Ratings firm Moody’s says the South African Reserve Bank’s move to set up a dedicated unit to focus on financial technology is a good move – and is credit positive for the country’s banks.<\/p>\n
Moody’s currently holds all of South Africa’s retail banks at the same level as the sovereign – one notch above junk status, under review for downgrade.<\/p>\n
However, in a research note published on Monday, the group was optimistic about the country – specifically on the back of positive sentiment around new president, Cyril Ramaphosa, and progress being made in the mining sector – highlighting some positive news for the banking sector as well.<\/p>\n
Last week, the SARB announced that it would be launching a special fintech unit, which will focus on assessing potential regulations in the cryptocurrency markets, investigating so-called innovation hubs, and experimenting with blockchain and\u00a0distributed ledger technologies (DLTs).<\/p>\n
According to Moody’s, the adoption of fintech infrastructure and regulations following these assessments – which are scheduled to conclude this year – will improve efficiency, strengthen anti-money laundering practices and increase South African technologies\u2019 competitiveness globally.<\/p>\n
“These are credit-positive developments for banks that will decrease their transaction costs,” the firm said.<\/p>\n
Of the three primary objectives outlined by the SARB, Moody’s sees the experimentation with distributed ledger technologies to be the most pioneering, as the adoption of these can improve efficiencies in back- and middle-office functions.<\/p>\n
“The cost-to-income ratio of South African banks is higher than that of peers elsewhere, with the improvements in the ratio in recent years also trailing peers. Consequently, adoption of more efficient and less costly processes will help bridge the growing efficiency gap,” Moody’s said.<\/p>\n
“The SARB\u2019s aim is to develop a proof of concept in collaboration with the banking industry to trial J.P. Morgan\u2019s Quorum blockchain potential in interbank clearing and settlement, with a report explaining the risks and benefits scheduled for release in the second quarter of 2018.<\/p>\n
“To develop the proof of concept, the SARB will partner with ConsenSys, a blockchain software technology company, to replicate the processing of wholesale payments using Quorum, an enterprise-focused version of Ethereum, a distributed public blockchain-based network.<\/p>\n
“Because this initiative, at least initially, emphasises wholesale payments processing, we expect Nedbank Limited\u00a0to be best positioned among South Africa\u2019s large banks to benefit because of its greater focus on wholesale banking services.<\/p>\n
Although the initiative does not imply a radical move to DLT for the country\u2019s national payments infrastructure, Moody’s said that the SARB\u2019s proactive approach toward the potential of blockchain – which follows a fintech working group including South Africa\u2019s central securities depository Strate – Absa, FirstRand, Investec, Nedbank, and Standard Bank\u00a0can benefit the banking system.<\/p>\n
“Despite high initial development costs, DLTs can improve efficiency by speeding up processes and reducing infrastructure costs relating to clearing, settlement, administration, cross-border payments, and collateral management.<\/p>\n
“DLTs also can improve digital security and have the potential to reduce capital requirements through reduced settlement periods,” the group said.<\/p>\n