The Role of Fintech in Driving Financial Inclusion and Payment Modernization in South Africa

According to a McKinsey & Company study, digital financial services have the potential to provide access to financial services for 1.6 billion people in emerging economies by 2025. The study also discovered that these developments are expected to boost emerging economies’ collective annual GDP (GDP) by US$3.7 trillion, or 6%, by 2025, while creating up to 95 million jobs across all sectors. The government of South Africa challenged the financial sector to achieve 90% financial inclusion by 2030, and significant progress has been made since then. However, financial inclusion and its ability to fuel growth in South Africa remain limited because many people in the informal sector continue to transact in cash.

Accepting electronic payments is a challenge for informal merchants. According to a Mastercard study titled “Insights into the Informal Economy Report,” while more than 50% of South Africa’s informal enterprises have experienced strong customer interest in card payments, approximately 90% of them are still cash-only businesses. This reliance on cash is frequently caused by a lack of infrastructure in the informal sector. Traditional acceptance channels, such as physical point-of-sale (POS) devices, are perceived as expensive, particularly by microenterprises. In fact, while rural and township residents used cards for 60% of their transactions at formal retailers, only 4% of their transactions at informal retailers were card-based.

Fintech firms are playing an important role in bringing financial services to the underserved. Fintechs have been able to offer some of the most innovative and customer-first payment offerings thanks to their agility and responsiveness to market needs. Learnings from other markets show that solutions that prioritise the customer in product and service design have been particularly successful. Deposit @ Till, an innovation developed by the AKELO subsidiary, Efficacy Payments, is a South African example of solving for the customer. Deposit @ Till allows consumers to make cash deposits directly into their card-linked bank accounts at select retailers, eliminating the need to visit a bank branch, which is especially useful for workers and informal traders who need to deposit cash securely after hours.

The customer-service provider trust relationship is also critical to ensuring customer adoption. While fintechs provide a better customer experience, traditional banks continue to maintain trust. They do, however, recognise that fintech can and should play a critical role in driving the adoption of digital payments and financial inclusion.

The shift to instant payments is an important area of innovation. Instant payment systems are being implemented across many geographies as part of their payment modernization processes, replacing daily batch processing with real-time systems. Instant payments can make a significant contribution to financial inclusion because their implementation has been shown to coincide with a decrease in cash in the economies where they have been implemented. For South African consumers, P2P and disbursement instant payment products enable one-to-one or one-to-many disbursements to card-linked accounts in near real-time, providing a more streamlined and cheaper alternative to EFT and providing immediate access to funds.

Financial institutions and fintech companies are increasingly collecting consumer data in order to gain insights into consumer behaviour and develop products and services that better meet the needs of their customers. Financial service providers have the potential to innovate and provide customer-first solutions more than ever before by building profiles of previously excluded groups.