By Akshay Grover, Group CEO, Cellulant
The payments industry has never been more exciting than it is today. Yet, in Africa, payments have historically been a pain-point for both businesses and their banks. Businesses, for instance, must engage a huge number of partners to process the different types of payment their customers use, as each country favours different solutions. Meanwhile, for banks, the large unbanked population and prevalence of mobile money mean card payments—the area in which banks are strongest—experience very little penetration.
But fintech (financial technology) has emerged to change the game—and collaboration between banks and fintechs can start to mend this fragmented landscape to the benefit of all.
The unbanked continent
Currently, approximately 57 percent of Africa’s population—accounting for almost 95 million people—do not have traditional bank accounts. In part as a result of this, credit- and debit-card penetration on the continent consistently hovers around 3 percent, which is extremely low compared to 90 percent in Europe, for instance.
In place of cards, a vast array of different solutions is in circulation—with mobile money being the most popular method. In the absence of a dominant method or provider, Africa’s payments market is highly fragmented. Different users and countries favour different solutions, while even similar solutions are typically covered by different providers and a broad range of telcos (telephone companies).
As such, the main obstacle for businesses is that it is highly inconvenient and costly to receive payments from different countries—to the point that some of them choose not to pursue opportunities in Africa at all.
The impact of fragmentation
To better understand the complexity of this issue, it is useful to study a local example. In Zambia, there are three telcos, each with a roughly even split of consumer market share. To receive mobile money from all the customers in their target markets, merchants, therefore, need to use three different phones via contracts with three different mobile-money providers using three different mobile wallets.
As a result, bottlenecks occur at the point of sale (POS) and in the back office. At the POS, the salesperson needs to operate three phones with individual log-in credentials and user interfaces. Meanwhile, back-office teams must reconcile payments from different providers, contending with data trapped in different systems and formats.
This is just one payment experience in one country. It should be easy to see how these challenges are exacerbated for businesses operating internationally, which must manage these challenges for multiple payment wallets in multiple countries.
Pathway to financial inclusion
So, the current system has major drawbacks for both banks, with limited access to the continent’s payment flows, and corporates, with major workloads to manage and reconcile the vast range of different payment methods required. Is there a way to solve both of these issues while improving financial inclusion?
If there is, it will surely involve mobile money, which looks set to remain one of the most successful drivers of financial inclusion on the continent, lowering operating costs and providing broad access to functional financial infrastructure. The challenge for banks, then, is how to support the development of this market of which they have historically been on the outside in a way that simplifies the management burden currently incumbent on businesses.
The key to achieving this lies in collaboration. Partnerships between banks and fintechs have the potential to make digital financial tools increasingly accessible to consumers right across Africa, facilitating greater levels of financial inclusion and more economic involvement by strengthening and streamlining the connections between businesses, banks and consumers.
The benefits of partnerships
How does this work in practice? For fintechs, partnering with banks represents a compelling go-to-market strategy, expanding the reach of their services to huge swaths of the continent’s largest merchants. In turn, banks gain the ability to offer a much broader range of payment options to their client bases (which need them to meet the demands of end customers). This suddenly opens the door to the 97 percent of African payments not covered by cards, which are more or less untouched by banks.
The benefit to businesses comes in direct, straightforward access to the services these fintechs can offer—not least the aggregation of various payment methods. This is the key to resolving fragmentation, providing businesses with a single platform and a sole set of log-in credentials, as well as a unified data feed, for all their different payment methods.
Beyond streamlining access to existing payment methods, bank-fintech collaboration also has the potential to spearhead new and more efficient transaction forms.
For instance, M-PESA—the most popular form of mobile-money transfer—is among the most prominent payment wallets in Africa, but consumers often keep only small amounts of money in their M-PESA accounts, preferring to keep the majority in their bank accounts. As a result, consumers often have to transfer money from their bank accounts to M-PESA wallets in order to make a payment—adding an extra transaction and an additional layer of complexity and cost to the process.
A typical M-PESA top-up involves the consumer travelling to the nearest bank or ATM (automated teller machines), taking out cash, walking to the nearest mobile-money vendor on the street and paying them in order to load money onto his or her mobile phone. By enabling direct transfers between bank accounts and mobile wallets, banks and fintechs can cut out this extra step—saving considerable hassle in the process.
More enticing still is the possibility of carrying out the same transaction directly via bank transfer—a far more efficient payment method since it does not require intermediate top-up transactions. This process is also more cost-efficient for the merchant and the bank (since they don’t have to pay for transfers from a bank account to an M-PESA wallet, eliminating the middleman in the transaction) and easier for the consumer. This approach is already gaining traction in certain African countries, including Nigeria, where bank transfer as a payment method has become prevalent.
These are just a few ways that banks and fintechs can work together to bring the African payments landscape together to improve the lives of all involved. Africa is a fascinating case, with markedly different financial infrastructures than other continents—making it a tricky proposition for traditional banks. However, as fintech continues to grow in influence on the scene, it is a prime example of the potential that can be tapped via collaboration. Certainly, this partnership will be vital if harmonising solutions are to reach critical mass.
The momentum for Africa’s fintech disruptors is set to remain strong, with new solutions continuing to create jobs, facilitate businesses and improve livelihoods on the continent. With the right mechanisms in place, banks and fintechs can bridge the gap between the old and the new, the traditional and the disruptive—ensuring new opportunities and economic growth for communities across the continent.