An opening address by Rashad Cassim,
a Deputy Governor of the South African Reserve Bank,
at the World Fintech Festival
8 December 2020
Challenges facing fintechs and opportunities to respond
Good day to our South African financial technology (fintech) community and to all our
fintech colleagues connecting to the World Fintech Festival in South Africa.
The Intergovernmental Fintech Working Group (IFWG) is honoured to be part of this
year's Singapore Fintech Festival. We
would like to commend the Monetary Authority
of Singapore for organising a virtual festival which is testament to the immense
possibilities that are unlocked when we embrace technology in the way we work and
interact. My understanding is that we are likely over 100 000 people connected to this
event.
Before we begin today's programme, I
would like to talk, very briefly, about the
significance of fintech, particularly in the context of COVID-191, and reflect on some
of the challenges that fintech continues to face. For fintech to continue making inroads
into financial services, it may be important for the ecosystem to overcome some of
these challenges. Many of these reflections will be explored further by esteemed
expert speakers in the panel discussions.
I realise that any discussion of fintech raises a dilemma for many of us, given that it is
a complex and multifaceted subject involving topics as diverse as, among others,
regulatory barriers, the nature and use of technology, and its social and economic
impact, be it economic efficiency or financial inclusion. COVID-19 has also opened up
a whole new set of issues and challenges for fintech firms.
While I would like to focus my talk specifically on four challenges facing the fintech
- -
industry drawing, in part, from the South African experience let me say a few things
about what COVID-19 means for fintech firms.
Although the pandemic has placed significant stress on all businesses, including
fintech firms, many of them, specifically those with established consumer bases, have
managed to pivot. There are growing examples of fintech firms helping small, micro
and medium enterprises (SMMEs) in 'going online and digital'.
The 'going online and digital' phenomenon is propelled by the pandemic. This is not
only as a result of waning demand during periods of lockdown, but also because of
shifting consumer behaviour. Heightened consciousness of social distancing and
avoidance of physical interaction has thrust fintech further into action, with more
people adopting digital financial services. South Africa is no exception, with nearly
80% of surveyed South Africans reporting that they used contactless payment
methods as a perceived safer way to pay since the COVID-19 outbreak.2
To meet the increased demand for digital payments, there has been a resurgence of
innovation in digital payment products and channels, including cheaper and more
convenient point-of-sale (POS) devices for small businesses as well as the
strengthening of apps and platforms that enable consumers and businesses to make
4, 5
payments.3, In addition to digitising payment at POS, merchants are also adopting
online sales (or e-commerce), which provides more safety and convenience to
customers while also expanding customer reach. In South Africa, for example, one of
the largest payment gateways has reported a surge in online payments, recording a
2
MasterCard, April 2020, Global Consumer Study, available at
https://newsroom.mastercard.com/mea/press-releases/mastercard-study-shows-south-africanconsumers-make-the-move-to-contactless-payments-for-everyday-purchases-seeking-touch-freepayment-experiences/.
3
14 September 2020,
Tom Jackson, 'SA fintech start-up Ozow launches new payments platforms,
available at
zero-rates data costs',
https://disrupt-africa.com/2020/09/sa-fintech-startup-ozowlaunches-new-payments-platforms-zero-rates-data-costs/.
4
29 October 2020,
Staff Reporter, 'Yoco launches new stand-alone card machine for small
available at
businesses',
https://www.iol.co.za/business-report/companies/yoco-launches-new-standalone-card-machine-for-small-businesses-f59ed3e8-c60f-4333-908f-5254bae139e9.
5
29 September, available at
Ishani Chetty, 'New payment tool launches for local SMEs',
https://ventureburn.com/2020/09/new-payment-tool-launches-for-local-smes/.
year-on-year increase of almost 90% in total new business account registrations since
the lockdown began.6
Possible structural challenges facing fintechs
Allow me to turn our attention to possibly more structural challenges facing fintech
firms today.
I have distilled these challenges to the primary challenge of access, and have tagged
it as challenges around four R's, namely:
i. access to regulators;
ii. access to rule-making;
iii. access to resources; and
iv. access to refined financial services data.
Access to regulators
Incumbent firms in financial services have a long history with regulators. By virtue of
being regulated, and often highly regulated, incumbents have access to regulators.
For these incumbents, when new products or services are conceived, it is often
mandatory to ensure engagement with regulators to gain approval for new innovations.
This is to assess fit with regulations and compliance frameworks. This required
engagement has strengthened further after the 2008 global financial crisis, and
especially as technology reshapes how financial services are delivered. New cloud
propositions, robo-advice services and even the application of artificial intelligence (AI)
often warrant deeper engagements with regulators.
In contrast to incumbents, fintech firms may operate on the regulatory periphery. They
often create services different from existing platforms. Cases in point are crypto-
assets, initial coin offerings, and Internet finance such as peer-to-peer lending and
crowd-funding platforms. Fintechs tend to focus on services close to the front-end and
the consumer interface. They are, again, likely to be on the outer periphery of highly
regulated value chains such as payment systems. Unlike the core players in clearing
and settlement that are highly regulated, fintechs may have 'light touch' or no
regulations applied to them.
Based on this, our experience is that fintech firms may often not be in the direct
regulatory purview of authorities, and may therefore have less formalised and less
frequent meetings with regulators.
The first possible structural challenge, then, is access to regulators.
This is an important challenge to resolve.
Our laws and regulations have historically been crafted for financial services
intermediaries, long in the domain. The legal and compliance frameworks may be hard
to interpret for fintech firms who may be tech-savvy start-ups with limited compliance
know-how or competencies.
Access to regulators, and know-how of which authorities to connect with for particular
types of queries, is important. Our regulatory architecture can be complex, with
multiple financial services authorities, ranging from prudential and conduct-focused,
through credit-related, to financial intelligence-related regulators. Access to this
network is important in order to reduce any potential barriers to entry from a legal,
regulatory and compliance perspective. This is why we have seen a rapid emergence
of innovation centres, hubs and guidance units across the globe: in recognition of the
importance of increasing access to regulators, by fintech firms in particular.
Access to rule-making
The
Rule-making in financial services can be complex. 'rules of the game' can be
embedded in legislation and regulations, and through related instruments such as
directives, position papers and standards.
A good example of this complexity can be seen in the regulation of payment systems.
Often, primary regulations set the conditions or criteria based on which stakeholders
can have access to clearing and settlement systems. Such primary regulations
position the overarching principles and objectives of providing legal certainty,
deepening financial inclusion, and ensuring the general safety and efficiency of
payment systems.
However, at a 'lower level', rules related to how payment schemes operate are equally
important in setting specific conditions or criteria related to a payment system. As an
example: direct credit systems will define clearing time-frames, and debit systems will
define charge-back rules or conditions. These types of rules are often called the 'rule
books' in jurisdictions like Canada and the United Kingdom (UK). There are 'rule
books' publically available for schemes such as the Single European Payments Area
(SEPA) Credits in Europe or, in the UK, the Faster Payments Scheme.
In South Africa, we have found that, due to legacy reasons, some of the rule-making
processes, especially in the payment system space, have traditionally been the
domain of incumbents. Based on some of the cases reviewed, our sense is that
broader input into the rule-making processes by those impacted across the value chain
would benefit from obtaining a variety of competing perspectives. The voice of fintech
firms in this process is important. This kind of ever-increasing access to influence rule-
making is vital to ensuring that the best policy and regulatory stances are adopted.
Even more importantly, the 'rules of the game' must not create barriers to growth for
fintechs. We have identified a few scenarios where this may be the case. Authorities
have to ensure that the approach to, and governance of such processes, is transparent
and robust.
Access to resources
Two significant resource challenges facing fintechs are access to capital and access
to skills sets.
Unlike incumbents who generally have reasonable access to finance, fintech firms and
specifically fintech SMMEs may experience significant additional challenges
accessing finance. While consumer credit is likely well-served in South Africa, SMMEs
continue to struggle to access critical funding to sustain themselves and even grow.
This is despite the significant contribution that these businesses make to gross
domestic product (GDP) and employment.
The inability of SMMEs to raise funds is caused by a number of demand- and supply-
side factors, such as the lack of financial records and the inability of lenders to tailor
their loan terms to match the business needs. According to a 2019 report by one of
the large banks in South Africa, few fintechs manage to secure start-up capital, with
the general sentiment indicating that funding seems to be readily, but not openly,
available. More broadly speaking, SMMEs also operate in a mostly informal, invisible
and cash-based economy. Addressing this challenge is related to the broader need to
digitise these businesses and ensure that they are included in the digital economy.
Turning our attention to the importance of access to skills: although much emphasis
is placed on the technologies in the fintech domain, it is the people, the skills and the
talent that create the innovation and propel the change. This is evidenced across the
fintech value chain: from the data scientists who unearth customer behaviour patterns,
through
needs and 'pain points', the software developers and engineers who develop
the solutions, to the business heads who craft growth strategies based on an emerging
technology.
However, similarly to most countries, particularly developing countries, South Africa
South African Information, Technology
has a shortage of technical skills. The 2019
and Communication (ICT)7 Skills Survey found that the Fourth Industrial Revolution
(4IR) has not had a significant impact on the South African ICT skills landscape yet.
According to the report, the skills associated with the current set of emerging
-
technologies such as AI, the Internet of Things, blockchain, automation, data science
-
and programming were the scarcest.8 This leads to a race for talented and skilled
individuals such as data scientists, programmers, software developers and design
thinkers. The challenge, of course, is not specific to fintech firms; it also affects us as
regulators. However, based on our discussions with fintech firms, the race for
acquiring such skills sets is pronounced for fintechs, especially if they are still in their
early phases of development and/or maturity. It is less so for big-tech firms with well-
established markets.
Access to refined financial services data
Finally, we turn to the importance of data, specifically refined and granular data.
It has become cliché to say that 'data is the new oil of the economy'. As the digital
economy continues to be embedded through the use of mobile devices, the use of
social media platforms, and generally increasing activities over the Internet and online
behind
commercial platforms, we will increasingly create and leave 'digital bread
crumbs' of unprecedented volumes. Never before have we seen such volumes of data.
And for the first time in human history, we also now have evolving tools and techniques
at our disposal through cloud-computing, AI and machine-learning methods to handle
such volumes of data.
However, in this new digital economy, the availability of, and access to, data related
to, for example, transactional payments or specific customer behaviour, has become
a key competitive driver. Access to both structured and especially unstructured data
can provide significant competitive advantages to those who own it. Fintechs in
particular are exploring the use of Big Data to produce new services such as product
comparisons and tailored solutions based on consumer-specific data. While Big Data
presents new opportunities, the scope of available data, and how to govern access to
that data, poses new challenges for the financial services industry and regulatory
authorities around the world.
As a result of the above, access to refined data is a key issue that regulatory authorities
have to deal with. Examples of addressing it through Open Banking and Open Finance
efforts are increasing in many jurisdictions.
For South Africa, it is important to land on the policy imperatives for such efforts. There
are a number of open questions for authorities. These include (but are not limited to):

Should incumbents be required to share their data with fintechs?

Should the standards for sharing data be developed by the regulators or by the
market?

How is customer data protection being ensured, and what commercial
arrangements might arise from owning that data?

When dealing with such large data sets, what measures are in place to detect,
respond to and recover from cyberattacks?
Addressing these and other open questions is important in moving the fintech dial
forward.
In South Africa, numerous fintech firms applied for our Regulatory Sandbox process
to trial new Open Banking models. To make progress within this space, we require
incumbents and fintech firms to work together to shape our policy thinking and policy
stances. Any unaddressed solutions will possibly continue to see fintech firms using
methods that may pose an increased operational risk. The solutions of open
Application Programming Interfaces (APIs) are therefore pressing. The industry
should actively engage with fintech firms on this long-standing matter. We also need
to learn from jurisdictions that have already traversed this path, and modestly take
from their emerging lessons.
Conclusion
Allow me to conclude.
The South African regulators recognise the role they can play in addressing these
access challenges. The IFWG aims to demystify the regulatory landscape, provide
space for safe experimentation, and actively advance innovation. We do this through
the Innovation Hub, launched earlier this year, and its three facilitators: the Regulatory
Guidance Unit, the Regulatory Sandbox and the Innovation Accelerator.
Since launching the Innovation Hub, we have received nearly 100 queries in the
Regulatory Guidance Unit and over 50 applications to the Regulatory Sandbox. These
numbers show just how vibrant and dynamic the South African fintech ecosystem is.
Most importantly, though, they are a positive sign of increasing access to regulators
and rule-making for fintechs, which enables us to hear more of those divergent and
new voices.
In addition, the Innovation Accelerator is a space for us to drive both internally oriented
and market-facing innovation initiatives. We focus particularly on those initiatives that
address the challenges faced, and have the potential to deliver benefits across the
regulatory and broader financial services landscape. We currently have eight initiatives
under the Accelerator, looking at important topics such as digital platforms, crypto-
assets, financial markets innovation, Open Banking, non-traditional data and big tech
in fintech. What makes this unique is that regulators are journeying along to co-create
an understanding of the major issues facing fintechs, including co-developing policy
stances.
The fintech phenomenon is here to stay, and will continue to grow. In the end,
however, it is not about fintech but about creating vehicles to support innovation in the
economy and the financial sector. It turns out that fintech firms just happen to be the
key agent through which we are moving towards a more dynamic financial sector.
I trust you will enjoy the deliberations today, and would like to end by congratulating
the IFWG and the Monetary Authority of Singapore for arranging this event.
Thank you.