The ultimate guide to South Africa fintech
Strategy Note / Global

The ultimate guide to South Africa fintech

  • The SA fintech scene is well-diversified; investech, insurtech are areas of expertise. But most fintechs are sub-scale

  • Strategic priorities: issuing new products, tech investment, regionalisation. Serving the underbanked will drive growth

  • Competition from informal players, market dynamics and regulations (like data protection) are major growth constraints

Rahul Shah
Rahul Shah

Head of Financials Equity Research

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Rohit Kumar
Rohit Kumar

Global Financials/Thematics

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Tellimer Research
22 December 2020
Published byTellimer Research

This 14-page report, part of our series on the risks and opportunities in the key emerging fintech markets, evaluates South Africa by drawing on the results of three detailed proprietary surveys of 10 local fintechs, 7 incumbent firms and 100 consumers, allied to desk research into 203 local fintech firms.

Our key findings

  • South Africa’s fintech landscape scores less well than most other emerging markets. Firms' positioning and strategies are generally less developed, and fintechs are typically smaller than elsewhere.

  • The ecosystem is well-diversified with a strong showing by investech and insurtech firms.

  • Key values that fintechs provide are personalised services, product quality and fast approvals. However, consumer demand for greater convenience is still not being adequately met.

  • Key success drivers for fintech firms are innovation and funding access. Targeted innovations include digital banking, augmented reality and digital assistants.

  • Key strategies priorities are introducing new products, technology investment and geographical expansion.

  • South African fintechs are expected to grow market share, largely by enfranchising financially-excluded customers.

  • Competition from the informal segment, market dynamics and regulations (notably relating to consumer protection, partnership agreements, capital requirements) are key growth constraints.

  • Incumbents are competing with fintechs mainly by lowering their product prices.

  • Highlighted innovative firms include The Sun Exchange (which uses blockchain to allow users to rent out their solar panels) and InvestSure (which insures listed shares for adverse price movement arising from fraud).

South Africa’s fintech landscape

Source: Tellimer Research

Overview

We outline the current fintech landscape in South Africa, including companies' success factors, future strategies, innovations and growth constraints, and gauge the impact of fintechs on their customers. We also evaluate listed financials, telecoms and technology sector incumbents in the country to assess how they are responding to the fintech threat. In addition, we analyse the results of our survey of South Africa consumers to ascertain their current financial product preferences and future expectations, and what that means for South African fintechs. Lastly, we highlight some interesting innovations from selected local fintech firms.

The South African fintech ecosystem is well-diversified, with clusters of expertise in investech and insurtech products. However, South Africa scores below the EM average based on firms' positioning and strategies, and in relation to the size of individual fintech firms, which is typically smaller than we have observed in other large emerging markets. The top values South African fintechs believe they deliver to their customers are personalised services, high product quality and speed of approvals. Local fintechs attribute their success largely to innovation and funding access.

Looking ahead, South African fintechs are expected to gain 8ppts market share in the next three years (above the average global EM gain of 5ppts), mainly by expanding the size of the pie, ie by offering services to financially-excluded customers. The top strategic priorities for South African fintechs are introducing new products, increased technology investment and geographical expansion. Fintech innovations are likely to be in the areas of digital banking, augmented reality and chatbots/virtual assistants.

Constraints that South African fintechs face include competition from the informal segment and overall market size and growth dynamics, along with the evolving regulatory environment, particularly in areas such as consumer protection, partnership agreements and capital requirements.

Incumbents in South Africa are fighting off fintech competitors by lowering their product prices. Since pricing is an important factor in consumers' decision-making and incumbents have more financial muscle to compete on pricing, this suggests South African fintechs are likely to face tough competition.

The fintech landscape has a high concentration of investech and insurtech firms

South Africa's fintech ecosystem is well-diversified, with payments and lending fintechs together accounting for just 49% of the overall universe (below the 56% global EM average). Being a key investment hub for Africa, the country has a high concentration of investech firms (19% of the local universe, versus 8% for global EMs). The weighting of insurtech firms is also higher than most other EMs; note South Africa has the third-highest insurance penetration in the world, after Taiwan and Hong Kong.

South Africa's fintech product mix

South Africa scores poorly on fintech sophistication

To evaluate South Africa’s fintech sector, we assessed the country relative to six other emerging markets (Brazil, China, Indonesia, India, Kenya, Mexico) across a range of metrics (fintech density; scale of fintechs; ecosystem diversity & profitability; funding access; positioning and strategy).

South Africa's fintechs score relatively poorly compared to the EM average. The major area of weakness, in our view, is firms' strategic positioning, which appear less sophisticated than peers. For example, South African fintechs give a lower priority to raising funds to drive growth than elsewhere. However, we know that successful fintech unicorns typically are much more focused on this aspect. Perhaps as a corollary to this, we note that South Africa's fintechs are typically smaller than those in other large emerging markets, and they have more limited access to external funding. On the flip side, we also observe that fintech density (ie fintechs per capita) is higher than in other markets; this may be because the industry needs to consolidate (and hence create fewer but larger firms), but is also because some fintechs headquartered in South Africa are providing their services across the region (Jumo is an example of such a firm).

Fintech sophistication score

Funding analysis

Africa has weaker fintech funding access compared to Asia and Latin America. Within the continent, South Africa ranks third, after Nigeria and Kenya, in terms of total fintech funding flows in 2019; the country’s fintechs raised around US$100mn in 2019 across 33 deals. Top deals include Retail Capital (lending), Tyme Bank (digital bank) and Lulalend (lending), while other companies raising over US$5mn include Ctrl (insurtech) and Yalu (insurtech).

Top fintech funding deals in South Africa

The fintech value-proposition to its customers: personalised services, product quality and speed

According to South African fintechs, the top values they deliver to their customers are personalised services, product quality and fast transaction processing. Compared to consumers' expectations, our data indicates South African fintechs focus excessively on personalised service and insufficiently on convenience.

Personalised services. We think many incumbent firms are failing to address customers' specific needs (eg due to difficulties/lack of focus on tailoring products/services), which is opening up opportunities for fintechs such as Yoco (payments) and GetBucks (lending) that use technology (like machine learning and artificial intelligence) to offer personalised services that don't need much human input.

Product quality is a broad term that includes factors like ease-of-use, product innovation, seamless execution and speed of service. This may explain why it is mentioned as one of the top values by both fintechs and consumers, not only in South Africa but in most of our surveyed markets. Some South African fintechs highlighting this as their key value proposition include Jumo (lending) and The Sun Exchange (blockchain).

Faster approvals: This is the third most important value cited by South African fintechs. Fintechs can bypass the legacy systems used by incumbents that require human interaction. They may also be less constrained by compliance checks. We think fintechs will need to keep progressing on this front as incumbents are also working to up their game. Snapscan (payments) and OUTsurance (insurtech) are among the fintechs that mentioned faster approvals as a key value they provide. In contrast, none of the incumbents in our survey cite faster approvals as their key value proposition.

Key fintech values

Key factors for fintech success: Innovation and funding access

The top success factors cited by South African fintechs are innovation and funding access. Compared to other emerging markets, fund-raising is a more important success driver for South African fintechs, servicing the unbanked population less so.

Innovation in service offerings enables fintechs to reach their customers in more cost-effective ways. It also helps fintechs to be more relevant to their customers, for example by offering them greater convenience and/or a better user experience. Fintechs that cite innovation as their key success driver include Wealth Migrate (investech) and Yoco (payments).

Funding access. To effectively compete with big industry players and achieve scale, start-ups may need significant funding for marketing, infrastructure and network-building. Funding has played a key role in the success to date of firms like Payfast (payments) and Jumo (lending).

Key fintech success factors

Fintechs’ plans: New products, technology investment and geographical expansion

Our survey shows that the top three strategies for South African fintechs are introducing new products, technology investment and expanding geographically. Compared with those in other emerging markets, South African fintechs are more focused on introducing new products and less fixated on enhancing management expertise and entering strategic partnerships.

Introducing new products. Fintechs tend to expand their service offerings to new products when they achieve a certain scale in their primary offering. For example, payments fintechs often expand to lending or investments once they have achieved a sizeable customer base. South African fintechs that plan to launch new products include Jumo (lending) and SnapScan (payments).

Technology investment. Technology, such as machine learning and artificial intelligence, can improve the speed, cost and quality with which services are delivered to consumers. Zoona (payments) and GetBucks (lending) are among the South African fintechs planning more technology investment.

Expanding into new countries. A modest domestic population and strong opportunities in other African markets encourages South African fintechs to consider expanding their geographic scale; some firms are already providing services in key regional economies like Kenya, Nigeria, but there is also a lot of scope elsewhere in Africa. Note that this goal can be achieved in various ways, such as through strategic partnerships or launching own-branded, greenfield services. Fintech firms citing this strategy include SIPP Investments (investech) and PayFast (payments).

Fintechs’ plans

Fintech innovations: Digital banking, augmented reality and chatbots

Considering their innovation plans over the next three years, South African fintechs are focused most on digital banking, augmented reality and chatbots/virtual assistants. Compared to fintechs in other EMs, South African companies plan to focus more on augmented reality and less on artificial intelligence.

Digital banking encompasses the full suite of products offered by traditional banks, but via digital channels. By adopting this approach, fintechs are simultaneously trying to capture a greater share of existing customers’ wallets and attract new customers to their franchise. Fintech companies with digital banking in their innovation plans include OUTsurance (insurtech) and Zoona (payments).

Augmented reality allows fintechs to enhance their user experience and help in making their services more personalised and tailor-made. South African fintechs that plan to innovate in the field of augmented reality include Yoco (payments) and Wealth Migrate (investech).

Chatbots and virtual assistants help improve the customer experience by automating customer service/education and simultaneously allow fintechs to reduce their operating costs by limiting the staff required to handle customer queries. Fintech companies with plans in this area include SIPP Investments (investech) and GetBucks (lending).

Targeted fintech innovations

South African fintechs have low market share, but should deliver strong gains by improving financial inclusion

We asked consumers which types of providers were meeting their current financial services needs for different products, and which provider types they expect to be using in three years. We used this data to estimate current and likely shifts in share of wallet for different types of firms. Currently, fintechs in South Africa have only 4% market share of the overall financial services industry, which is well below the 26% level for global EMs, and the lowest in our sample of seven emerging markets. Looking ahead, South African fintechs are likely to gain around 8ppts market share compared to 5ppts market average gain expected in global EM. The shift is mainly driven by offering services to financially-excluded customers. Note that these responses are unweighted; we think fintechs would have an even lower share if our survey were volume-weighted.

Financial services provider market shares

Key constraints to fintechs’ growth: Competition, market dynamics and regulations

Competition from the informal segment, overall market size/growth dynamics and regulations are the three biggest growth constraints faced by South African fintechs. Compared to fintechs in other EMs, competition from informal channels is a bigger challenge in South Africa, while consumer adoption appears to be less of a concern.

Competition from the informal sector: Informal enterprises can benefit from lower operating costs, giving them a pricing advantage. South African fintechs highlighting this growth constraint include The Sun Exchange (blockchain) and Wealth Migrate (investech).

Size and growth of the market. It can be difficult for industry leaders to outgrow the overall market, particularly as the number of competing fintechs rises. Also, the population size of South Africa is smaller than other large EMs in our study like China, India and Indonesia, thereby representing a more limited domestic growth opportunity. Jumo (lending) and PayFast (payments) are among fintechs that cite market dynamics as a concern.

Regulations. Fintech operations differ considerably from those of incumbents and are continuously evolving. Regulatory oversight also tends to rise as fintechs grow larger. Due to these factors, fintechs are often subject to considerable regulatory uncertainty, which can act as a barrier to investment. South African Fintechs that think regulations are a constraint to their growth include SnapScan (payments) and GetBucks (lending).

Key constraints to fintech growth

Fintech regulatory hurdles: Consumer protection, partnership agreements and capital requirements

According to our survey, consumer protection, partnership agreements and capital requirements are the key regulatory hurdles that South African fintechs face. Relative to other emerging markets, consumer protection is more of an issue for South Africa fintechs, while Know Your Customer and Anti-Money Laundering rules are less of a concern.

Consumer protection. Fintechs have access to consumers' funds and collect and utilise customer data to generate competitive advantages. Regulators are heavily focused on protecting consumers, both in terms of their money and their personal information, which limits fintechs’ scope in these areas. Fintechs citing consumer protection regulations as a hurdle to their growth include SIPP Investments (investech) and OUTsurance (insurtech).

Partnership agreements. Partnerships are a key feature of the fintech landscape; it is difficult for smaller firms to provide a complete suite of services. Regulations can restrict the formation of such partnerships, or how they operate. Some fintechs that cite partnership agreement as a key regulatory hurdle include Yoco (payments) and Jumo (lending)

Capital requirements. Capital requirements create significant entry barriers for new players; in general, fintechs tend to favour capital-lite business models. They are also a key consideration for incumbents expanding their businesses. Fintechs citing this regulatory hurdle include Zoona (payments), and The Sun Exchange (blockchain). For incumbents, Absa Group and Nedbank Group are among the companies that cite capital requirements as a key regulatory issue.

Fintech regulatory hurdles

Incumbents are using competitive pricing to counter the fintech threat

Lowering product prices is the main tool used by incumbents in South Africa to fight off fintech competitors. Compared to other EMs, incumbents in South Africa are more focused on competitive pricing and less on technology investment.

Our consumer survey indicates product pricing is more important for consumers than financial services providers think. For South African incumbents like FirstRand and Huge Group, focusing on delivering low prices to their customers could be a good strategy to retain customers, although to be sustainable it would likely require in tandem a commensurate overhaul of cost structures.

Incumbents’ steps to counter the fintech threat

Innovative fintech practices

In the table below we highlight some innovative approaches highlighted by our desk research:

South Africa fintech innovative practices