By David Whitehouse
The adoption of South Africa’s Rapid Payments Programme in 2022 is set to redefine competition in the banking industry.
The system is being developed by Africa’s largest clearing house BankServAfrica along with the country’s banking and payments associations, and will be tested initially across 11 banks. The plan is to allow people to use a real-time clearing system that will process transactions within 60 seconds. Users will be able to send money to cell-phone numbers and email addresses without having bank account details, and will also be able to make digital requests for payment.
Banks which can quickly develop and deploy services geared at instant money withdrawals and transfers will be beneficiaries, says Radebe Sipamla, financial-services analyst at Mergence Investment Managers in Johannesburg. He sees the country’s new wave of banking start-ups as more likely to do this than incumbents such as Standard Bank, FirstRand, ABSA, Nedbank and Investec. As of March, those “Big Five” had 90% of the country’s total banking assets.
Recent entrants to South Africa’s banking market include TymeBank, Discovery Bank and Bank Zero. “The challenger banks will continue to erode market share from the incumbents,” Sipamla says. The new banks are “generally more agile and don’t have constraints of complex legacy banking systems that constrain their speed of innovation and competitiveness in terms of pricing.”
The rapid payments plan stems from South African Reserve Bank’s Vision 2025, and aims to reduce cash dependency and increase financial inclusion. Research from the Payments Association of South Africa argues that using cash costs South Africa about 88b rand (US$5.8b) per year, including transactional fees, the costs of printing and supplying cash, as well as maintaining infrastructure such as ATMs.
On top of that comes unquantifiable costs such as the time spent obtaining cash and the impacts of cash crime, the association argues. But, it says, existing electronic payments do not truly rival the capabilities of cash, specifically in the real-time transfer of value.
Rapid payments will open up the banking market to foreigners in South Africa, such as business owners from Somalia, says Lebogang Mokgabudi, a non-executive board member at Old Mutual Alternative Risk Transfer (OMART). The OMART unit manages Old Mutual’s partnerships with fintech start-ups.
The new system will also end the “nightmare” of transferring money from abroad, Mokgabudi says in Johannesburg. Currently, a transfer from Kenya to South Africa takes about four days, she says. Once those transfers are instant, remittance providers such as Ozow will be among the winners, she adds.
For the challenger banks, winning customers from entrenched incumbents will not be easy. New entrants such as Bank Zero and Discovery Bank have been targeting millennials with mobile banking offers but to date have failed to really take off, Mokgabudi says.
“Mobile first is not enough to shift a consumer” as the incumbents also offer mobile services, she says in Johannesburg. The newcomers “need a differentiating product,” but there is still nothing sufficiently distinctive and affordable for small businesses. TymeBank is targeting the small business segment and may be able to break through, but is currently held back by a lack of distribution scale, she says.
The move to a rapid payments system takes place with the cyber-security risks increasing. Some South African banks are still struggling to understand whether or not they were breached months ago. Debt recovery specialist Debt-IN was targeted by cybercriminals in April, but the breach, in which data of more than 1.4 million South Africans was illegally accessed from its servers, only came to light in September.
Rapid payments will raise the stakes because once payments are made, the bank cannot reimburse in case of fraud, says Audrey Mothupi, CEO at tech and financial innovation company SystemLogic Group in Johannesburg. Cybersecurity is an area where banks can’t only rely on one provider, she says.
A key banking task will be the constant education of consumers to ensure they understand the risks which rapid payments entails, Mothupi says. The banks that will win are “those with already tried and tested cyber security systems and platforms.”
Mothupi suggests CYANRE, based in Centurion in South Africa, as a reputable cyber-investigation service.
The battle for control of the market is taking place against a gloomy economic backdrop. Net interest income at the incumbent banks has been under pressure with credit demand from the county’s corporates “lacklustre”, says Sipamla at Mergence. “This does not bode well for the banking sector as core earnings growth could remain subdued,” he says.
People with jobs, the bedrock of the incumbents’ client base, have been able to build up their savings during Covid-19 due to reduced spending on travel and entertainment, Sipamla notes. That reduces funding costs for banks, but also means less demand for borrowing, he adds.
Those without formal jobs make up an ever-growing share of the population. South African unemployment climbed to a record 34.4% in the second quarter of this year. “Employment remains structurally low and does not look as if it will return to pre-pandemic levels in the near term,” according to a note from Jee-A van der Linde, an analyst at Oxford Economics in Cape Town.
Widespread riots and looting in July following the jailing of former President Jacob Zuma have put a damper on any prospects for a quick recovery. “As a result of the poor start to the third quarter, unemployment levels could increase even further,” van der Linde writes.
That means banks need to reach out to the informal economy where millions of people are struggling to survive. The informal sector at times has been “completely neglected” by the incumbents as they “didn’t understand that segment of the market” and deemed the returns less attractive relative to the formal economy, Sipamla says.
“Broadening financial inclusion and economic participation will help alleviate the dire unemployment situation facing the country,” he argues. “The banking sector needs to be more proactive in playing their part to achieve that goal.“
The strong growth of Capitec since 2001 is because the bank targeted South Africa’s unbanked and underbanked populations, says Sipamla. Capitec’s success prompted Nedbank to define its current strategy targeting townships and the informal economy, he adds.
Banking services in South Africa “without a doubt” need to target the informal economy more, says Ross Tasker, fintech ventures executive at Khulisa private equity in Cape Town. “Banks have paid lip service to the need to support the mass market but this has not always translated into a better service” for those who historically have lacked access, he says.
Tasker picks out Ukheshe, a Johannesburg-based banking-as-a-service (BaaS) provider for banks and telcos, as the pick of South Africa’s current fintech crop. Ukheshe has partnered with incumbent banks and telcos to facilitate their digital transformation processes. “This symbiotic relationship allows the respective parties to do what they are good at and everyone wins,” Tasker says.
In August, Ukheshe agreed a joint venture with ForexPeople to facilitate cross border payments from South Africa to the rest of the continent. Ukheshe has also said it wants to expand into the Asia-Pacific under a partnership with card provider dzcard.
There is “significant scope for new entrants to compete with more relevant, cheaper and easily accessible product offerings,” Tasker says. Fintech businesses using technology to reduce the cost of servicing these customers stand to win, he argues. “It’s really up to the banks whether they want to stay and play in supporting these new innovators, or resist and risk being taken out completely.”
David Whitehouse is a freelance journalist and business editor of The Africa Report in Paris.