Amid all the hype, fintech is in the process of revolutionising the provision of financial services in Africa.
It is greatly reducing the cost of transferring money and giving hundreds of millions of people access to financial services for the very first time. Africa is different to most of the rest of the world in that new technologies don’t have to displace existing options, such as credit and debit cards, in most instances, because they are currently little used
Most simply, fintech is merely an abbreviated form of the term financial technologies but it is now most often used to refer to disruptive technologies; that is, those with the potential to completely revolutionise the way banking and the financial services industry operate. Most fintech developers are small startups.
They usually have very low operating costs but often require an injection of capital to really make the most of their potential. This can mean crowd funding (although that phenomenon is only just taking off in Africa), venture capital financing, or mentoring by larger companies or entrepreneurs.
Estimates vary but fintech is generally reckoned to attract about 30% of all investment in African technology. Marketing products is easier than ever for developers, while it has also never been easier for customers to take advantage of fintech offerings.
It used to be expensive to pay for goods and services remotely but where PayPal and Square have led the way, other payment firms have followed suit. The concept of disrupting existing financial services is often discussed but just as regularly overcomplicated.
It simply involves using new technology to pose a challenge to existing financial systems, sometimes in a way that would undermine the latter’s business model by bypassing, undercutting or leapfrogging it. It offers several advantages: it can be cheaper to operate and more efficient in terms of manpower, money and data but the most often highlighted benefit is that it can more easily reach those currently without access to financial services.
According to consultants McKinsey, about 2,455m people around the world – or 53% of the global adult population – do not use any formal financial institution. An incredible 78% of all adult Africans lack access to bank services. Yet at the same time, there are 220m registered mobile money accounts on the continent, more than in the rest of the world put together.
M-Pesa and similar services allow users to send and receive money from anywhere with a mobile signal via a mobile handset and at far lower cost than by traditional banks and money transfer services. Most customers want just four services: banking, borrowing, money transfer and insurance, so platforms can be fairly simple, relying on access to mobile phones.
The proportion of adults with mobile phones is roughly the same in Nigeria and the US, although smartphone penetration is more advanced in the latter. However, fintech developer MyBucks gets around even the lack of mobile technology by offering customers a basic mobile handset as part of its package.
Strong disruptive potential
It is with the hundreds of millions of unbanked people in Africa that fintech can have most impact. The growth in mobile penetration rates is slowing and the telecoms sector’s focus is now on boosting average revenue per user (ARPU) rates, which will become easier as smartphones become more readily available, particularly through falling prices.
This will make it easier for fintech firms to provide a far wider range of services to potential customers. There is certainly plenty of scope for new products, as about 19 out of 20 retail transactions on the continent are made using cash.
This is a far higher proportion than in most of the rest of the world. It seems most likely that large parts of Africa will simply leapfrog the use of credit and debit cards, with cheaper and more efficient alternatives on offer.
Mobile payment systems are likely to inhabit this space before payment cards have even entered the market. Disrupt Africa looked at 301 African fintech startups in its Finnovating for Africa: Exploring the African Fintech Ecosystem Report 2017 and found that most of them had been set up since the start of 2015.
The report stated: “These companies are disrupting the financial services landscape with innovative solutions that are attracting the attention of banks and investors.” Kenya’s reputation for innovation seems justified, with 56 of the 301 startups identified by the report based in the country. Only S Africa, with 94, and Nigeria, with 74, had more.
The Finnovating for Africa report found that African blockchain startups were the most successful in terms of accessing finance, with 39% securing funding. It found that fintech startups as a whole had attracted $92.5m in finance since the start of 2015.
Of fintech startups considered, at least 125 concentrate on payment and remittance services, while another 65 focus on lending. Competition is increasing, so companies offer slightly different services in order to stand out. Rwanda’s Mergims allows those living outside Rwanda to pay directly for electricity, airtime and other products for family members and friends in the country.
Most potential customers have no financial paper trail and so no means of demonstrating their creditworthiness, as would be the case in many other countries. However, the boom in mobile use is creating data for fintech firms to mine, including mobile wallet usage, airtime consumption and even social media use.
Customers’ creditworthiness can usually be judged electronically if they give service providers permission to access their financial data. Data can also be collected via the many services that piggyback on the top of existing networks.
For instance, off-grid solar power specialist M-Kopa provides solar photovoltaic kits to customers in return for small daily payments made via M-Pesa. A customer’s ability to pay off a substantial sum over perhaps the course of a year provides a good indication of their creditworthiness for other forms of lending.
Overseas remittances are more important in Sub-Saharan Africa than in any other region, even South and Southeast Asia. Indeed, it is easy to forget that remittances are the biggest source of foreign investment into Africa. Yet it has traditionally cost more to transfer money to the continent than anywhere else.
The World Bank puts average traditional money transfer charges at 9.5% of the value of each transaction. It is therefore no surprise that fintech in Africa has focused on mobile money.
However, it is important to remember that although fintech seeks to be disruptive within the industry, it is not isolated from the more general problems that affect banking and financial services. Kirsten Kern, a Partner at S African law firm Bowmans, said: “Fintech is incredibly fast developing and agile, but the law is not, creating all kinds of potential challenges for data protection and cyber security, and even fuelling harmful lending practices in some cases.”
On the following pages we examine the challenge that fintech represents for traditional banks and explore in detail the way the new technologies are reducing the cost of sending remittances.