SA's outdated banking regulations stifling innovation, preventing competition
While the stringent financial regulations in South Africa protect consumers and the financial services sector from systemic risk, they also create high entry barriers for innovative entrepreneurs looking to improve the industry’s customer value proposition.
That is the view of Nadir Khamissa, founder and chairman of the Hello Group, who believes the current framework of the banking industry in South Africa is such that the oligopoly enjoyed by the bigger banks is extremely difficult to break.
“In the long-term, this could be detrimental to the banking industry, access to financial services by the previously unbanked population, innovation in the industry and the South African banking regulatory system.
Khamissa points out that technological advances in the last 10 years have opened the door to new ways of carrying out banking transactions at far cheaper costs – for both the service provider and the consumer. ”A financial transaction today is nothing more than a database entry and should carry zero costs for the consumer,” he says.
“The future of banking globally is moving towards a system where consumers have transaction accounts that do not carry any charges. However, banks will still be able to maintain a successful business model by offering their customers value-added services or additional products such as mortgage loans, car finance, and savings products,” he explains.
Khamissa believes the idea of a free bank account might sound like a death toll for banks, but it actually will drive volume growth as consumers increasingly look for safer ways to save and protect their money and opt into an electronic transaction lifestyle.
However, he says that because of the high barriers to entry in the local banking industry, the incumbent banks have very little incentive to truly transform their business models.
He says a significant entry barrier into the South African banking industry is the large, upfront capital requirement of R250 million cash for a banking license. “This appears fairly restrictive for an entry level player in the electronic money space, particularly when one considers that the UK equivalent works out to roughly R5 million.
“More significant than the high cost of entry is the fact that we have a banking and regulatory framework in SA that is incentivised to maintain the dominance of the large banks and to exclude new entrants. There are a large number of bureaucratic rules and regulations which effectively turn incumbent banks into the gatekeepers of the industry. It is obviously not in their interest to allow innovative entrepreneurs to introduce technologies that serve customers much better at a fraction of the cost. The result is a closed market where consumers pay more than they should for service that is not as good as it would have been if South Africa’s banking industry had a more level playing field for new entrants.”
He adds that the danger that the South African banking industry faces is that by enforcing restrictive regulations on new players, they open the industry up to competition from international, online competitors who are not regulated in South Africa. “That means local innovators as well as the established banks will get shut out of the market as consumers turn to online applications that are easy to access and much cheaper to use.”
“What stops South Africans from downloading a payment or banking app from abroad and using it now? Nothing whatsoever. The reality is that this is already happening with crypto-currencies. Once this trickle turns into a flood, it will be too late and the disruption of our rigid regulatory structure will be unstoppable,” he cautions.
Khamissa says that as one of the most progressive financial systems on the continent, the South African financial services industry needs to pay close attention to global trends and embrace fintech entrepreneurs or face losing control over financial services providers who enter the market via the cloud.