Fintech: The Rolling Stone of SA

Fintech in Africa - you will likely find yourself in one of two camps. You’re either celebrating your company’s latest seeding round or wondering what a smart contract is and how it has anything to do with local firms operating in the financial technology sector. Not sure where you stand? Here's a simple test - if you are not yet clear on how the decentralised nature of a ledger affects the legality of smart contracts, then you are probably part of the latter. Not to worry, you’re not alone. Many South Africans are interested in Fintech, but don’t know how to make heads or tails of the industry.

This article will provide you with some opinions and references in order to guide you along what will hopefully be a longer and more promising ride within our economy than many sources would have us believe. So let’s start with a more recent matter that requires our attention - the possibility of Fintech heading out the backdoor.

A concern that we have is that the industry has already started showing signs of possibly fizzling out; or at least the way in which it is funded - which is not that difficult to understand. In 2017 alone, forty seven South African Fintech Startups successfully closed deals for online card payment channels. This naturally serves as motivation for eager investors and programmer entrepreneurs to get their head into the game, and as a result, 2018 marks a year during which many acclaimed Fintech startups will go public. According to Victor Basta, MD of Magister Advisors, it will also display how the overexuberant investors of yesteryear have calmed down and started to reevaluate their stakes and position on the wider industry.

Perhaps even more menacing is the reality of initial public offerings (IPOs) and the volatile road to expected returns which many stakeholders are on. Initial public offerings are the first point of entry for the public to buy stock in a private company and generally a great way for startups to gain initial capital. These IPOs also at times sport an attractive promise to provide 16x revenue. Basta raised his concern over this 16x revenue multiplier that some Fintech IPOs are banking on and appropriately compares it to Google and Paypal’s 7x revenue mark. We’ll discuss the nature of Unicorns and Gazelles soon enough, but these Fintech multipliers are a questionable claim by any measure - especially in having become more generally accepted than any single investor should be comfortable with.

Yes, we live in a time of cryptocurrency millionaires and Youtube demonetisation. Yes, it’s not about your age or experience anymore. Yes, many far-fetched dreams have become very achievable get-rich-quick schemes. In the wake of all the excitement there does exist a very realistic sentiment however and it takes into account the scalability and functionality of enterprise.

Rome was not built in a day and maybe the Colosseum had been stripped of all the beautiful marble that had decorated its exterior walls following the barbarian raids, but maybe that’s the point. It is possible, even after taking substantial damage, for anything to stand the test of time reasonably well if it receives careful consideration and dedicated craftsmanship over an extensive period of time.

Today’s companies are faced with staying ahead of the competition’s deadline with first-to-the-finish line attitudes. Most of the work is done by upstart developers and architects who might make use of a prize-winning development platform, but lack the commitment necessary to achieve a 16x revenue mark. Fintech startups can in fact be built in a day if you believe the dream sold by countless hackathons hosted internationally. We should ask ourselves whether we subscribe to the thought that an enterprise life cycle is dependent on the time it took to build it - that something that takes years to build will last long and that which is built in mere days will dissipate within a period of equivalent length. Our tools have evolved, but are we up to the task of harnessing these incredible devices with the commitment it demands?


“It is becoming clear that being disruptive is not sufficient in itself.”


It is worthy to note that the dissipation of Fintech associated hype has already started spreading and we’ve started to shift our focus locally towards the next, potentially monetizable, challenge - regulation. In a report titled The impact of the 4th industrial revolution on the South African financial services market, published by the Centre for Excellence, it is noted that Fintech companies will increasingly start to collaborate with financial institutions instead of competing on an independent level. This move will directly serve to counter a time consuming war on unnecessary regulation, depending on which side you’re on, that many companies would have to endure should they choose to stand alone.

The report questions the industry’s capacity for successfully managing customer and distribution networks while also complying to the relevant regulatory challenges. Banks, in comparison, already provide this network in addition to their tried and tested systems. It should seem quite obvious for newcomers to pair up with the very institution that provided cause for the origination of the many regulations we face today.

The counterargument is of course that it might very well be in the interest of Fintech companies to instead decide on meeting these challenges head on and independently. It is becoming clear that being disruptive is not sufficient in itself. The nature of the industry demands for regulations that meet its disruptive nature as supposed to conforming to a system that is becoming outdated by the hour.

The report also remarks on the low success rate of Fintech startups attempting to partner up with banks - adding fossil fuel to the dinosaur bank burn-out. It is too early in the game to tell whether this will hold true for the majority of companies within the next five years, but the question remains as to the impact these forming years will have on the Fintech industry in the long run.

We’ll be tapping into some discussions around Gazelles, Unicorns and the general nature of employment within the industry soon enough as promised, but for now I’ll conclude with these fine lyrics written by Bob Dylan for your consideration:

“Once upon a time you dressed so fine Threw the bums a dime in your prime, didn't you? People call say 'beware doll, you're bound to fall' You thought they were all kidding you. You used to laugh about everybody that was hanging out. Now you don't talk so loud, now you don't seem so proud About having to be scrounging your next meal”

Like a Rolling Stone - Bob Dylan

Rolling stones may gather no moss, but it is continually in motion - an obvious statement which should be used as an obvious indication when considering industry sentiment.

Kind Regards Johan Bronkhorst Co-Founder & Director

The purpose of this article is not to launch any type of attack, but to assist in guiding the general public towards a better understanding of some important factors within the Fintech industry. So don’t panic, but if your only response is to immediately exclaim that “I’m not worried!” - then you should potentially take a moment.