Africa’s Top 10 Stories – November 2020

The application of communications technology to the financial sector, or as it is more commonly referred to, fintech, can be traced back to 1866 when the first Transatlantic cable was laid between London and New York. Telegraphs, followed by telephone lines, would become a vital component of the global economy, allowing for the rapid dissemination and sharing of financial information. From the late 1960s onwards, these technologies would be increasingly accompanied by the computer, which freed up human involvement in executing repetitive mathematical and administrative tasks. This allowed for the development of far more complex financial and insurance products and played an integral part of the strong service-driven growth in the global economy from the 1980s. These developments, which may be viewed as Fintech 1.0 and 2.0 respectively, were similar to one another in that they were primarily borne out of the global north and remained concentrated within there. The mass rollout of the internet in the 1990s and then in the 2000s would, however, give rise to Fintech 3.0, which shape and form has diverged considerably from its predecessors.

Following the financial crisis of 2008 new financial instruments like cryptocurrencies made consumers more willing to adopt alternative banking facilities, which also coincided with the rise of smartphone usage. The two trends would soon unite, and usher in the next phase in fintech development driven near-exclusively by developing countries, with Africa serving as a key driver. The early start of this changeover began in 2007 when Safaricom and Vodafone, two of Africa’s largest telecommunication operators, partnered in the development and launch of M-Pesa, a mobile-based micro-loan and payments service platform for East African customers. What was originally meant to be a basic service offering quickly grew into a genuine digital wallet after customers discovered how to perform transfers between accounts. Growth was explosive, reaching 17 million accounts in Kenya alone within five years, and a further seven million in neighbouring Tanzania by 2016. M-Pesa has since been joined by a growing ecosystem of competitors, which includes MoMo, a mobile wallet and payments service hosted by global telecommunications leader, MTN. Others, including Orange Telecoms and Airtel Africa, have followed suit and developed their own mobile money offerings in more recent years. Cumulatively, the industry is expected to reach over 500 million African customers by the end of this year, maintained by strong mobile internet penetration, and support from local governments, who see mobile money as a bulwark against financial exclusion.

As mobile money continued to take root and grow its customer base, industry players began to unpack the utility of mobile money apps in aid of introducing more innovative digital products. East Africa proved to be the driving force of such initiatives as the strong market presence of M-Pesa, which stands at 75% amongst Kenyan adults, made it a viable testing ground for new digital financial products. None have capitalised more on this development than Tala, a US-based start-up, which pioneered the use of digital microfinancing aimed at small scale entrepreneurs. After a successful pilot project known as Makapo Rabisi, which translated from Swahili stands for ‘easy loan’, in 2014 on the M-Pesa app, Tala has grown to become a mainstay in the local credit market, ranking as the fifth most downloaded app in the country. It is also responsible for the disbursement of over US$1 billion in loans across the three African markets in which it operates. Other contenders have now poured through the breach to provide their own service offerings, including Safaricom. At present over 50 different loan apps exist in the Kenyan market alone and the African fintech space is primed for further evolutions of the mobile banking concept.

Outside of East Africa, notable developments in mobile money penetration are taking place across the continent, including Central Africa, which has been slowest to adopt new financial instruments. July 2020 saw the deployment of Gimcpay, a new system which allows for interoperability between mobile money providers and local banks in the Economic and Monetary Community of Central Africa. The deployment of this system will help inject economic growth through local mobile money initiatives in the coming years. With African economies becoming increasingly more involved in regional economic trade and the international remittances economy, there will also be an increasing need for services which can operate along a more “open loop” approach. This will enhance the ability of services to integrate payments and transfer systems between banks and other financial operators, and across both regional and international borders. One example of such a service is Mahindra Comviva, an early entrant into the East African market that has since expanded its service offering to include both local and international remittances and full interoperability between banks and a variety of African mobile money providers.

A pressing problem in Africa has been finding ways to introduce credit and insurance into the mobile money space. Historically, the absence of local financial infrastructure made it difficult to provide these services as many consumers lacked a documented credit history upon which a credit score could be calculated. The local ubiquity of mobile phones has provided fintech start-ups with a way to circumvent this general lack in consumer credit history by using collected phone transactions data to fill in the gaps. The first to spearhead this locally was Tala, which pioneered the provision of micro loans through mobile money apps. Another is M-Shwari, a successor and analogue to M-Pesa, which was developed by Safaricom in partnership with the Commercial Bank of Africa to compete with Tala and provides an average of 80 000 consumer loans per month. Other more sophisticated offerings like Branch, have disbursed some US$350 million in loans in Kenya, Nigeria and Tanzania. The big challenge with the launch of such mobile money apps and credit facilities is the problem solving required to make such services as versatile as formalised commercial bank offerings. The first product offerings based around this concept have already taken root, and include apps like Digiduka, a mobile wallet and online retailer for informal traders in Kenya. Also, DPO, a leading African payment service group, has collaborated with mobile money providers in the disbursement of ‘tap and pay’ cards, which combine with mobile wallets to offer the same functionality as debit cards at both formal and informal retail outlets.

Insurance technology, or insurtech as it is more commonly referred to, goes hand in hand with the growth of fintech. By using digital platforms and mobile devices, insurance firms have been able to offer their services to a wider customer base, whilst also reaching under-serviced clients and increasing their financial inclusion. In South Africa, Simply, a digital insurance company that offers life, disability and funeral cover at affordable rates, has streamlined their life insurance offerings by ensuring the process is easier and less time intensive by going completely digital. The process also consists of a few select questions for clients, replacing the arduous health-check currently in place. Simply also provides businesses with group cover for their employees, without the need to physically meet with a broker. In Ghana, BIMA uses mobile devices to offer affordable life insurance that is tailored for low-income clients by using digital signatures to sign up customers and deducting premiums from airtime balances, which accommodates the cash flow of its clients. In East Africa, the Agriculture and Climate Risk Enterprise is taking this a step further and offering smallholder farmers weather index insurance through mobile technology – the implementation of the index is set to lower the cost of customer acquisition and claims assessment.

Through bypassing restrictions that previously prevented millions of African consumers from accessing financial services, mobile fintech has found a way to turn Africa’s informal sector into a new fuel source for financial growth. However, it also exposes both service providers and their customers to various risks. As this is the first time millions of new consumers are accessing credit and banking facilities, there will be some delay before consumers adjust to a new culture of financial prudence. There is evidence, for example, that Ugandan customers have made substantial use of instant credit apps to help fund gambling activities, and while the initial entrants to the market have managed to retain remarkably low loan default rates, the risk remains that as the initial market expansion begins to slow, less reputable credit providers will erode standards of financial prudence and create unsustainable credit inflation in an effort to retain margins. It is therefore vital that fintech service providers work with regulators to ensure that consumers are educated and protected against malpractice, and that service providers in turn adhere to the necessary standards.

The rise of fintech has also brought about new challenges surrounding data protection and privacy that need to be considered by various stakeholders. As Africa transitions into a digital financial world, threats such as cybercrime, new mobile banking malware and high-level data breaches are becoming more prevalent. To combat this growing trend, several countries have adopted data protection legislation, including Ghana, Nigeria, Senegal, South Africa and Tunisia. Nigeria has promulgated the Nigeria Data Protection Regulation (NDPR), which regulates fintech companies, while South Africa has recently updated the Protection of Personal Information Act (POPIA). The latter looks to prioritise data privacy and protection in light of a spate of recent data breaches, including the August 2020 attack on Experian, a South African consumer credit-reporting company, which affected around 24 million South Africans and over 700 000 businesses where personal information and financial details were exposed. As fintech in Africa continues to grow, private companies and governments alike will need to implement stronger measures to safeguard data and ensure that regulations relating to data protection are up to date with developments.