According to Christopher Ball, co-founder of Finch Technologies, the open banking sector is projected to surpass a total market value of $123.7 billion by 2031. For South African banks to maintain a competitive advantage over their global counterparts, they must embrace open banking fully. This approach offers a distinctive opportunity to foster innovation, meet customer demands, and secure a strong foothold in the market.
Amidst a dynamic financial landscape, traditional payment methods such as cash, cheques, and cards are witnessing a decline in market share, giving way to more innovative alternatives. Digital wallets, bank-to-bank payments, BNPLs (Buy Now, Pay Later), and cryptocurrencies are taking the lead. According to Boston Consulting Group, 89% of South Africans now exclusively adopt digital banking, reflecting a broader industry trend and reducing the necessity for brick-and-mortar facilities to cater to customers. As open banking gains momentum, financial inclusion will advance, presenting new opportunities for marginalized segments of society.
Global stakeholders paving the way.
The European Union’s Payment Services Directive (PSD2) is a model for open banking, granting third-party access to customer data, promoting competition, and encouraging innovation. In the UK, the Financial Conduct Authority (FCA) plays a pivotal role by enabling companies to leverage open banking APIs, fostering collaboration and fostering growth in the sector. Meanwhile, the Central Bank of Ireland diligently oversees open banking in Ireland, ensuring a secure and conducive environment for further advancements. In Hong Kong, the Open API Framework, launched in 2019 with the participation of 20 banks offering over 500 APIs, empowers customers to access comprehensive banking information, thereby driving better services and user experiences.
In the fintech space, TrueLayer has emerged as a frontrunner in the UK, offering secure data-sharing infrastructure through its open banking APIs. Their introduction of innovative solutions, such as variable recurring payments (VRPs), has revolutionized the industry. TrueLayer’s remarkable success can be attributed to strategic partnerships with all major UK banks.
Pivotal South African players
In the open banking ecosystem in South Africa, key players include regulators, financial institutions, and TPPs (Third-Party Providers)—recent progress in the regulation of open banking signals promising developments in the country. The South African Reserve Bank (SARB) is moving beyond screen-scraping businesses and expressing the intent to regulate data sharing to accelerate fintech momentum.
A significant step in this direction was taken on May 23, when SARB issued a draft directive through its National Payment System Department (NPSD), focusing on Instant Electronic Funds Transfer Credit (Instant EFT) payments. This move underscores the commitment to enhance security and regulation in the country’s financial landscape. Collaborative efforts, exemplified by the Intergovernmental Fintech Working Group (IFWG), involve engaging financial sector regulators, competition authorities, and industry players. Finch Technologies’ latest whitepaper report emphasizes the necessary framework perspective for banks to leverage the potential of open banking fully.
Major banks like Investec, Discovery Bank, Capitec, and Nedbank actively allocate substantial resources to the open banking landscape. Investec offers API access to consumers and businesses, emphasizing simplicity and compliance.
The Discovery Bank app adheres to an open banking approach, allowing clients to acquire value-added goods and combine non-Discovery items with improving their Money Status. Capitec collaborates with Ozow to provide consumers with secure online payments through Capitec Pay, ensuring convenience and cost-effectiveness. Nedbank has partnered with Xero to streamline accounting processes for SMEs by integrating banking transactions.
Undoubtedly, fintechs such as Finch Technologies, truID, BankserveAfrica, EasyEquities, Ozow, and Stitch will lead the charge in this endeavor. They leverage dependable financial data to craft novel financial products.
The benefit for banks
Open banking brings many advantages to banks, enabling partnerships with Third Party Providers (TPPs) that promote innovation and amplify their value offerings. Banks can interact more effectively with customers, offer personalized experiences, and make data-driven forecasts. Compliance procedures are streamlined, costs are reduced, and the shared data enhances Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures. The concept of embedded finance helps tap into new customer segments, and the reconstitution of financial products allows for customization and options. By adopting open banking, banks remain competitive and can offer comprehensive services tailored to their customer’s changing needs.
“South Africa has a significant player base with over 600 insurance companies and 6,000 lenders that can actively contribute to this ecosystem,” states Christopher Ball. “The country deals with millions of applications for loans, insurance policies, and mobile contracts, leading to an urgent need for risk assessment and recurring payment systems. We already boast a robust banking technology infrastructure. The forthcoming step is to extend its accessibility to a wider market.”
Success stories in the country comprise initiatives like nano lending. A leading South African telecom company created a product specifically designed for the underbanked population, employing Finch Technologies’ open banking-ready software for the necessary digital onboarding. Another case in point is the digitization of taxi finance collections. Here, a business utilizes an open banking solution to evaluate the cash flow of the taxi owner. This not only spares the taxi owner the hassle of delivering cash but also provides the finance business with efficient seasonality analysis for optimizing collections.
Moreover, the revolution in merchant services and payments is noteworthy, as Fintechs have constructed solutions enabling merchants to accept payments directly from a customer’s bank account. For instance, Ozow collaborated with Capitec to introduce Capitec Pay, the country’s trailblazing payments API. Lastly, open banking APIs empower financial institutions to create personal finance management applications, such as Discovery Bank’s Vitality Money.
What does the road to success entail? Capitec illustrates a bank that shifted focus from earnings via lending towards transaction-based revenue. Could open banking serve as the next major revenue source for banks? South African banks must engage proactively, cooperate, and lay down regulatory structures to maintain a notable standing in the changing financial arena. Those who take the initiative early will earn a considerable competitive advantage, as catching up later could be demanding due to the changing customer habits.