The economic impact of FinTech in the South African banking industry: A case of digital disruption
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The Fourth Industrial Revolution has provided new opportunities to tackle problems in health, education, transport and many other sectors. In the financial sector, new financial technology (FinTech) is providing new ways of tackling the problem of financial exclusion. The uptake of cell phones has enabled financial service providers (FSPs) to expand into areas where the most vulnerable have hitherto been outside the reach of the banking agency model. This has ultimately allowed previously financially excluded individuals to have access to bank accounts. Through SMACT (Social Media, Mobile, Analytics, Cloud and the Internet of Things) technologies, FSPs are able to collect new types of data such as call detail record data and mobile app data which have been leveraged globally to enable the emergence of M-Pesa in Kenya, the WeChat payments module in China and KakaoBank, South Korea’s first online-only bank. The common thread in these innovations is that these are telecommunications company-led business models that have encroached into the area of finance. Such digital disruption has happened in South Africa but little is understood about how inclusive digital financial services are in the South African context. Moreover, what are the barriers to further financial inclusion, given that South Africa has significantly high bank account uptake rates? What role can the Fourth Industrial Revolution technologies have in breaking those barriers and reaching the lower-income population that has largely been mis-sold financial products that were created for the middle to upper-income population? This study sought to investigate how the diffusion of SMACT technology has contributed to financial inclusion in the South African financial services sector. The study made use of a mixed methods approach to answer this research question. Finscope data from 2012 to 2015 was used as the data source for the quantitative section and key informant interviews as the source of data for the qualitative section. The study found that roughly 80% of adults in South Africa are financially included through formal banks. Despite the near 100% uptake rates of cell phones across all income groups, proximity to an ATM or bank branch still significantly determined whether an individual accessed formal financial services. The study also found that ATM withdrawal, store withdrawal and internet banking were infrequently utilised by lower-income adults. In terms of internet banking and digital financial services in general, financial products, especially digital credit, do not appear to be well aligned with the needs of the lower-income consumer. The mismatch of financial products and the needs of lower-income consumers is further worsened by poor financial literacy levels in South Africa, especially among lower-income consumers. The study concludes that more needs to be done to increase economic inclusion, digital inclusion and financial inclusion for the lower-income population in South Africa. While consumer protection and transparency are well covered in the regulatory and legislative framework to which FSPs by and large adhere, a more inclusive and sustainable financial sector will only exist if product fit, affordability, financial literacy and convenience issues are addressed. This should happen in an enabling environment where ICT infrastructure benefits all, interoperability of digital financial services is reached and a regulatory framework more focused on financial inclusion is in place.