The rapid adoption of digital financial services is touted as a silver lining in the dark cloud cast by the ongoing Covid-19 pandemic. E-commerce is booming, squeezing 10 years of growth in penetration into three months, according to a McKinsey report.
While global payments are expected to decline this year in line with a contraction in economic output, more individuals and businesses are adopting electronic payments. Over the last few years, several fintech unicorns have emerged backed by deep-pocketed investors seeking to meet the growing needs of consumers and merchants.
In Africa, 2019 was also a bumper year for foreign direct investment into the fintech space, with $679-million in investments, 138% above the prior year. The informal sector is a difficult segment of the population to serve with conventional thinking. But it employs about 70% of the adult population in sub-Saharan Africa. How will their payments needs be met?
Africa is a hotbed for innovation in the consumer payments space. The ubiquity of mobile devices and other factors, including a population underserved by financial products, created a perfect environment for the rapid evolution of mobile money and other digital financial services.
When I moved from New York to Lagos in 2011, I was amazed that I could make an instant funds transfer between banks in Nigeria, something that is only now becoming a reality in parts of Europe and the Americas. With more than 469-million mobile wallets, sub-Saharan Africa is host to almost half of the mobile money wallets worldwide. Last year more than $450-billion worth of transactions were processed by mobile money operators in the region, far greater than any other geographical area.
Prior to 2000, access to a phone line was largely reserved for the privileged in Africa.
Similarly, the traditional model of banking using branches, dedicated personnel and requiring a lot of documentation only reaches a small percentage of Africans.
Today, thanks to the ubiquity of mobile devices, digital financial services are accessible to all. Where banks were unable to reach consumers closer to the bottom of the pyramid, mobile money is prevalent across all segments of the population with a wide agent network of 1.5-million locations for cash deposits and withdrawals as well as a quickly developing ecosystem of merchants and billers. According to a 2018 GSMA study, in every 1 000 km², there are 60 mobile money agents compared to two ATMs and one bank branch.
Mobile money is not without its challenges. A subsistence farmer in rural Uganda accessing mobile money still contends with expensive charges for cashing out of the system, with higher fees for the small transactions he often does. To be financially included he seeks access to credit, insurance and good savings rates which are not available to him. His seed or fertiliser supplier might not accept mobile money as a form of payment, only taking cash or bank-issued cards due to limited capabilities for merchant integration with mobile money. To make a single payment, he might have to enter up to 45 digits on the unstructured supplementary service data (USSD) most mobile money services run on, though fintech firms such as Nala are easing some of these difficulties.
Serving the masses of consumers in the informal sector across Africa with products that meet their needs of instant and secure payments is no easy task. Cash remains king on the continent. It is responsible for about 90% of consumer payments, which are expected to reach $2.1-trillion in 2025.
Frankly, a tailor working in a bustling city like Abidjan needs a lot of convincing to open a store of value account. She needs 24/7 instant access to her funds, cannot afford expensive transaction fees and probably would not meet the know your customer (KYC) documentation requirements.
Governments play a key role in expanding access to financial services and must ensure their policies are driving digitisation of the informal sector as a priority. They should collaborate with financial institutions to include this population and provide easy means of identification for all citizens in an efficient and cost-effective manner.
The availability of light KYC bank accounts or wallets could meet the needs of these individuals and microentrepreneurs in the informal sector. Farmers, traders, transporters and other merchants could also benefit from several options for accepting digital payments.
An auto mechanic working in Ghana, for example, wants instant value, and probably cannot afford devices for payment acceptance, hence sticks to cash. However, he also needs to pay his automotive parts suppliers who may not be physically present. Digital financial services are cost-effective and there are several options available for collections and funds transfers that may benefit businesses like his, such as quick response (QR) codes.
A Mastercard research report revealed that merchants in South Africa accepting mobile payments via QR codes saw their revenues climb by 10 percent.
Businesses receive instant value without the need to have equipment, electricity or a data line. It is possible to integrate this payment option into mobile money such that merchants receive funds into a bank account, which provides more payment flexibility for them. It can also facilitate cross-border payments, an area of increased focus with the upcoming implementation of the African Continental Free Trade Agreement (AfCFTA).
To effectively meet the needs of the informal sector, banks, telcos, fintech firms and others need to team up more extensively in mutually beneficial partnerships. In the past few years, there has been a rise of partner banks who collaborate well with fintech firms and a recent study shows that many are two or three times more profitable than the average.
While mobile network operators have broader distribution networks and good consumer insights, banks offer financial services they cannot, such as payment cards, and have deeper knowledge about meeting regulatory requirements. Fintech firms are agile and innovative enough to quickly improve user experience such as the ability to transact without data, digital KYC validation and more.
Working together with appropriate regulatory support, these stakeholders could unlock the economic potential in the informal sector, providing innovative payment services that meet their needs. The rapid evolution in service models among these players catalysed by the pandemic, presents a unique chance to capture the informal sector opportunity. Will it be seized?