Have you heard about the latest large bank forced to cut back because of competition from disruptive Internet start-ups? Not locally you wouldn't have, and you're not likely to.
South African banks are fortunate to operate in a highly regulated market that allows them to remain largely untouched by the digital revolution that's decimating the likes of the print media and the travel and music industries.
The large commercial banks occupy the enviable position as final clearing houses for the SA Reserve Bank, cementing their place in the money supply chain and therefore removing pressure to be first-movers in the digital game.
This privileged position, however, requires compliance with the strictest of regulations that provide the perfect platform on which the innovators in mobile and convenient payment systems can piggyback.
"The payment gateway providers have been innovative and we love it," says Arif Ismael, executive for Strategy and Communication at the Payments Association of SA (PASA). "They're a lot closer to the market, provide what is needed as well as unique opportunities to do new things. It has really mushroomed in last two years."
Payment gateways
PASA is the industry regulatory authority that oversees the National Payments System, which it does under authority of the SA Reserve Bank. This system dictates the operation and handling of any payments, with regulations and requirements increasing with the perceived risk of transactions.
Payment gateways are required to register with PASA and are certified according to whether they can handle funds, and how they do it. If, however, their monthly transactions don't exceed R10 000 or R10 million in value, they fall under the registration threshold, and PASA's oversight. There are currently more than 80 operators registered with PASA.
Ismael says the organisation covers about 80% of all payments and payment providers. "There are hundreds of [payment providers] we don't have line of sight of because they're not seen as systemically risky," he says.
The payment gateway providers have been innovative and we love it.
PASA is, however, working with the Reserve Bank to amend the thresholds and regulations and expects this will result in its reach extending to these smaller operators.
"It's a pretty saturated market already," says Tielman Botha, Mobility Services lead at Accenture SA. "You have to start being visionary about the fresh things you can bring to the market."
Accenture has broad experience in both consulting and developing mobile payment systems for customers, with recent research indicating that future success is going to depend on offering something beyond simply a payment channel.
A crowded market
This 'mobility transformation' is required within the banks to understand customers better and give them the services they want. Botha cites the muted response of M-Pesa in South Africa as an example of not clearly understanding customer needs.
Charles Pittaway, MD of Sage Netcash, a large payment gateway provider with a strong presence in the B2B market, shares this view about the applicability of a service to a market. He suggests that the sophisticated banking system, a wide ATM network and lack of integration at retailer level hampered the M-Pesa case in South Africa.
"What I've noticed in the past five years is that a lot of the newcomers in the market are focusing on very specific market segments," he says. This fragmentation of the market, he suggests, is detrimental to the long-term viability of these businesses unless they develop a value proposition based on either price, integration into existing systems or a truly unique service.
He says clients are reluctant to manage multiple payment providers and are looking for a single source from which they can choose payment options. Pittaway believes this will eventually lead to consolidation in the market, which is starting to happen.
Mobile e-commerce beckons
Peter Harvey, MD of PayGate, a dedicated e-commerce payment gateway, agrees that the market is currently saturated, but only if one considers the ratio of solutions and providers to the number of e-commerce companies and volume of their transactions.
"E-commerce as a percentage of retail sales is less than half a percent, and therein lies the possibility," he says. "The challenge for all gateways and banks is to grow e-commerce."
E-commerce as a percentage of retail sales is less than half a percent.
According to research published last year by World Wide Worx, the value of retail e-commerce in 2011 was R2.636 billion, up 30% from the previous year.
"The study further indicates that e-commerce is growing at a rate of around 30% a year, and is showing no signs of slowing down. In fact, taking into account that a number of major consumer brands and chains have not yet devised comprehensive online retail strategies, the scope for future growth is even greater," wrote Arthur Goldstuck, author of the report.
Harvey says competition has definitely increased over the last few years, led largely by the rapid growth in mobile Internet connectivity. The potential across Africa because of the mobile Internet explosion is one reason he expects to see strong demand for mobile payment and banking systems. "I think we'll see phenomenal growth, and in the next three to five years, we'll probably see a swing to e-commerce."
PASA's Ismael welcomes this potential, but cautions that solution providers need to innovate in the right spaces. This requires understanding the market needs and ensuring that payment solutions increase financial inclusion.
"I think many people approach it from 'how can we capture the market and become dominant?', rather than asking, 'how can we serve the market?' Financial inclusion is part of our mandate and I want to see payment gateways open and accessible by the masses," says Ismael.
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