Chengdu is the centre of science and technology, finance, trade and commerce in the southwest China.
Chengdu is the centre of science and technology, finance, trade and commerce in the southwest China.

IN THE last 15 years or so the internet has led to the disruption of a number of traditional businesses, especially the way in which products are bought and sold. For example, the world’s largest accommodation provider, Airbnb, owns no property; the leading taxi service, Uber, owns no taxis; the top media company, Facebook, owns no content; and the biggest retailer, Alibaba, has no inventory. This is just a shortlist of a longer list of disrupters who have made their presence felt around the globe.

Almost all sectors will be impacted, positively or negatively, by the internet. If one does not embrace change and remain dynamic, one is destined for obsolescence. In this scenario, it should be noted there is no such thing as good or bad luck. The key is to constantly prepare oneself to take advantage of an opportunity.

These disrupters bring about massive and swift change that not only alters the way we think about that area of business but also the way service is delivered.

As recently noted by market commentator Bruce Whitfield and Craig Bond, CEO of retail and business banking at Barclays Africa and Absa, the financial sector is on the precipice of disruption. I would argue that this disruption has already started. The banking system is already changing, with a wide variety of technologies entering the market globally and altering the way users transact.

The world is seeing the rise of finance technology (fintech) startups that are shaking up the way financial services are provided. To be clear, this does not refer to the IT spend of a bank in making its back-end functions more efficient. This technology is about innovating financial services aimed at, among others, raising finance for a business or paying someone who does not have a bank account without exchanging hard cash.

The interesting observation is that fintech provides financial services at a faster turnaround than that of established banks. Those providing invoice discounting, for example, can provide prospective clients with support facilities within 24 to 48 hours, which is not necessarily possible for banks even if you are an existing client. There are a few reasons for this, including that many of these startups operate in a grey regulatory area. In addition, these fintechs can provide their services cheaper than established banks due to their lean cost structure. They do not need offices to interact with clients and their smaller size and product offering is an important contributor to their nimbleness.

Fintechs operate in a grey regulatory area because while their services continue to grow in popularity, it is hard to put a handle on who is providing what service and to whom. Furthermore, their services do not conform to a mould that regulations such as the National Credit Act cover. It is important to note, however, that being in this grey regulatory area is neither a good thing nor a bad thing.

With regard to regulation, one of the reasons countries such as the US and UK have warmed to fintechs is that they do not use depositors’ money for risky but necessary investments such as small-and medium-sized enterprises (SME) loans. Fintech companies are generally capitalised by investors who have a higher risk appetite, which allows these entities to operate in risky areas. Unlike banks, they also do not have to deal with a great deal of prudential regulation, especially those focusing on how much a bank should hold as reserves or lend to its clients.

The potential role fintech companies could play in the SMEs space warrants a closer look at what they have to offer and understanding their role before moving with haste to regulate them. Of course, front of mind should be that there should always be responsible borrowing and lending practices in place. This also means the public needs to be educated. I am not convinced that public-sector regulation of these entities, in the short term, will necessarily yield a positive result, as one may inadvertently do more damage than good.

SA requires a great deal of financial assistance to support the development of SMEs. Neither the banks nor state-owned development finance institutions can meet the funding gap for SME finance. These entities, therefore, have an important — and I would argue more complementary than competitive — role to play with banks and development finance institutions, especially in assisting SMEs with operating capital, at very competitive rates, required in the day-to-day operations of their businesses. They can, for example, assist SMEs with liquidity; these funds may be necessary to pay, among others, bank loans, suppliers and salaries. Banks and development finance institutions are not suitably geared to provide this kind of support rapidly.

The reason I note that fintechs should not be seen as a threat by banking institutions is that they have a comparative advantage and not necessarily a competitive advantage. Yes, they could provide specific services more efficiently than the more established banks but I would advocate that banks see this an opportunity to collaborate.

Of course, there will be rogue fintech entities that will seek to make a quick buck at the expense of the consumer as opposed to those who are in it for the long term and seek to add value. This is where education comes in and, above all, if the system is going to thrive with the addition of these players, it requires a great deal of transparency, which may come about through encouraging self-regulation.

This already exists to some extent. We should, however, cautiously approach state intervention on how these entities operate in the short term or risk losing a potentially important and innovative partner to SMEs starting out, those looking to sustain their business, or those seeking to expand operations. In all three instances finance is required — banks and development finance institutions cannot go it alone.

Morais, formerly a senior adviser to the executive director of the World Bank Group representing Angola, Nigeria and SA, now works as a management consultant