Business banking innovation - what lies ahead on the road to digital innovation?

By Colin Timmis, General Country Manager, Xero SA

South Africa’s small businesses face a number of challenges: a declining economy, skills shortages and more. National statistics agency, Statistics South Africa recently revealed that the economy contracted by 3.2% in the first three months of 2019 – the largest quarterly drop in a decade, and an unfortunate turnaround from the 1.4% growth the country experienced in Q4 2018. But some of the more enduring problems they face have to do with banking.

One of the major issues that small businesses in South Africa face is lack of capital. Getting access to funding, tailored service, and ultimately, value for money can be a real struggle, especially for small business owners trying to get off the ground – or stay afloat. And yet, there’s cause for optimism.

Because even if some conventional banks resist it, disruption and innovation are right around the corner. And if you’re running a small business (or aspiring to do so) you can benefit from it sooner than you might think.

Securing funding

Here’s the thing about South Africa’s small businesses: they tend to have good, sensible business models. When they make requests for finance, they tend to be reasonable, and well within the scope of what the bank they’re applying to offers. Even so, they often find it hard to get finance anyway: the unmet lending need in South Africa is estimated at between R86 – R346 billion: a wide range, but one that’s still quite substantial at the lower end.

If you’re applying for funding, though, technology can make it easier to secure what you need. The problem usually isn’t the business model or the amount requested: it’s the documentation. Basically, banks need you to prove that you’re loan-worthy, and they can’t do that without the right financial data.

Using cloud accounting tools, you can make sure this data is kept scrupulously up to date –making it easier than ever to supply banks with the information they need. And when it comes to banks, don’t think you have to go down the conventional route: alternative lenders such as Lulalend, Retail Capital, and Bridgement can be accessed through an API. This means that they sync up directly to your cloud accounting software, so that quick, informed financial decisions can be made. In some cases, they can review applications in a matter of hours through these systems.

The disruptors

Some 80% of South Africans already have bank accounts, so it’s easy to see it as a settled issue. But the rise of digital banks and alternative lenders shows that preferences are changing and so are the conventional ways of banking. Their offerings are becoming less specific and their systems less arcane: technology is simplifying, strengthening, and ultimately reorienting finance around the customer – including the small business customer.

South African banks will inevitably learn from digital disrupters from overseas such as Monzo, Starling, and N26, which focus on user experience above all (in Monzo’s case, it didn’t even have a banking license for the first two years of operation). Three digital newcomers in South Africa – Tyme, Discovery Bank, and Bank Zero – have entered the market with low-cost operating models, competitive pricing, and sophisticated data systems. The aim is to attract a new generation of tech-savvy consumers, who have no problem banking through apps and devices rather than branches and ATMs.

Open banking, open banks

We can’t speak to the success of these banks just yet – but banking is ripe to be disrupted in South Africa.

The Second Payment Services Directive (PSD2) in the UK introduced the concept of ‘Open Banking’ into European legislation: basically, using open APIs to allow third-party developers to build applications and services around the bank. So if you’re a small business owner, you can more easily customise your banking service with apps and add-ons.

That’s not as easy a proposition in South Africa as it is in Europe, of course, because it’s hard to get hold of the relevant data. But tools such as Xero’s Bank Feeds API make it easier to get access to this information – Sasfin already has a direct feed with Xero, which will make it easier to integrate banks within the platform once Open Banking is adopted.

And it will be adopted here, sooner rather than later. Banking’s digital future isn’t on the horizon: it’s almost arrived at shore. Change is coming sooner rather than later, and if small business owners embrace it, they’ll surely benefit.