Open banking is set to reach a total market value of more than $123.7 billion by 2031. To stay ahead of international counterparts, South African banks need to embrace open banking as it presents a unique opportunity to innovate, cater to customer demands, and secure a competitive edge.
In a rapidly evolving financial landscape, traditional payment methods like cash, cheques, and cards are conceding market share to innovative alternatives. Digital wallets, bank-to-bank payments, BNPLs, and cryptocurrencies are leading the charge. According to Boston Consulting Group, 89% of South Africans are turning exclusively to digital banking; indicating a wider trend in the industry and a diminishing need for brick-and-mortar facilities to cater to customers. As open banking continues to gain traction, financial inclusion will be one step closer, offering newfound opportunities to marginalised segments of society.
Global stakeholders paving the way
The European Union’s Payment Services Directive (PSD2) sets the precedent for open banking, enabling third-party access to customer data, fostering competition, and driving innovation. In the UK, the Financial Conduct Authority (FCA) takes charge, empowering companies to utilise open banking APIs, stimulating collaboration and growth. Meanwhile, the Central Bank of Ireland diligently oversees open banking in Ireland, ensuring a secure and conducive environment for advancement. Hong Kong’s Open API Framework, launched in 2019 with 20 banks offering over 500 APIs, which allows customers to gain comprehensive banking information, driving better services and user experiences.
In the fintech arena, TrueLayer, has come out on top in the UK, by providing secure data sharing infrastructure through its open banking APIs. They have introduced innovative solutions like variable recurring payments (VRPs), revolutionizing the industry. TrueLayer’s success can be attributed to strategic partnerships with all the major UK banks.
Pivotal South African players
Key players driving the open banking ecosystem in SA encompass regulators, financial institutions, and TPPs. Recently, South Africa has taken a promising step towards regulating open banking, signalling progress. To foster fintech momentum, the South African Reserve Bank (SARB) must expand its scope beyond screen-scraping businesses, and they have already indicated the intent to regulate data sharing. Notably, on May 23, SARB made a significant move by issuing a draft directive through its National Payment System Department (NPSD), specifically addressing Instant Electronic Funds Transfer Credit (Instant EFT) payments. This directive reflects the commitment to enhance security and regulation in South Africa’s financial landscape. Collaborative endeavours, like the Intergovernmental Fintech Working Group (IFWG) engage financial sector regulators, competition authorities, and industry players. In Finch Technologies’ latest whitepaper report, they shed light on the necessary framework perspective for banks to harness the full potential of open banking.
Other players include major banks like Investec, Discovery Bank, Capitec, and Nedbank who are investing lots of resources into the open banking landscape. Investec offers API access to both consumers and businesses, with a focus on simplicity and compliance. Discovery Bank’s app supports an open banking landscape, enabling customers to access value-added products and integrate non-Discovery products to improve their Money Status. Capitec has partnered with Ozow to provide consumers with secure online payments through Capitec Pay, offering convenience and cost-effectiveness. Nedbank collaborates with Xero to integrate banking transactions for SMEs, streamlining accounting processes.
Fintechs will inevitably play the biggest role in driving this initiative, with companies like Finch Technologies, truID, BankserveAfrica, EasyEquities, Ozow and Stitch using reliable financial data to develop innovative financial products.
The benefit for banks
Open banking offers numerous benefits to banks, fostering collaboration with TPPs to drive innovation and enhance value propositions. It empowers banks to engage customers better, deliver tailored experiences, and gain insights for informed forecasting. Compliance becomes simpler, costs reduce, and shared data leads to improved KYC and AML protocols. Additionally, embedded finance reaches new customer bases, while re-packaging financial products allows customisation and choice. Embracing open banking empowers banks to stay competitive and provide holistic services that meet their customers’ evolving needs.
With over 600 insurers and 6,000 lenders, there are a wide range of players that can participate in this ecosystem. The country sees millions of applications for loans, insurance products, and mobile contracts, resulting in a need for risk vetting and recurring payments. South Africa already has a strong banking technology infrastructure, and the next step is to make it accessible to a broader market. Success stories in the country include nano lending, where a major South African telco developed a product to cater for the under banked. Finch Technologies, a Fintech developing open banking ready software was used for the digital onboarding solution required. Another use case is digitising taxi finance collections, where a business uses an open banking solution to calculate the taxi owner’s cashflow, and the the taxi owner has the added benefit of not having to deliver cash and the taxi finance business has efficient seasonality analysis to optimise collections. Additionally, we’re also seeing merchant services and payments being revolutionised, where Fintechs have built solutions that allow merchants to accept payments directly from a customer’s bank account e.g., Ozow partnered with Capitec to launch Capitec Pay the country’s pioneering payments API. Lastly, we’re seeing open banking APIs empower financial institutions to develop personal finance management applications like Discovery Bank’s Vitality Money.
What does the path to success look like? Capitec is one such example of a bank that steered away from relying on earnings from their lending business, instead they’ve ramped up revenue from transactions. Could open banking be the next big revenue driver for banks? South African banks must actively participate, collaborate, and establish regulatory frameworks to secure a prominent position in the evolving financial landscape. Those who seize the initiative will gain a significant competitive edge, while playing catch-up later will be challenging given the evolving customer behaviour.
