Open banking in Africa: the next big opportunity? 🌍

Photo by Ali Mkumbwa on Unsplash

Some time ago, I was shopping on an e-commerce site when it was time to checkout. And yes, you guessed it—the dreaded walk to get my credit card to finish the payment (and a quick prayer against potentially lurking fraudsters). But something interesting happened: I pressed the pay button, and was asked whether I wanted to be redirected to my banking app for payment. I was pleasantly surprised when I realized I did not need to enter my bank card details or share my banking login information. All I needed to complete the payment was my cell phone number. You might be wondering: “Why the shock? Surely it’s not a big deal, right?” Well, it kind of is. If you ask most people who live in Africa, or have tried to make payments to Africa, they will attest that it is not always that simple. Or at least it has not been for the longest of time.

So what is changing? The answer is Fintech, and more specifically in my shopping cart case—open banking. So far, open banking has made inroads in over 60 markets globally since its inception in the UK in 2016. Now, I will be the first to acknowledge that my shopping experience is a light issue compared to other payments and financial services challenges in Africa. To gain depth on this matter, I went down a rabbit hole to understand: what is the state of open banking in Africa in 2023? Is there a real opportunity for open banking to address some of the complex unsolved problems limiting financial access on the continent?

Before we get into open banking and its who, what, and where in Africa, we need to start at the source of it all: Fintech.

📱Fintech in Africa

Over the past few years, Fintech has played a key role in innovating the payments and financial services landscape in Africa. Between 2020 and 2021, the number of tech start-ups in Africa tripled to around 5,200 companies, according to a McKinsey report. Almost half of these new startups are Fintechs, creating innovative financial products and services with the aim of providing Africans with convenience, speed, and tailoring. A key driver in the success of Fintechs across the continent is credited to the accelerated growth of internet connectivity and availability of affordable mobile phones. The high penetration of mobile phones has provided access to mobile apps and digital tools, particularly amongst the younger populations across Africa.

Between 2021 and 2023, Fintech startups have attracted the most amount of venture capital funding in comparison to any other sector in Africa. This was in part due to the acceleration of the adoption of technology across various sectors and consumers, with the pandemic leading to a shift towards digital payments and contactless transactions. Mobile payment apps, digital wallets, and online payment platforms became even more essential for conducting financial transactions and retail purchases.

The distribution of the funding went mainly across 4 geographies, namely Nigeria, Kenya, Egypt, and South Africa. 2021 was particularly a standout year for African Fintechs, with four African Fintech companies achieving unicorn status. These included Flutterwave, a B2B payments services company, mobile money platform Wave, Jeff Bezos-backed payments app Chipper Cash, and mobile payments company OPay. Of these 4 unicorns, 3 are Nigerian, and 1 Senegalese.

The reason why Fintechs are highly attractive to VCs is because they are leveraging mobile and digital penetration to innovate the banking and financial services space, thus reaching a wider market which traditional players have struggled to do. For instance, Fintechs are delivering value to customers through low transaction fees, interest rates, costs of remittances, etc.

2023 has however been a difficult year for VC fundraising globally, and Africa has been no different. Funding has slowed down across sectors, including Fintech. Even so, there is still a positive outlook on the growth of the Fintech sector in Africa. This is largely due to the fact that even with the already established Fintech startups, there is a host of unbanked and underbanked populations which incumbents and traditional establishments have not reached. Fintechs are primed to deliver solutions for these first-time customers, and also to help incumbents innovate. In addition, cash is still king across the continent, and addressing the problem of financial inclusion on the continent remains extraordinary. To put the remaining opportunity in numbers: BCG projects that the African Fintech market will reach $65bn in revenue by 2030, with South Africa, Nigeria, Egypt, and Kenya continuing to be the key markets.

💰Open banking: an un(der)tapped opportunity in Africa

Taking these findings into account, it can be derived that while Fintechs have made significant inroads into Africa, there is still opportunity for more innovation and expansion. So far, Fintechs have provided innovation predominantly in the categories of wallets, payments, and distribution on the continent.

So what could be next for Fintech on the continent? Now that the market is maturing, unique white spaces are arising in multiple areas of financial services. One of these areas of opportunities identified by Mckinsey is open banking.

🤷‍♀ So what is open banking?

Open banking refers to the practice of banks sharing consumers’ financial data with third party service providers. Open banking is made possible by APIs (Application Programming Interfaces), a software intermediary that allows two applications to “speak” to each other in order to share data within and across organizations. Historically, financial data was accessible only by the controlling bank, limiting the use thereof to a single institution. Open banking goes beyond that: it is built on the principle of a collaborative ecosystem where data is shared amongst financial institutions, Fintechs and other third parties. The concept first originated in the United Kingdom, with The Competition and Markets Authority issuing a directive requiring banks to give licensed businesses direct access to data. The rationale was to stimulate innovation and competition among banks, Fintechs and other third parties.

💸 Why could open banking matter in the context of the African continent?

Africa is a diverse market with over 1.4 billion people in 54 countries, making it the second-largest and second most populous continent on earth. Though the continent is resource-rich, with great opportunity for economic development, Africa still has a long way to go. One of the key areas for economic development is financial inclusion, with over 350 million adults currently lacking access to traditional financial services. The financial exclusion is mainly a result of high banking costs, lack of infrastructure, and low financial literacy, amongst others. The result in the lack of financial access excludes vast populations from participation in basic financial activities such as saving and investing for their futures.

Since open banking is reliant on banking data, the high rate of people without bank accounts in Africa might seem like there is no premise for open banking at first glance, but actually quite the opposite upon closer look. This is because while almost half the population of adults are unbanked, mobile penetration is high across Africa. Thus, open banking can be significant for consumers because Fintechs and third parties can leverage alternative forms of data to inform product innovation strategies. This in turn can generate value to diverse customer segments across Africa, reaching people who are often excluded from the digital and financial economy. Open banking in Africa is therefore bound to take its own shape in order to be context-fitting for the continent. For instance, in Europe, open banking is predominantly associated with APIs by banks that enable authorized third parties to access account data and initiate payments.

However in Africa, the high volume of unbanked populations can provide an opportunity for more diverse use cases for open banking, and ultimately open finance. According to Pwc, use cases for open banking in Africa can be categorized in three broad streams:

1. Open data (use of APIs to grant verified third parties access to consumer financial data)
2. Open process (Using APIs to access bank systems and initiating transactions for customers), and
3. Open products (Third parties developing products which customers can access seamlessly across financial platforms)

The use cases will also bring about innovative business models within the open banking ecosystem. Some potential business models identified by industry leaders include:

1. Banking as a Service, where banks distribute financial services via third parties and profit from customer acquisition, cross-selling and upselling
2. ​​Banking as a Platform, where banks open up their product suite to third parties and profit from revenue sharing and white-labeling fees; and
3. Banking as a Third-Party Provider, where banks source services from third parties and profit from improved customer experiences

🕐 The state of the open banking landscape in Africa

Although open banking is still in its nascent stage in Africa, there are already exciting developments and use cases on the continent to draw from. Open banking startups are utilizing their technologies to develop products and services aimed at addressing some of the fundamental issues that the traditional banking and financial services sector has not been able to address. The innovation stemming from these startups in turn has the potential to enable a more open, innovative and competitive landscape. The hope is that open banking can thus drive banks, Fintechs and other financial service providers the impetus to develop products and services that are more personalized to the audience, reduce costs, and ultimately increase financial inclusion across the continent.

As of 2023, six startups focused on open banking have emerged since 2017, and have collectively raised $73.8M in funding from top global VC funds. The origin countries of the six startups are South Africa and Nigeria. Interestingly, we see that Kenya and Egypt-the other 50% making up Africa’s tech startup “Big Four’’ is yet to establish open banking startups. The markets currently served by the startups include South Africa, Nigeria, Kenya, and Ghana.

Please reach out to me on LinkedIn if your startup is missing

Here are the six tech startups currently innovating using open banking, and three examples of use cases in their markets:

🚀 Stitch helps businesses move money better through providing a single API built on direct integrations with multiple banks and networks, allowing developers to connect apps to financial accounts.

🚀 Mono helps businesses to access financial data and start processing payments directly from bank accounts.

🚀 TruID provides an API that allows third parties to securely access consumer financial data from all major banks in South Africa.

🚀 Okra supports third parties to access financial information from banks and financial service providers with one API in order to build financial products.

🚀 OnePipe supports businesses to embed or launch financial services like accounts, credit, payments and loans with APIs.

🚀 Png.me creates APIs for lenders to understand clients’ financial behavior in order to make data-driven lending decisions.

Use Case #1: Mono

The next exciting evolution of open banking will be open finance, where Fintechs go beyond bank data, and use alternative data sources to innovate where banking data is scarce or non-existent. Mono is one of the Fintechs already doing so.

Mono recently launched a Telco data API which aggregates data from Nigeria’s leading mobile network providers. Businesses can retrieve data such as customer transaction history, balances, account information etc. The data is used to inform product strategies, predict potential user behavior, offer personalized experiences, and make data-informed decisions regarding customers. In addition, businesses can utilise the API to assess customers’ creditworthiness by creating alternative credit scores based on their transaction history and transaction records from their mobile money wallets.

Use Case #2: Stitch

Stitch supported Franc, a South African investment app to reach more customer demographics. Launched in 2019, Franc’s mission is to allow every South African to become an investor, regardless of their educational background, income level or financial experience. To achieve this mission, Franc offers customers the opportunity to invest in money markets and equity funds through their app. Franc believes in providing their customers with an ability to grow their portfolios, at zero or low cost.

Initially, Franc users only had the option of funding their portfolios by setting up a payment through their banking app, which caused friction in the onboarding journey. Other alternatives such as paying via card or debit order would result in high fees, going against Franc’s mission of making investing accessible to everyone regardless of the size of investment.

Stitch’s infrastructure enabled Franc to customise and embed a pay-with-bank-account feature within their app. This resulted in customers benefitting from an improved user experience, ability to tokenize bank accounts for repeat payments, fraud risk reduction and cost savings. Through Stitch, Franc dropped its users’ potential portfolio funding costs by 80%.

Use case #3: OnePipe

Many logistics and supply chain processes across the retail market in Africa are still heavily cash based and manual. This results in high costs of cash handling, and productivity losses. OnePipe partnered with Omnibiz to help overcome these challenges.

Omnibiz is a B2B e-commerce platform that aims to aggregate end-to-end retail operations to help manufacturers, distributors, logistic partners, and retailers achieve their business goals. Through Omnibiz, retailers are able to digitally request inventory directly from the warehouse and have it shipped to them. However, Omnibiz realised that a lot of the retailers still preffered to pay in cash or direct bank transfers to the distributors. This created significant reconciliation challenges for the distributors and manufacturers, often leading to operational inefficiencies. Omnibiz acknowledged that changing retailer’s behaviour will be a long-term process, and thus required a solution to address the problem immediately.

Source: Omnibiz.com

Using virtual account APIs published by partner banks on the OnePipe platform, Omnibiz was able to issue accounts to retailers and drivers, as a way to resolve the reconciliation issues without significantly changing retailer behaviour.

This cut out the risks of long distance cash handling, as well as hours spent on daily reconciliation. Later on, Omnibiz also added additional services such as offering incentives to encourage cashless behaviour. These included discounted airtime purchases, and credit lines linked to the account activity.

🤼‍♂ Challenges for open banking on the continent

Although open banking has the potential of driving a positive impact in Africa, there are also significant challenges that need to be addressed to ensure the success of the concept:

• Digital connectivity and infrastructure: Although there have been improvements, Africa still has a long way to go in terms of digital connectivity. In 2022, only 36 percent of Africa’s population had broadband internet access. Although mobile internet availability has increased in the continent, broadband infrastructure reach and the quality of available services still needs focus. Initiatives such as the World Bank’s DE4A in coordination with multiple national and regional stakeholders including governments and the private sector are necessary for the acceleration of digital connectivity and quality infrastructure.
• Data privacy and security concerns: Even with the highlighted opportunities for open banking, many banks are still hesitant to share customer data with third-party providers due to concerns around data privacy and security. The need for strong data security protocols, and clear regulatory and compliance frameworks is critical for open banking to be implemented across the continent.
• Robust regulatory frameworks: There are currently gaps in the regulatory sphere regarding open banking, which can hamper the scale and speed of innovation. Currently, only a few African countries have started developing regulatory roadmaps and frameworks, namely Nigeria, Kenya, Ghana, and South Africa. Earlier this year, Nigeria adopted open banking regulations, making it the first African country to regulate open banking. The regulations provide rules for how banks and third-party financial institutions interact with customer data, ensuring consistency and security across the open banking system. The Central Bank hopes that the regulations will enable increased competition and innovation in the financial sector. In March, The South African Reserve Bank (SARB) launched PayShap, a real-time rapid payment platform in partnership with leading banks and fintechs. Although SARB has issued a consultation paper on open banking, there has been no regulatory directive as of yet. In Kenya, the Central Bank committed to open banking and APIs as part of its five-year domestic payments digitisation plan. In Ghana, the promotion of open banking initiatives form part of Bank of Ghana’s National Payment Systems Strategic Plan.

🔎 What we can expect in the near future

As seen with Mono’s use case example earlier, the next stage of open banking will be open finance. In the near future, we will probably see more cases of Fintechs in Africa aggregating financial data from multiple non-banking sources such as insurance, investments, pension funds, e-commerce, utilities etc to build financial products.

Although open banking is still in its early stages on the continent, I look forward to seeing how it can shape new financial pathways for many people across the continent. The concept is not without its challenges, and it will take cross-industry collaboration to make it happen. I’m curious to see how startups rise to the challenges and opportunities over the next coming years, and how we can learn from their experiences.

Thank you to Maxime Bayen and Africa: The Big Deal, Dario Giuliani and the Briter Bridges team for offering their insights and perspectives. Thank you to Richard Ferreira for taking the time to provide me feedback on this article.

P.S I enjoy learning from others, so please feel free to reach out to me if you have any insights you would like to share.