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Role of Banking R


expected to pump capital into deserving areas of the economy. This will stimulate productivity and reduce risk, thereby attracting private sector and foreign investors.


However, local development finance institutions (DFIs) aren’t playing the role they should in stimulating economic growth: our DFIs are just as, if not more, risk-averse than the private sector: they don’t have the necessary skills to manage risk and are exposed to political interference which blurs their mandates and compromises their ability to deliver. Because of this, the pension fund industry has effectively replaced DFIs in their developmental role in the economy, with its appetite for funding long-term infrastructure investments.


Have financial institutions done enough to encourage and promote access to products and services?


Commercial banks and development finance institutions haven’t done enough. If you look at their balance sheet profiles, they remain dominated by large, white business. This isn’t changing fast enough. There’s no debate – they haven’t done enough.


While education and financial literacy are persistent problems, small successful businesses are treated as if they don’t know what they are doing when they seek bank funding. They are presented with complex contracts, expensive money and a lack of transparency on how loan decisions are made. We simply cannot have the same funding requirements for the previously advantaged and the previously disadvantaged. This is what the DFIs have reduced the market to.


If you look at the design of our lending rules, given our historical background, there is no way we can say banks have done enough.


Digital innovation and the reinvention of banking


There is no doubt that banking will have to undergo a reinvention, given new entrants. A lot of re-engineering needs to take place. Banks need to find solutions that work for the poor and lower the unit cost of delivering services, reduce complexity and take into consideration the geographical location of the service. Kenya’s M-Pesa was able to achieve all three and this is the key to its success.


At present, banks are more concerned with maximising profits and not with maximising service delivery to meet customer needs. “Treating customers fairly” has yet to be realised in South Africa.


The Burning Question


Banks are intermediaries. They facilitate transactions that make an economy work by bringing buyers and sellers together. But in a world where digital is disrupting old business models, where risk is holding back lending and where new entrants are unencumbered by legacy issues, the effectiveness of banks in lubricating these markets with their skills and services is being interrogated.


We posed two burning questions to our panel of experts:


If banks are losing ground to fintech competitors, is it because these new entrants have a cost advantage, or because they are playing by an entirely different set of rules, parachuting in from outside and bypassing capital and other regulatory requirements?


Elias Masilela, DNA Economics: “[Fintech’s advantage] lies in client-centricity and understanding the market. M-Pesa is a good example here.”


Adam Cracker, IQBusiness: “I often see that leading fintechs focus on a specific customer need and design their offering from the outside in. This means they’re able to make a compelling customer proposition that serves the customer need using an enabling technology. Regulations and competitors catch up fast, although the really nimble fintechs are able to iterate through their agile approach to advance their proposition.”


Fabrice Franzen, Bain & Company: “I believe fintechs are creating a broader financial services revenue pool in Africa by expanding the reach to people otherwise largely excluded or by providing cheaper ways to engage customers, allowing banks to improve their efficiencies. I wouldn’t think of this as ‘banks vs fintech’. The large banks in South Africa do have their own digital labs and innovation hubs that are run like fintech operations, and they leverage a lot of the innovation developed by fintechs.”


If banks are not meeting customer needs, due to risk aversion and a reluctance to extend credit, why are nimble competitors not doing so in sufficient numbers to make the banks uncomfortable enough to change their practices?


Elias Masilela: “This is to a large extent a first-mover advantage matter, where the payment system gives banks market power. It’s very difficult to compete with this.”


Adam Craker: “I think the market is shifting, in part motivated by the positive sentiment we’re now experiencing as a result of new political leadership, enhanced growth projections, declining interest rate charges and growing business and consumer confidence. All these factors make it likely that banks will open up their lending to participate in the growth trajectory. Nimble competitors have developed their platforms and will increase competition as they attract customers away from traditional lenders with compelling and effective approaches.”


Fabrice Franzen: “The reason it is so hard to bank and provide lending at the bottom of the pyramid is the difficulty of doing so in a cost-effective way, relative to the size of the loans and hence the profit one makes on them. That’s why few players have been historically active in that segment, except micro-lenders charging very high interest rates. Now, through technology, players such as fintech entrants or banks themselves can serve remote customers in a cheaper way, while still making a profit on small customers and small loans. Fintech is expanding the financial services revenue pool by bringing more customers on board.”


. Gradient Issue 1 7


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