One of the major factors limiting the progress of economic transformation in South Africa is that millions of South Africans remain excluded from formal financial services because they’re “unbanked”. They have never had a bank account or they only use very limited banking services, which leads to a patchy or non-existent credit record.
It’s true that the situation is improving. According to a 2019 report by Deloitte, as much as 80% of the population interacts with a bank in some way – a substantial increase from 46% in 2004. But financial inclusion – and its ability to create growth and stability – remains a massive challenge. Too many people are still forced to rely on informal channels and transact in cash, at the mercy of loan sharks and off-the-book credit operators who charge exorbitant interest rates.
The good news is that such a fluid society has also given rise to some incredible technology. Our mobile payment solutions, for example, are among the best in the world.
“Cash is expensive,” said Michael Jordaan, co-founder of Bank Zero, in a recent podcast interview. “If we can get rid of it, we’ll take money out of the pockets of taxi drivers and middlemen, and put it onto the phones of consumers.”
But if fintech companies really want to continue making inroads into the informal sector, they need to do more than just cut out cash. They also need to give many more people access to safe and smart ways of saving and investing – and the way to do that is by combining traditional information with alternative data.
What is alternative data?
Basically, it’s any data that is not typically used by financial institutions to calculate a credit rating: cash payments for groceries, transport and airtime, for example, as opposed to your history of paying off your car and your home loan. Other examples of alternative data include medical aid contributions, payment for TV streaming services, and payments towards electricity and other utilities.
All of this data has already been captured, but it is locked away at different institutions that have no way of communicating with each other. With the proposed open finance framework currently under review by the Financial Sector Conduct Authority (FSCA), customers will finally be able to see all of their data in one place, and companies will be able to use insights from that data to design inclusive financial products that will service previously excluded sectors of the population.
For example, an individual can elect to share his or her payment history for their MultiChoice and City of Johannesburg accounts, adding to a pool of aggregated alternative data that a lender can use to assess the viability of new credit products designed for that sector of the market.
How does it work?
The most important first step is that customers need to give their express consent to their data being shared. The actual sharing takes place using stringent security measures, either by a process known as screen scraping, or using application programming interface (API) technology.
Alternative customer data that has been aggregated and categorised using AI and machine-learning technology gives financial institutions detailed insights that will paint a more complete picture of a population group that may have previously been ignored. And that, in turn, should result in the development of more inclusive financial products.
The technology is already available and it is changing the way the industry thinks about banking and credit. If that leads to financial inclusion and a better economic outlook for the average South African, then it’s something to be applauded.
Joseph is MD of budgeting and investing app 22seven