This article was published in the digital edition of Business Day on 29 September 2020. It is authored by Jesmane Boggenpoel and Amara Strategic Investments founder, Karabo Morule.
Fintech solutions can empower Theuns in Melville to easily access a low priced loan from his feature- or smart-phone, and Gugu in Bishopscourt can use the extra funds not used from the payout of life insurance to invest in long term savings via an app, both also accessing financial education at the same time. Know Your Client (KYC) and fraud risk management solutions are most valuable now because the total global cost of fraud is $3 trillion – dealing with the scary Experian data breach is a case in point. And, digital identity is a process digitization enabler as enterprises need to authenticate the customer continuously to avoid fake claims. Fintech solutions to solve pain points like these are crucial.
Fortunately, there is an existing ecosystem in place, while nascent, to develop and support fintech innovations. Briter Bridges and the GSMA Ecosystem Accelerator Programme identifies 816 active tech hubs on the Africa continent, with South Africa hosting 80 hubs, second to Nigeria at 85 and some way off from Egypt at 56. 75% of these hubs offer technical support and expertise beyond merely offering a co-working space.
What we desperately need is much more funding for fintech to seed fund, commercialize and scale the innovations and power South Africa’s contribution to the development of global solutions. According to the South African Venture Capital Association (SAVCA) 2019 report, in 2018 only eight fintech deals were reported and 6.4% of the South African venture capital (VC) active portfolio value was fintech specific – compare this to the size of the listed financial services sector which makes up approximately 16.5% of the value of the all listed, investible and sufficiently traded shares on the JSE Main Board. The deal activity mentioned is dwarfed in comparison to international statistics reported by CB Insights where global fintech funding increased to $9.3 billion in Q2’20 and monthly deal activity in June alone saw 141 deals. Furthermore, Statistica reports that 53% of the global VC investment was in fintech companies in 2019.
Within the general limitation of funds for fintech, there is a dearth of capital at the seed and early investment stage. From the SAVCA 2017 report only 12 of the 107 SAVCA members (representing 18 of a total of 177 investment funds) prefer investing in fintech start-ups at the start-up, seed and early stages.
This lack of early stage funding for fintech results in a fintech founder community being neither diverse nor inclusive. The SA FinTech in Motion Report for 2019 by RMB indicated that most fintech startups were bootstrapped and this lack of funding, especially at the early idea and pre-revenue stage also means it is no surprise that the founder demographic is not inclusive with the average founder being a white male aged 31-35 who studied at the University of Cape Town (UCT). The wealth dynamics in South Africa where, as per the WIDER Working Paper 2019/24 by Morné Oosthuizen, the peak of the average lifetime earnings of a white South African is 4.3 times that for a black South African, also mean there is too little friends and family capital to foster a higher number startups and a higher number of startups with diverse founding teams, in general and in fintech in particular. Racial equality is a pre-condition for economic growth and more economic equality in South Africa could also foster a greater number of people being able to bootstrap their early stage ventures.
There are interventions that are low hanging fruit to unlock investment capital into VC to create more innovative and inclusive fintech applications:
Have tax incentives for companies to invest in fintech start-ups directly. Firstly, we advocate for section 12J of the Income Tax Act to be amended to accommodate investment in fintech companies. Secondly, we advocate for a separate tax incentive allowance when companies invest in tech start-ups directly.
Allow for an explicit allocation for venture capital under Regulation 28 of the Pension Funds Act. Currently, VC is included in the limit of 10% for hedge funds and private equity; by not making VC explicit, funds tend to focus on private equity which looks at established businesses generally.
Corporates to set up or leverage existing pooled VC vehicles. South African corporates have not yet embarked en masse on establishing in-house corporate VC structures as is the international trend. Though as a start and to reduce single entity risk exposure, industry-wide pooled corporate VC vehicles can be set up; financial and strategic investors such as these can open up their networks and help the fintech scale. Another option is investing in a fund of funds structure like SA SME Fund that also pools corporate capital and help reduce the volatility in outcomes.
Local development finance institutions, such as the IDC, DBSA, NEF and others, should act as anchor investors and promoter for new fintech investment vehicles.
South Africa to establish a Sovereign Innovation Fund, as per the recommendations from the Presidential Commission on 4IR.
There are a range of fintech start-ups in South Africa. Boosting the funding in fintech generally, and at the early stage in particular, will improve diversity in the founder community, allow the existing fintechs to grow and scale, and finance new and existing fintechs to solve a range of the pain points that South Africans feel when dealing with the financial services sector.
Jesmane Boggenpoel (@jesmaneboggenp1 on X) is the Chairperson of fintech company Sybrin and member of BRICS digital economy working group. She is a Chartered Accountant (CA(SA)) and also has a Masters in Public Administration (Harvard).
Karabo Morule (@KaraboMorule on X (formerly Twitter)) is a fintech investor and independent non-executive director on a number of boards. She is a Fellow with the Actuarial Society of South Africa, and holds a Bachelor of Business Science degree (UCT) and is an Advanced Management Programme (Harvard) alumnus.
Both Karabo and Jesmane have been selected as Young Global Leaders of the World Economic Forum.