and social development.

At the same time, Rainfin’s lending marketplace creates a high liquidity of capital within South Africa and across the African continent. Naturally, this high liquidity of capital in a globally interconnected financial system translates to further market stability and regulation, thus strengthening investors trust. For example, RainFin's vision to remove the traditional costs or barriers for borrowers and lenders through innovative technology creates a financial system that is more transparent, fair and competitive. This leads, from the investor’s perspective, to more trust in the financial system. It also enables investors to make varied investments, allowing for the spreading of risk through diversification.

Furthermore, lending platforms such as Rainfin provide a larger pool of investors for businesses seeking to raise funds, which would increase competitiveness through competitive interest rates and lower fees. From a business perspective, this will ultimately lead to a better allocation of capital as businesses have greater flexibility to perform market functions and grow. However, the rise in fintech such as in lending platforms like Rainfin and mobile banking and payment platforms like the FNB Banking App also present its risks. These risks are political and economical, an increasing need for regulation, or the operational challenges of extended platforms. For peer-to-peer lending platforms like Rainfin, credit risk of borrowed capital not being repaid or repaid late remains a great risk for investors, while banks need to keep up with operational risks such as security, thus requiring regulatory risk management.

In the coming years, developments in the fintech space in South Africa are only expected to accelerate with new start ups being built to tackle all angles of financial technology across the country and the African continent, while more and more banks and financial institutions utilize fintech to avoid extinction and adapt to disruption. Inevitably, risk will always be present, and companies like Rainfin and First National Bank will have to learn to what extent to allow possible risks associated with new approaches while balancing the potential benefits of innovation.