By Reneilwe Mthelebofu – Communication and Language Services
This quarter the FSCA published the Financial Sector Outlook Study; an insightful review of the South African financial landscape under the FSCA’s jurisdiction, with particular focus on key developments and trends in South Africa’s banking sector. In addition to analysing individual industries, the study also looks at macroeconomic developments, drivers of change and the impact of the COVID19 pandemic on the financial sector. One such industry is banking.
There are 40 registered banking entities in South Africa, supervised by both the FSCA and the Prudential Authority (PA). Of these, 18 are commercial Retail banks 4 are Mutual banks, 5 are Co-operative banks and 13 are local branches of foreign banks with a combined 29 offices Banking activity is highly concentrated, with 83% of the industry’s deposits being held by the “Big Four” of ABSA, FirstRand (FNB), Standard Bank and Nedbank.
However, competition has notably increased in the last three years with the arrival of three newcomers in the form of Tyme Bank in 2018, Discovery Bank in 2019 and Bank Zero launched just recently in 2021. These new challengers with digitally driven business models and limited physical infrastructure are a growing trend in the provision of banking services at an international level.
Key Trends and Developments in SA’s banking sector:
- Covid-19: Impact on operating models and profitability of banks
- Social unrest and the damage to banking infrastructure
- Accelerated digitalisation of the industry
- Social media as a platform for engagement between customers and banks
- Cost management amongst commercial banks
The Financial Sector Outlook study has revealed that the accelerated digitalisation in the industry has led to increased adoption of digital products. The move towards customer self-service through digitalisation has been a strategic focus for South Africa’s largest banks for more than a decade. Banks introduced banking apps, improved digital payment options and implemented next-generation ATMs that allow customers to do a wider range of transactions to reduce dependency on bank branches.
The COVID-19 pandemic further accelerated the rate at which businesses and consumers adopted technology for transactions. In particular social distancing requirements transformed payments models as many customers opted to transact either online or with card over cash. Indeed, “tap-and-go” card transactions have increased significantly.
Historically, banks developed their digital strategies around internet banking accessible through personal computers, laptops and banking apps on smartphones and tablets. As the FSCA encouraged broadening the provision of accessible banking services to lower income customers, investment in Unstructured Supplementary Service Data (USSD) technology has also increased. This also helped to minimise the high costs of data and smartphones as barriers to entry.
Another trend impacting banking more broadly is the “platformification of financial services” as more or new platform-owned businesses act as enabling intermediaries. As in many instances of modern “open finance”, the ability to integrate third party technology businesses with the infrastructure of banks and other financial institutions seeks to provide customers a wider variety of products and services for comparison. The third-party technology further facilitates all the necessary admin work on behalf of the financial institution, once the customer makes their choice.
The banking industry has evolved from traditional product-focused banking capabilities such as transactional services, safekeeping of deposits, credit provision and investment opportunities - towards more holistic, customer-centric offerings. More and more resources have been invested in research and development to acquire a stronger understanding of customers and their financial needs, in order to offer solutions beyond established traditional models. By 2020 the largest spending across the big banks was on technology and digitisation, driven in no small part by increased competition from digital banking platforms.
Open banking has therefore emerged as a new way of offering financial services and products, and in the process disrupting the financial landscape globally. Over 22 jurisdictions across the world developed and implemented an open banking framework in 2019. Open banking presents an innovative opportunity to increase access to finance, enhance market competition, and broaden the financial services ecosystem.
Open Finance is also gaining traction as it takes open banking a step further by giving consumers the ability to share access to all their financial data online. Value to consumers is increased by integrating the use of data beyond traditional payment accounts to now include savings, investments, pensions, credit, insurance and mortgages.
In 2020, the FSCA conducted a survey on over 70 FSP’s in South Africa to understand their sentiments and perspectives on open finance. The survey revealed that most participants were open to the reality and even inevitability of innovation enabled through a data-sharing framework. Areas identified as poised to benefit from an open finance framework include account aggregation, where 21% of participants’ customers will most likely value a consolidated view of all their financial relationships to inform their financial decisions, whereas 18% thought credit scoring would be another area for improvement. The main risk identified related to data privacy and data misuse as a result of data exchanged and aggregated by FSPs; while 21% of respondents identified cybersecurity as the second biggest risk. Respondents identified consumer adoption as the third risk, in that consumer may not be ready to adopt open finance owing to limited digital literacy and low financial education levels.
The FSCA sees open finance as a means to encourage innovation, foster competition and develop customer-centric financial services. However, it does recognise the data sharing risks associated with open finance given that the Protection of Personal Information Act (POPIA) legislation was passed in 2021 specifically to protect the privacy of consumers. Banks and financial institutions need to consider data ownership and customer consent when sharing data. Also important are issues of data minimality and ensuring that only the necessary data is and used for the original purpose for which it was collected.
Partnerships between incumbents and the new fintechs have raised questions about the shift in liability and the extent to which the responsible third-party providers are held accountable in the event of data breaches.
For more insights into the four other identified trends, we encourage you to click on the link below:
Financial Sector Outlook Study
| 
