Bourse-driven financial inclusion

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Simbarashe Manwere, FIFM

SimbarasheIf the consumer is indeed king, as marketers passionately trumpet, then the recent flurry of stock exchange license bids at the Financial Services Board (FSB), both conditionally approved and pending, serve as coronation ceremonies for the South African investor whose seal of royalty is embodied in choice. From the second half of the year 2016 at least, the Johannesburg Stock Exchange (JSE) will no longer enjoy a monopoly in the securities trading industry as it will have to compete with three other exchanges for the investor’s pocket, shifting the balance of power from financial service providers to the consumer. Hail king investor!

For nearly six decades from 1958 to 2016 (58 years) the JSE has been the sole exchange in South Africa more as an embodiment of the Darwinist survival-of-the-fittest spirit than natural or state-controlled monopoly. Indeed, other exchanges have been established before and subsequently closed down.

The Kimberly Royal Stock Exchange commenced six years prior to the creation of the JSE (2 Feb 1881), but shut down operations when the gold rush to Witwatersrand eclipsed the ‘eternal’ lustre of diamonds and poised the JSE as the new centre of economic power.

Similarly, the stock exchange in Cape Town (established on 3 May 1901) closed down after the Anglo Boer war as it had been created as a business continuity response to the war. More recently, the 1933 Union Exchange was discontinued by government and its eligible listed companies migrated to the JSE in 1958. For the 25 years of Union Exchange’s operating history from 1933 to 1958, the JSE and Union Exchange competed side by side in a duopolistic market structure.

Now the days of rivalry are back. Competition widens choice, spurs innovation and drives down costs as market structure shifts from monopoly to duopoly and then to oligopoly (if pending licenses are approved). According to its CEO, Nicky Newton King, the JSE is all set for competition regardless of what market structure may emerge from the license bids at the FSB.

In the first place, the investor will be lavished with the new choice of same day settlement made possible by pre-funding of transactions under a T + 0 settlement system pioneered by ZAR X, the new exchange scheduled to commence business in September 2016. The T+0 settlement does not involve the Delivery versus Payment (DVP) mechanism which is used to link delivery and payment obligations where final settlement of one obligation is contingent upon the final settlement of the other. ZAR X’s same day settlement is possible because they are handling only one leg of the transaction.

At the same time, the JSE, under the Delivery versus Payment (DVP) is transitioning to a T+3 settlement system which significantly slashes waiting time by 40% from the current 5 days under the T+5 settlement system to a mere 3 days. The T+3 settlement system will be operationalised in July 2016. The JSE handles both buyer side payment and seller-side delivery of scrip via DVP which eliminates principal risk.

According to Taichi Ohno of Toyota, the architect of lean manufacturing engineering methodology, there are seven wastes which must be eliminated in the value chain of any system. One of the wastes is unnecessary waiting between one sequenced activity and the other. Both ZAR X and JSE have minimised the time lag between matched trade and settlement and clearing into the investor’s account. This significantly reduces settlement risk. Consumers in the financial markets are set to benefit from these reduced cycle times as lean and agile systems are implemented.

As a natural outgrowth of waste elimination outlined above, costs tend to be significantly reduced in lean systems. Etienne Nel’s ZAR X purports to provide a low-cost, simple and convenient trading platform that empowers ordinary South Africans with shareholdership opportunities.

Similarly, another exchange called A2X, aspires to disruptively slash down transaction costs while offering innovative, more efficient and faster trading platform. The A2X consortium is led by trio of Kevin Brady (ex-Investec), Gary Clarke (ex-JSE) and Neal Lawrence (ex-UBS).

The third exchange is 4 Africa Exchange which will focus on the over-the-counter market covering the trading of black economic empowerment schemes and agriculture co-operatives, among others. 4 Africa Exchange will be in direct competition with ZAR X in the OTC market space, and both these new entrants will jostle with the JSE’s Alternative Exchange (Altex), which specifically focuses on smaller companies.

The theme of choice is echoed by A2X’s strategy of leveraging off existing JSE primary listings and creating a choice in terms of trading platforms for the investor. Thus a JSE-listed share can be traded on the A2X platform at a lower cost than on the host exchange where the primary listing is housed. Thus, while A2X will not be offering primary listings, it will still be able to trade the so-called qualifying equity securities listed on competing exchanges. This model is already in use in Europe, Australia, Canada and the United States of America.

Does the creation of choice translate into financial inclusion? Does provision of supportive infrastructures and associated legal frameworks lead to optimal financial behaviour? Will the historically disadvantaged segments of population increase their participation in the financial markets?

According to Herzberg’s Two Factor Theory (Herzberg et al, 1959), human beings in the workplace seek gratification of higher order needs of achievement, recognition, responsibility and advancement while the lower order needs of salary and work conditions appear secondary. (This agrees with the Maslow Hierarchy of Needs). Thus to satisfy these higher order needs, motivator factors have to be manipulated. The lower level needs are classified under hygiene factors and working on them enables a reduction in dissatisfaction.

Hygiene factors simply reduce an individual’s dissatisfaction without really motivating them. They are external, perhaps sugar-coating approaches meant to allay the negative effects of an unfavourable situation for a short while.

On the other hand, motivating factors do just exactly that. They tend to inspire from within, creating self-motivation on the inside for manifestation on the outside. Self-motivation can take place when the environment is conducive, some authorities maintain. Psychologists agree that both nature and nurture do affect human behaviour, meaning the environment can shape behaviour while behaviour itself can alter the environment in an alternating cause-effect chain of causality and reverse causality.

By extension, will the availability of choice and alternative trading infrastructure influence particularly the new investors to transact in the financial markets? Will new investors be motivated?

While possible responses to these questions lie beyond the scope of this paper, the transition to financial inclusion should involve both availability of infrastructural provisions and the capacity by the intended beneficiaries to exploit them.

Financial literacy is a requirement for financial inclusion.

Research evidence (Lusardi, Mitchell 2006, 2007a) shows that sub-optimal financial behaviour is positively correlated with low levels of financial literacy. And financial literacy itself is in turn affected by the level of financial knowledge, when socio-economic and demographic factors are held constant (Hilgert, Hogarth, Beverly, 2003). There is need, therefore, for a more focused financial literacy campaign using, among others, coaching and mentoring methodologies to enhance financial inclusion.

Without financial literacy, the consumer king is not aware of their royalty. They are not aware of the extent of the domain over which they must exercise their kingship. Ultimately, they may not know what the JSE, ZAR X, A2X and 4 Africa Exchange emblems signify. The solution lies in the combination of choice with knowledge, infrastructure with know-what and know-how. Arguably, this may broaden financial inclusion and add colour and sparkle to the South African rainbow.