Building a Digital Future for Africa
M-Pesa was a spark that helped set off the global fintech revolution. By demonstrating that mass market financial services could be provided in a different way, by a different kind of provider, and that, more importantly, Kenya’s banking sector thrived as a result, Kenya showed the world that it was possible to build a more inclusive financial system. It also showed that technology and new business models make a huge difference in our ability to reach the poor with financial services.
M-Pesa’s innovations first spread across Africa, with mobile money deployments springing up across the continent in relatively short order. According to the GSMA’s latest State of the Industry report, there are now 157 mobile money deployments in sub-Saharan Africa, an average of almost three per country. These provide 548 million registered accounts, covering a large proportion of Africa’s adult population. The report also shows that nearly 30 percent of these accounts are active, well above the global average of 25 percent. In fact, Africa represents 53 percent of active mobile money accounts globally. The mobile money industry has virtually single-handedly improved rates of financial inclusion in Africa, which rose from an average of 23 percent of adults in 2011 to 43 percent in 2017. We have reason to believe that the COVID-19 pandemic has driven these figures higher since 2017, but we will have to wait for the Findex to come out in early 2022 to confirm.
Insights from these innovative new approaches quickly spread to emerging markets beyond Africa, where providers adapted solutions for reaching poor customers to their own contexts. As a consequence of this rapid propagation of new ideas, we have seen massive increases in financial inclusion in India, largely driven by active intervention of the state, and in China, where e-commerce and social media drove a different wave of financial inclusion. These advances in emerging markets have, in turn, inspired a new wave of innovation in developed countries, from the proliferation of new fintech business models to regulatory experimentation with open banking and data portability and the consideration of central bank digital currencies in many markets. Financial inclusion is suddenly very mainstream.
But what of Africa, where the story began back in 2007? Well, to be honest, Africa feels a bit stuck. We haven’t seen the same disruptive pace of change that we now see in the big Asian markets, but rather more incremental change. Steady progress has been made in expanding the reach of mobile money accounts. In some countries, this has spurred a competitive response from the banking sector. New products like digital credit and savings have been introduced on the digital payment rails built by mobile network operators (MNOs), and there are thriving fintech ecosystems in Nairobi, Cape Town and Lagos. But the pace of change seems to have slowed in comparison with the rapid growth we have witnessed in recent years in Asia, Europe and Latin America.
From Senegal to South Africa, digital financial services providers are bumping up against the hard realities of operating in Africa, including:
- Small market sizes. India and China have markets of more than a billion people overseen by one regulator. By contrast, Africa has a market of over a billion people scattered across 54 different jurisdictions, introducing frictions for anyone wanting to build large-scale digital businesses. The average adult population for a country in Sub-Saharan Africa is just 14.4 million people. Compare this with East Asia, where the average is 163 million, or South Asia, where it is 178 million. Those aspiring to build large-scale platforms, particularly for services like e-commerce or advertising-driven social media, are likely to find more promising markets elsewhere. As a result, Sub-Saharan Africa attracted just 1 to 2 percent of global fintech investment in 2020, compared with 11.6 percent in the Asia Pacific region.
- Demographic and geopolitical factors. While Africa has a lower proportion of people living in rural areas than South Asia or East Asia, the 40 percent of adults who do live in rural areas are in low-density communities. This makes it cost-prohibitive to build out last-mile connectivity and payments infrastructure. They are also overwhelmingly poor. The average GNI per capita in Sub-Saharan Africa is only $1,515, an average income of just $4.15 a day. There is not a lot of disposable income to go around. Regional conflict is also a big challenge to building profitable and sustainable businesses in some of the biggest markets in Africa, including Ethiopia, the DRC and parts of Nigeria.
- Fragmented national markets. Even within countries, a lack of interoperability among mobile money systems has made it difficult to build the kinds of integrated platforms that facilitate scale. A use case that particularly benefits from interoperability is merchant payments. For users to switch to digital payments, a digital transaction has to be as frictionless as cash, which means that payment acceptance infrastructure should ideally accept any provider’s payments. MNOs around the world have been trying to crack merchant payments as a use case for mobile money for at least a decade. And yet, in the GSMA's latest State of the Industry report, merchant payments represented only 4 percent of mobile money flows globally. In Africa, MNOs’ inability to widely digitize merchant payments means that mobile money is still heavily mired in cash. And this requires MNOs to continue running the large cash management systems that underpin mobile money on the continent.
What will it take to move Africa into a dynamic new phase of financial innovation for the poor?
I believe it will require a multitude of factors coming together to improve the environment for building better financial services. A few that would make a real difference include:
- Access to smart phones and data plans. We are starting to see asset financing services that make it possible to get smart phones into people’s hands, but the cost of data plans in Africa is still prohibitively high for low-income people. Finding ways to equip poor people with smartphones and data will vastly improve the user experience and help to expand the kinds of use cases that are relevant and accessible to the poor. Smart phones will also be an important factor in keeping payments digital, through their ability to incorporate digital payment acceptance via QR codes. This will eventually help eliminate the need for the expensive cash-in cash-out infrastructure that underpins most mobile money operations in Africa.
- Interoperable platforms that can cross borders. Digital services need scale and that isn’t going to happen with fragmented services in small markets. If we can start aggregating demand within and across markets, then we might start getting at the kind of scale required to attract bigger tech players and investment to Africa.
- Infrastructure and improved regulation. Everything from improved broadband and better physical infrastructure to interoperable payment systems and data sharing infrastructure is required, along with the regulatory changes that will support fair competition and market access, data privacy and protection, improved cybersecurity standards, and consumer protection and choice.
- Continuing to grow entrepreneurship ecosystems. When large platform providers open up to smaller nimbler fintech innovators through open APIs, these start-ups have a much better chance of reaching a larger digital market, much as the Apple App Store opens up a big new market to app developers in the US. Seed capital and venture funding will also be crucial to financially sustaining early stage start-ups.
- Equalizing access for women. There is a persistent 9 percent gender gap in access to financial services globally and Africa is not immune from this. Cote d’Ivoire and Senegal have gender gaps of 9 percent and 10 percent respectively. Ethiopia’s is 12 percent and Nigeria’s is a whopping 24 percent – and these two countries combined represent 28 percent of the adult population of sub-Saharan Africa. We will never achieve full financial access and the benefits that arise from it if we do not close the gender gap.
Given the challenges in Africa, there is an important role for donors to play in moving things forward. Donors can provide support in the political and regulatory spheres by promoting harmonized regulatory frameworks that enable businesses to operate across borders. Continued progress on the African Continental Free Trade Area will be imperative in this context. Donors can help de-risk investments that are designed to serve the poor; local currency fluctuations alone have resulted in near-death experiences for microfinance institutions and fintechs in recent years. Through Development Finance Institutions, they can invest in innovative new business models, as they have historically done in both the microfinance and the off-grid energy sectors. Donors can also support and invest in interoperable market infrastructures that help facilitate the development of pro-poor business models – like biometric ID, interoperable payment systems and new data sharing schemes that can help unlock credit for low-income households. There is still a lot of work to be done to bring meaningful and affordable financial services to every poor household in Africa.
The Africa Digital Financial Inclusion Facility (ADFI) — a partnership between the African Development Bank, the Bill and Melinda Gates Foundation, and the governments of France and Luxembourg — is mobilizing to support many of these crucial objectives and seeking further partnerships to scale up initiatives to meet its goal. A multi-donor partnership with the intention of disbursing $400 million in grant funding to support financial inclusion by 2030, ADFI has a goal of reaching 332 million more Africans with financial services, of which 60 percent will be women. ADFI’s objectives focus on building out integrated digital infrastructure, creating supportive policy and regulation, innovative new products and capacity building.
Led by an African institution, the ADFI partnership will play an important role in building a more digital and inclusive financial system across Africa. And this, in turn, will support more inclusive growth. ADFI recently finished its first round of grant approvals and, as this work accelerates, we can expect it to make significant contributions to the continent’s journey to a better, more integrated and digital future.