There are a number of start-up banks set to challenge the dominance of the big four in South Africa (Absa, FirstRand Bank, Nedbank and Standard Bank) in the coming months, including Bank Zero, Postbank and Discovery’s new banking arm.

Challenger banks are good news for consumers, offering more choice, and hopefully putting upward pressure on the quality of services, and downward pressure on the price of services. Digital banks in particular have a lower cost base, due to being digital only, as well as a greater reach by not necessarily relying on bricks and mortar branch networks. In addition, they have a reputation for good user-experience and there is also an expectation that these challenger banks will be more consumer friendly.

The Chair of the Prudential Regulator has recently said that South Africa will not let new disruptive entrants compromise stability in the banking system,[1] but new technologies also bring new ways to exploit consumers and the system, so the conduct and consumer regulators should also be on alert.

One of the new entrants to the market, TYME, is currently owned by Australia’s Commonwealth Bank (CBA), one of Australia’s own four behemoth banks. CBA was recently awarded a ‘Shonky’. ‘Shonky’ is an Australianism meaning ‘dishonest, unreliable, or illegal, especially in a devious way’, and Australian consumer advocacy organisation, Choice, awards the Shonkys for such behaviour. CBA’s Shonky was based on the bank’s ‘Dollarmites’ program. This simple banking product targets young children – and is pushed through primary schools.

The Shonky was awarded based on kick-backs the bank was paying to primary schools for their participation and ongoing support of the scheme, as well as a recent apology CBA was forced to make about ‘widespread manipulation’ by staff of Dollarmite accounts to inflate bonuses and meet performance targets. Bank customers are sticky – rarely switching banks – so targeting young people often gives the bank a lifetime customer.

This isn’t the only shonky behaviour with which CBA has been associated. For example, its life insurance division admitted during hearings of the Australian Financial Services Royal Commission that it hadn’t updated its definition of heart attack to the global standard for commercial reasons. That is, it deliberately kept a more restrictive definition in order to avoid paying claims. And while CBA provides excellent user-experience and innovative tech, this has also led to breaches of the law. In June this year, CBA admitted to contravening Australia’s Anti-Money Laundering and Counter-Terrorism Financing Act 2006 on 53,750 occasions, resulting in an A$700 million (±ZAR 7.3 billion) settlement with the regulator.

This new entrant, along with the several others that have recently been granted banking licences in South Africa, highlights the tension inherent in financial regulation – inclusion and competition must not come at the expense of the end consumer or the stability of the system. The financial regulatory infrastructure is a critical component in enabling the sector to develop safely and in a way that is beneficial for consumers. When the new entrants are foreign, cooperation and arrangements between the ‘home’ regulator and the ‘host’ also become crucial. Cooperation in financial regulation is relatively well-developed, but less so consumer protection regulation in the financial sector.

As African countries look to grow their financial sectors, it will be especially important to ensure that new foreign entrants come with the assurances of cooperation from the home regulator. As pan-African banks expand, and fintechs proliferate, it will be worthwhile for African Continental Free Trade Agreement (AfCFTA) members to consider how the AfCFTA can support this kind of cooperation. The financial services annex to the services protocol could include mutual obligations[2] – opening of the financial sector in the host country, combined with a commitment from the home country of the financial services providers for regulatory cooperation and consumer protection. This kind of mutual obligation is beginning to appear in trade agreements, for example with respect to data and would make a real contribution to the greater integration envisioned by the AfCFTA.

In the meantime, South Africa’s financial regulators will need to carefully balance the new flexibility they are showing towards entrants into the system with a focus on consumer outcomes, not just stability. As for TYME, reports suggest that the CBA will sell the remaining 90% of the South African business to SA partner, African Rainbow Capital (ARC). If the deal comes to pass, ARC would do well to adopt the positives associated with the CBA – good digital interfaces and low fees. And leave the shonky practices to Australia...

[1] See https://www.biznews.com/sa-investing/2018/10/08/sa-banking-giants-disruptors-regulators

[2] For more on reciprocity in the context of services trade: https://www.ictsd.org/themes/global-economic-governance/research/services-trade-and-regulatory-cooperation