South African authorities are working behind the scenes to ensure that regulation and oversight of fintech or innovative financial products keeps up with the pace of innovation, the FSCA-OECD International Conference on Financial Education in Cape Town heard this week.
The South African Reserve Bank (Sarb) and the Financial Services Conduct Authority (FSCA) will establish an innovation hub for the regulation of fintech or innovative financial products in the first half of 2020.
The hub will include:
- A regulatory guidance unit – a platform where financial institutions and fintech providers can engage with regulators for guidance on these new products and services. It will provide formal guidance engagement for fintech companies that need to understand the regulatory landscape and act as a tool for regulators to keep abreast of innovation in financial services.
- Regulatory sandbox – this will allow innovators to test their fintech products in a ‘live’ environment with specific regulatory relief. For example, the innovator may test a specific product with 100 clients over a three-month period. Sarb and the FSCA will have oversight of the process and will use the information gathered to guide any regulatory actions that may need to be introduced.
Sarb senior fintech specialist Anrich Daseman says a consultant has been contracted to assist with the practical implementation and development of the hub. “Hopefully the consultation process will be completed by the end of 2019 and we can move forward with practical implementation next year,” he says.
Daseman confirmed that after releasing a discussion paper on the proposed regulation of cryptoassets earlier this year, the Sarb is likely to issue a draft policy paper within the next couple of months. The intergovernmental fintech working group, including Sarb, the FSCA, the Financial Intelligence Centre (FIC) and National Treasury will host its second workshop on fintech and related matters in September this year to discuss the way forward.
Fintech as a means to improve financial access
Tendani Mathobo from the regulatory policy division at the FSCA told the conference that fintech offers good opportunities for financial inclusion. “We need to look at fintech as an innovative and efficient way to provide financial services through digital means,” he says.
“Accessibility to financial services can be provided in rural areas via cellphone penetration. A Finscope survey showed that 90% of [the] adult population have cellphones and close to 60% have a smartphone. So there is definitely opportunity to leverage that and promote financial inclusion.”
However, Mathobo warns that service providers have to be cautious about introducing products that may have worked in other markets but might not be not suitable for the South African consumer.
He says a typical example is M-Pesa, the cellphone-based money transfer, financing and microfinancing service that was successful in Kenya but flopped locally.
“South Africa is more developed in terms of banks having a physical network,” he says, adding that often with these types of products, there is high initial uptake but accounts become dormant over time. “It has to do with financial literacy. There is a need to make consumers aware of the benefits of using technology to access financial services and also we have to change the mistrust of financial services providers that is entrenched among consumers.”
What does fintech include exactly?
Daseman notes that, contrary to popular perceptions, fintech products are not limited to bitcoin but include innovation within different financial service activities – lending, deposits and savings, insurance and investments, and payments. The international Financial Stability Board defines fintech as technology in financial services that materially disrupts existing business products and services. An example would be a cryptoasset, defined by international economist Usman Chohan of McGill University in Australia as an asset that exists in a dimension that is not physical and can only exist in a digital form. The value of a cryptoasset is also determined by supply and demand forces and not by outside intervention.