Leadership and Democracy LabWestern Social Science

Fintech Incubators in South Africa: Banking with Start-ups


Primary Analyst: Ranem Bakhit

FinTech Team Leader: Jake MacDonnell

South Africa's financial technology start-ups are set to have a positive impact on the country's social and economic stability. The emergence of this new industry will produce easier and faster banking services while at the same time reducing high unemployment rates and encouraging educated millennials to become invested in technological innovation. Specifically, fintech will have a direct impact on the day-to-day lives of millions South Africans and the way they perceive and interact with banks and financial institutions. The surge of fintech is a direct response to the lack of efficiency with the banking system.

Currently, South Africa's banking system is plagued with several economic issues that have consequently alienated the population from interacting with them. While South Africa has done an effective job at modernizing their banks through development and regulation since the turn of the century, they have failed to align themselves with the public's needs, especially relative to the uncertainty of the domestic economy. One of the main reasons major South African banks have been facing challenges in recent years is that the country's export-oriented economy has been adversely affected by a global decrease in commodity prices. In addition, the banks are facing challenges due to declining 2016 profits in the private sectors such as agriculture, mining and manufacturing. Severe droughts, unstable electricity supply, increasing inflation, political instability and various structural constraints have further exasperated problems by affecting the economic output of several industries. The volatility of the South African currency, the rand, in the past years has also proven to be challenge for the banks.  The rand has not been able to withstand global issues, such as U.S. monetary-policy expectations. With a weak currency, the state will continue to struggle with high inflation, reduced investor confidence and low domestic growth.

In contrast to traditional banking, fintech offers a new opportunity to connect with customers by producing and providing their most imperative financial service solutions. Fintech is also in-tune with constantly evolving customer needs and technological means to accomplish mundane, but necessary everyday tasks. There are many factors that make fintech services more favourable than traditional banking. South Africa has the largest telecommunications industry on the continent with the majority of its 52.9 million population owning mobile phones. Although approximately half of the population lives below the poverty line, more than 75% of them are mobile users. Thus, mobile phones have become increasingly essential in the lives of South Africans for internet access and the widespread use of social media. While banks will not be hindered by fintech start-ups at this stage of their development or anytime soon, customers see the appeal of accessing banking services whenever and wherever, without the restriction of fixed hours and locations. This underscores the usefulness of fintech apps and their growth potential for major South African banks, such as Barclays Africa and Standard Banks, because many South Africans do not have access to formal or semiformal banking services. Furthermore, this highlights the necessity to find a balance between traditional banking and innovation in order to secure the strength of their institutions in the future. 

As a result, there has been increased interaction between the banks and fintech start-ups in recent years. The banks, referred to as incubators in the fintech sector, have begun to form positive relationships with disruptors, aka start-ups, for mutual opportunities and information. The most expansive and extensive of South Africa's incubators are located in Johannesburg and South Africa. Incumbents typically have a lot to offer new start-ups in the form of funding, legal and business aid, technical guidance as well as software and advanced technology capabilities. For example, the Standard Bank incubator, Standard Banks Technical and Business Incubator, in collaboration with Johannesburg University, is fully funded by Standard Bank and provides start-ups and entrepreneurs with access to technical support on manufacturing, design, 3D printing, patenting, and new technologies, thereby enabling rapid prototyping. In addition, another incubator that has been able to effectively collaborate with start-ups is Barclays Africa. This bank created a 13-week accelerator program spearheaded and privately funded by Barclays called Tech Lab Africa. The incubator exclusively chooses ten start-up ventures to be mentored by leading experts with market access and a range of other valuable resources.

Technological innovation reinforces the pressure to implement strategic fintech components into the banking system because there is a justified fear and uncertainty that the banks will ultimately get left behind. Thus, banks have also forged strategic partnerships with fintech companies that will help guide them into this new arena of financial services. For example, a recent partnership emerged between Absa bank and the fintech start-up, Walletdoc, a mobile and bill payment service. Absa customers receive cash rewards every time they use the mobile service to pay for their monthly accounts. In some cases, incubators partner with the start-ups they helped develop, which was the case for three fintech startups developing within Barclays' Rise incubator. Three start-ups signed proof of concept partnerships with Barclays at the end of the program. Thus, these partnerships do not only help banks adjust, but create change within the institutional culture of the banking system. Nevertheless, it's important to mention that the fintech sector also gains advantages from business partnerships with banks because they deliver start-ups with very large customer bases from very early on, which accelerates growth and national outreach. 

It is expected that banks will continue to foster start-up companies through incubators well into the future while simultaneously attempting to innovate through partnerships and adopting new technologies to their own financial processes. However, as the fintech sector grows new risks emerge for both banks and start-ups. Currently, one of the most crucial political risks for banks is the dire state of the South African economy and the limited infrastructure available to promote growth, especially since it is unclear how the banks will handle the incoming instability.  Furthermore, relative to incorporating financial technology, banks will also have heightened cyber security risks due to the globally diverse residencies of cybercriminals. One of the major risks of fostering fintech innovation for banks is that customers are likely to leapfrog banks in the future by becoming entirely dependent on mobile technology. The increasing risk for banks now is the preservation of their customers, regardless of appealing customer-centric fintech services, which will be a difficult task to achieve in a time of relentless technological evolution.

Fintech is going to continue disrupting banking institution in South Africa and the entire continent. It is predicted that in the next 3-5 years, global investment in fintech will exceed $150 billion. Incubators will also continue to accelerate the development and growth of start-ups in South Africa, which are receiving wide-spread recognition for their innovation and potential positive economic growth.  Furthermore, improving banking capabilities and implementing strategic innovation will continue to be the top priority for banks within South Africa.