Is the future of fintech African?
The era of m-banking in Africa has begun — and it may surprise you
Nowadays, it seems obvious to be able to interact with one’s bank using one’s smartphone or a computer. Most banking services, such as checking your balance, paying a bill, or sending money to a relative, are available with a banking application, or a website. Easy right? For those living in a developed country, yes it is! But that is not the case for the average African.
The rate of banking is estimated at 25% of the adult working population in Sub-Saharan Africa while North African countries such as Tunisia have a rate of around 60%. Typically, the available banking products are not relevant or adequate for low-income people, rural populations, and SEMCs, which make up most of the sub-Saharan African population. There is, though, a solution — and it will come from the telecoms companies with the establishment of m-banking services which are a logical response to the exponential growth of mobile users in Africa.
The mobile boom in Africa
The world is becoming increasingly digitalized with the expansion of internet access and the high penetration rate of smartphones. The digital boom in Africa began in the early 2000s with the expansion of the cell phone penetration rate. In 2000, the smartphone penetration rate in sub-Saharan Africa was barely 2%. In 2016, the rate reached 28%, in 2020 it is 44% and it is estimated to reach 50% in 2025. In 2020, Sub-Saharan Africa and China dominate in the number of mobile users with respectively 13% and 15% of the 67% total world users. However, the compound annual growth rate is higher in Sub-Saharan Africa with 4.3% compared to 2.6% in the rest of the world. South Africa, Egypt, and Nigeria currently dominate the African market with respectively 15,4%, 11,6%, and 11,1%.
This high mobile adoption rate is explained by various factors:
· The African population is growing faster than in the rest of the world with a fertility rate of 4.43 per woman in 2020 compared to 2.15 in Asia and 1.62 in Europe. In addition to this, 65% of the population is under 25 years old and projections show that in 2050, 25% of the world population will be from sub-Saharan Africa with at least 70% of young people under 25 years old.
· Intense competition between telecom companies also explains the high connectivity on the continent. They are making significant investments in network expansion and even in diversifying their services. The French company, Orange, for example, has since the beginning of 2020 launched the pan-African optical fibre that interconnects 8 countries in West Africa. This network is a first in West Africa and will allow equal access to broadband Internet by businesses and private individuals.
· Companies such as Huawei, Samsung, or Tecno have created phones that are accessible to all budgets, which has facilitated the growth of the rate of smartphone users.
Mobile money, an alternative to banks that is revolutionizing the continent.
“It’s inspiring to see how engineers here are using mobile money to build businesses and help their community,” said Mark Zuckerberg after visiting Nairobi ihub in Kenya. As indicated earlier in the article, the rate of banking is rampant in sub-Saharan Africa. There are huge disparities between the countries in this area, but these were quickly filled by the arrival of mobile money or m-banking and digital finance. M-banking is not a bank service. It is a service of money transfer and payment, offered by a telecommunication company. The telecommunication companies took over from the banks when it comes to financial inclusion in the region. In 2007, Kenya began its first steps in m-banking with simple transactions such as sending money to a relative in the same country or buy phone top-ups. The telecommunications company Safaricom launches M-PESA and it is going to be a great success. In 5 years, they had 16 million subscribers with more than 2 million transactions per day.
The development of this new service is rapid but uneven. In West Africa, Orange will launch in 2008 in Ivory Coast, then in Mali and Senegal in 2010 when MTN, a competitor, announced the launch of its financial service in more than 15 African countries. In 2011, Orange money has 3 million subscribers from Senegal to Madagascar. Over the last 10 years, the mobile money sector has experienced an extraordinary boom and today represents a global market of more than 40 billion transactions of which Sub-Saharan Africa accounts for a little more than half, or 26 billion distributed among nearly 132 services related to mobile money. People could now send money at a lower cost and in a short period of time. The rapid adaptation of this new technology can be explained by the simplicity of use of the system, which requires only a connection to the mobile network. The services offered via mobile money have become much more diversified over time. Users can now pay their electricity bills, send or receive money outside the continent, access savings and various insurance products and even get a prepaid credit card for transactions at electronic teller machines or online transactions.
Telecom companies thus offer an alternative to banks, but this does not mean that they can operate without banks. Indeed, the Mobile money system has no legislation on the continent now. Banks are obliged to guarantee their transactions. Mobile money services have solved several problems apart from financial inclusion:
· In Kenya, for example, women are encouraged to use their mobile money account to save money and only use it in case of urgent need. Studies show that family savings have increased by more than 15% per month. In Kenya, the introduction of mobile money has helped to combat poverty. About 196,000 families are living much better since the existence of M-PESA.
· The mobile money system allows for the traceability of transactions and complete transparency. In the future, this will allow a formalization of the economy and a better system for tax collection.
· New payment systems are emerging such as pay as you go. This business model allows the most destitute households to manage their electricity consumption for example. In Senegal, there is a system called “Yakhanal” that allows consumers to purchase prepaid cards to buy a certain amount of electricity.
The E-commerce evolution in Sub-Saharan Africa.
In 2018, only 23% of the population in Sub-Saharan Africa used mobile internet. It is estimated that the annual compound growth rate will increase by 10.6% by 2025. The use of 3g has increased from 28% in 2016 to 50% in 2020. With the expansion of mobile internet, telecom companies have added a wide range of products to their portfolio. For example, since 2013, Orange has been offering its users the possibility to benefit from a prepaid visa card to make online purchases. Local virtual stores can also receive Electronic Payments thanks to a merchant code provided by Orange. E-commerce can become an essential sector in Africa if the necessary investments are made to make the Internet more accessible to the population but also if the adequate infrastructure is put in place to facilitate the exchange of commercial goods across the continent.
A financial revolution always strewn with challenges.
There is no interaction between the different mobile networks. This means that a customer connected with network X cannot send or receive money from a customer subscribing to network Y from the same country or across the continent. However, Orange Africa and MTN are associated and have created a platform called Mowali in 2018 which allows this interoperability. Mowali is an open-source innovation accessible to all mobile money services. This interoperability will allow a money flow between different countries and thus participate in the economic integration of the continent. The low rate of Internet users does not allow a wide implementation of new digital financial products that involve Internet access such as cryptocurrency, a crowdfunding platform, stock trading apps … But this should be possible if the prediction that 600 million sub-Saharan African will use mobile data by 2025 becomes true.
Credit and savings still lag far behind on the continent. However, digital wallets will allow creating a profile of the client, to be able to “score” him, and thus to set up a micro-credit system. This innovation is called digital credit and is currently being discussed among the different actors of the telecommunication sector.
Despite a quick evolution when it comes to technologies, Africa is still very behind when it comes to ITC compared to the rest of the world. The private sector should insist on the training of human capital to be more competitive. The telecommunication companies must also invest more in their infrastructure to make the access to internet less costly for the users. Nevertheless, huge progress is being made in that sense, with the giants of tech such as Google, Microsoft, or Huawei investing a lot.
The rise of cryptocurrency in Africa.
The adoption rate of cryptocurrency is way higher in Africa than anywhere else in the world. After embracing mobile money, the new generation who are more tech-savvy got captivated by digital money. Digital money in Africa is used as an alternative to fiat money to avoid inflation rate or just for commerce. Countries like Nigeria, Kenya, and South Africa are the pioneers of this new technology.
It is easy to see why Africa and other third world regions will dominate when it comes to cryptocurrencies. It is mainly because they understand the functioning of crypto money since they already have been introduced to m -banking world which is not the case in the West. Plus, the economy in these regions is not stable so people are trying to find new ways of making money. As cryptocurrency marketer Akyaw, 19 years old, said “It’s a no brainer in the sense that that’s where finance is going. A lot of big brands initially dismissed the potential of cryptocurrency, saying it was just going to vanish. It’s been over ten years and cryptocurrency is still growing, it’s still getting stronger.’’
About this article
This article has been written by a student on the Grenoble Ecole de Management’s Advanced Masters in Digital Strategy Management. As part of a content creation assignment, students are given the task of writing articles based on their digital interests and disseminate the articles online. Articles are marked but we make minimal changes to the content. Thanks for reading! James Barisic, Programme Director, MS DSM.
