FinTech or Financial Technology has grown with the advent of new technology applications such as blockchain, artificial intelligence, Internet of Things (IoT), wearables, and others. Application of these software technologies into the financial sector promises to transform the way in which consumers interact with the financial services industry as well as the solutions offered by the industry.
Financial institutions are paying attention to startups playing in this FinTech space as this is where potential disruption of their business model is going to come from. Disruptive innovation is defined by Christensen, Raynor and McDonald, in their paper “What is Disruptive Innovation” for the Harvard Business Review, as “a process where a smaller company with fewer resources is able to successfully challenge established incumbent businesses.” These disruptive companies target market segments that are ignored by incumbents with products that have more suitable functionality at a lower price. In some instances, these new companies then progress to capture the traditional market that incumbents are playing in at a lower cost and with a more suitable solution. When mainstream customers start adopting the new company’s offerings in volume, disruption has occurred.
According to Christensen, Raynor and McDonald, incumbent companies do need to respond to disruption if it’s occurring, but they should not overreact by dismantling a still-profitable business. Instead, they should continue to strengthen relationships with core customers by investing in sustaining innovations whilst creating a new division that can focus on the disruptive innovation and take advantage of that as well. Financial institutions, rather than be disrupted by a new entrant, are future proofing themselves by creating disruptive innovation capabilities within their organisations and supporting external startups in return for equity or partnering with the larger organisation.
According to Accenture research on the evolving space of FinTech, players with a vested interest in the FinTech space have poured an unprecedented amount of money into global FinTech startups. More than $50 billion has been invested in almost 2,500 companies since 2010. And this continues to grow.
Within the South African landscape, the lack of funding has been a barrier to entry for many, often relying on self-funding or being funded by friends and family. This lack of funding is changing in South Africa. There is a focus of activity taking place in this space as corporates start paying more attention.
From ideation stage to playing with the big boys, support structures are being put in place by corporates, universities, non-governmental organisations and other institutions to assist startups reach the next level in their progression. Critical in this process is to fail fast and fail cheaply. Timeframes have shrunk with regards to start-ups progressing to scaled commercial models. The burgeoning incubation and acceleration programmes in South Africa and across the world are based on this understanding. Given that the majority of startups fail for various reasons, investors and funders are creating many opportunities for startups to take their startups from ideation stage to a point where they acquire their first client as quickly as possible. With access to mentors and resources to fully explore their business model, the process is engineered to remove barriers that may hinder the startup achieving its potential. The below diagram is an illustration of the process many of these start-ups go through:
The South African FinTech space is growing rapidly and it is good news not only for the pedestrian economy but also for improved employment levels. Traditional industries that previously fuelled the South African economy are stagnant or in decline. Recent third-quarter numbers released by Stats SA showed a decline in the trade, manufacturing and agriculture industries. The finance, real estate and business services industry are becoming increasingly vital to the SA economy having recorded positive growth every quarter since the fourth quarter of 2010.
As Exponential Ventures we are passionate about the FinTech startup space and look forward to nurturing and seeing these innovative companies like Tax Tim and LifeQ grow to make a meaningful difference in the lives of consumers locally and globally and making a significant contribution to our economy.