The world of finance is both static and innovative, conservative and courageous. More than three centuries after the Bank of England launched printed cheques, for example, there are countries in the developed world such as the US where cheques – pieces of paper that you sign and put in the post box in a stamped envelope for manual delivery – are still standard forms of payment. At the same time, there are parts of the world, like Kenya, which in the absence of a useful banking network leapfrogged cheques and most instruments of conventional banking to go straight into mobile money.
The landscape of consumer finance remains a complex mix of legacy instruments and conceptual cryptocurrencies; and the curve of change and innovation is ever steeper. Most recently the curve was meaningfully escalated by the Covid-19 pandemic, notably in the realm of retail. Contactless payment systems grew in stature from being somewhat of a rarity and possibly even a gimmick, to being a health recommendation; retailers without an online option were scrambling to fix that.
This case study looks at the RCS LevelUp Innovation Studio and its ability to drive the uptake of financial innovation. It uses the South African-born enterprise PayFast as an example of how even established businesses may draw from an open innovation system to accelerate impact, to the greater good of the broader community.
South Africans have not been among the early adopters of e-commerce, or indeed any kind of remote buying. In part this is because we have not been able to trust cheap and conventional delivery options such as the Post Office, either for delivery or for more complex returns processes. Partly, also, it is a function of low levels of customer-centricity among e-shopping retailers: Grocery stores, for example, while having online options more than a decade ago, also required lead times of 48 hours or more and offered inconveniently broad delivery time slots.
Additionally, payment for e-shopping generally depended on a credit card – something many South Africans did not and do not possess.
However, e-retail has been working on getting its house in order. According to research by World Wide Worx, South Africa’s e-commerce sales finally reached tipping point in 2020, growing by 66% from 2018. In 2020, total online retail revenue reached R30.2 billion.
It is expected that SA’s e-commerce sales will reach R42 billion in 2022, says the research.
The timing makes it clear that the Pandemic lockdown had much to do with the surge in adoption. Customer-centricity has migrated emphatically into the heart of e-commerce businesses, revolutionising the whole value chain.
What remains true, however, is that financial services institutions are necessarily risk-averse. Internal and regulatory governance issues create a vital network of security that is also, unfortunately, often antithetical to the innovation environment. Nevertheless, all financial institutions became charged during the Pandemic with a consciousness of the urgency to find mechanisms that would allow them to balance the tension between the push to delivery and the handbrake of compliance. Finding this balance is the essential work of innovation. It is for this reason that RCS’s Innovation Studio is becoming a meaningful part of its internal project pipeline.
THE SOCIAL ROOTS OF PAYFAST
Back in the relatively analogue days of 2006, PayFast’s co-founders Jonathan Smit and Andy Higgins noted a barrier to business for vendors wanting to extend into the digital space: Online payments required the vendor to have a merchant account at a bank. Retailers could not, however, open a merchant account until they had logged a six-month trading history. So, for any new business, it was impossible to have a digital offering without first having a brick-and-mortar offering, which carries its own substantial layer of costs and considerations.
The founders believed that ecommerce should be democratised. And so, with little insider knowledge but driven by conviction, Smit – who has a background in electronic and computer engineering – built the PayFast platform from scratch over the course of about a year.
When it launched in 2007, PayFast was positioned as a gateway that allowed all retailers to join the digital era. In practice, it works like this: PayFast is a payments aggregator which online shoppers can use to channel payments to the vendor. When they are directed from an ecommerce platform to PayFast, the shopper selects their preferred method of payment, which PayFast processes. PayFast then pays the vendor concerned.
In the spirit of customer-centricity, the menu of payment methods needed to be as broad as possible; and over time PayFast signed up the full spectrum of credit, debit and cheque cards. It also added instant EFT, Masterpass, SnapScan and Zapper, RCS store cards and more.
And to make it attractive to vendors even from the small or micro sector, it needed to be cost-effective – it couldn’t be trading cash for convenience. Therefore, there are no set-up or monthly fees; PayFast’s income comes from a negotiable turnover fee. For the vendor, the advantage is that they do not need to jump through complex regulatory hoops implicit in handling sensitive credit and debit card information – PayFast effectively fulfils all regulatory and risk management roles on their behalf.
There was massive take-up. By 2015, more than a million transactions had been processed on the platform; and today PayFast integrates with more than 80 platforms, and serves more than 80 000 merchants.
The RCS store card option is a relatively recent and notable addition. The holders of RCS-underwritten cards, including Game, Cape Union Mart, Makro etc, tend to use these cards in-store. The connection with PayFast means these cards are now also usable for online shopping, in the same way as a credit or debit card could be used. This is particularly meaningful for people who do not hold credit or debit cards.
The world noticed PayFast, and in 2019, it was bought by Nairobi-based payment services provider DPO Group in a shares-and-cash deal reported to be worth more than R100m. The DPO Group, in turn, was acquired in 2021 by Network International, a globally renowned enabler of digital commerce across the Middle East and Africa.
ABOUT THE RCS LEVELUP INNOVATION STUDIO
LevelUp was founded in 2019 as RCS’s Enterprise & Supplier Development programme. However, in response to the urgent need for greater resilience in the small, micro and medium enterprise (SMME) sector, the vision for LevelUp expanded and it grew into what it calls “an inspirator”, providing customised and specific support to cohorts of SMMEs.
It is a model of innovation and cross-corporate collaboration; and its unique differentiator is the benefit that comes with adjacency to a significant player in the retail financial sector.
The Innovation Studio, an integral pillar of LevelUp, was established to support RCS’s ability to be agile and responsive to innovation, adding value in two ways:
- Inside Out, which focuses on accelerating innovation from within, seeking to bring additional capacity to ensure agile implementation on innovation or new projects; and
- Outside In, which focuses on trend-spotting, proactive innovation and idea generation, ecosystem management and the enablement of cohort participants and other innovative solution providers to work with RCS or its partner network.
The former approach involves bringing new ideas to the RCS team that support the group’s strategy; supporting RCS teams to accelerate their business ideas through pre-development work, e.g. product improvements & operational efficiency changes; and supporting with proof of concept design and testing.
The latter approach is achieved through identifying external innovation opportunities linked to RCS strategic objectives; sourcing external solution providers and facilitating their engagement with RCS; ideating, validating and testing vetted opportunities; and identifying companies that have potential to scale, can partner with the RCS ecosystem, or have social impact.
The PayFast project is a demonstration of the Outside In function.
PAYFAST AND RCS, AND THE ROLE OF THE INNOVATION STUDIO
When a financial services organisation lets a payment gateway like PayFast into its system, there is a plethora of considerations. How will the systems integrate? What are the respective security systems like? How can the interface be made seamless for the customer?
Usually, there is a year or so in which to work through the technical and other considerations. In its relationship with PayFast, RCS appreciated there was an urgency to get the benefit to its customers whose needs were changing fast. It thus sought to be a whole lot more agile.
And so a certain amount of pragmatism was required, balancing, for instance, the time-consuming considerations of IT governance against the needs of the rest of the project; and engaging the Innovation Studio to bring supportive systems and processes to the project. As a case in point of new ways of thinking, IT governance – often treated as sequential and foundational to any integration – ran as a parallel process, continuing through the Beta phases and beyond. And the complexities of this kind of work – application forms, onboarding packs, achieving clarity through terminologies and jargon, defining Business Requirements Specifications and scope, achieving focus on the right things – could be facilitated by the Innovation Studio, which has deep institutional understanding while not holding responsibility for the day-to-day business of RCS.
From RCS’s perspective, the value of the Innovation Studio in the integration of PayFast, derived from the relationships the Innovation Studio held and facilitated, its domain knowledge, and its function as an enabler. The Innovation Studio team was relentless in driving quick turnaround times, ensuring alignment was reached, coordinating calendars when group discussions were needed – but also, when there was a simple bottleneck, in picking up the phone and resolving things. “Sometimes,” says RCS’s Amanda Daniel, “five minutes on the phone at the right time is all you need to drive something over the line” – but you do need someone to make those five minutes happen.
It helps process, agreed Shanaaz Solomons, then responsible for managing all the touchpoints on Network International’s side, to have an interface with a unit that is not of the business and thus not distracted by its day-to-day demands – but which can work in an agile and knowledgeable way alongside the structures of the business. Shanaaz credits the Innovation Studio for the fact that within three months of it stepping in, the PayFast project was able to “go live” within RCS.
Both teams agreed that the magic lies in the personal focus the Innovation Studio is able to bring, its consistency throughout the project and the helicopter view it is able to take across all the stakeholder teams and people. This allows the Innovation Studio to form a bridge across teams, engaging deeply with their respective organisational understanding. Effectively the PayFast project demonstrated the importance of keeping communications open and why dogged focus is vital to efficient outcomes.
Online shopping boom leads to social commerce trend, July 2021: https://www.itweb.co.za/content/KWEBbvyZA547mRjO
PayFast founder Jonathan Smit resigns, August 2021 https://mybroadband.co.za/news/business/412046-payfast-founder-jonathan-smit-resigns.html
QR payments become the norm in SA, PayFast finds, March 2021 https://www.itweb.co.za/content/G98Yd7LYwBDMX2PD
DPO acquires SA’s PayFast in reported multi-million rand deal, July 2019 https://ventureburn.com/2019/07/dpo-group-acquires-payfast/
3 ways banking is expected to change in South Africa, December 2021, https://businesstech.co.za/news/banking/536438/3-ways-banking-is-expected-to-change-in-south-africa/