The coronavirus pandemic has brought financial inclusion in Africa under the spotlight, we caught up with Austin Okere to get his thoughts on the lessons that have been learned and the best way forward.
As the vice chairman of CWG you will have bared witness to the growth of the fin-tech space in Nigeria, you have spoken excitedly in the past about the future of fin-tech in Nigeria and how it can help with financial inclusion. With the recent events of Covid-19, it has been highlighted that financial inclusion still has more work to be done. What are your thoughts?
The Haves and Have Nots
In most emerging markets and developing countries, the current formal financial system only reaches a minority of the working-age adult population. Smallholder farmers, self-employed households, and micro-entrepreneurs have to rely on the age-old informal financial mechanisms such as rotating savings clubs. These mechanisms can be unreliable and very expensive.
While society in the past was split between the haves and have nots, society today is split more along the lines of those who are included and those left behind. This inequality is most heavily felt in emerging markets, where 80% of the world resides. The one sector where exclusion is most rife is the financial sector.
In Nigeria for instance 84.6m people, accounting for 47% of the population are unbanked. In sharp contrast, mobile phone penetration is very high at 94.5 per cent. The digitization of retail payment systems and financial services has become an important economic development priority. It offers the prospect of reaching far more people at far lower costs with the broader range of financial services they need to build resilience and capture opportunities. This speaks to inclusiveness; an area that does not seem to hold any attraction for traditional banks.
Should Banks be changing?
The biggest threat to the banks has been precisely their seeming success. Centuries of relatively significant higher returns, even during economic downturns that adversely affect the real sectors, has engendered an attitude of invincibility and pomposity, characterized by a loss of touch with their customers.Considered too big to fail, they take it for granted that they will be bailed out with taxpayers’ money in the event of any missteps – this is a perfect set-up for disruption.
After centuries of conservatism in receiving deposits and making loans, there are two main issues stirring the yearning for change in the banking sector:
• The first being that it is a very difficult Club to join as a customer, and hence the large population of unbanked adults.
• Secondly, even for the members of this elite club, the relationship is acutely skewed in favour of the banks
Early experimentation with Fintechs show that they are able to provide financial services to the bottom of the pyramid in a cost-effective manner and at scale, by leveraging existing telecoms infrastructure and the proliferation of mobile phones over a technology known as Blockchain. For instance MPESA, one of the pioneer Fintech companies in Kenya has made it possible for a large swathe of the population to gain financial inclusion on a continent where typically 70% of the population is unbanked.MPESA today has more than 60% of Kenya’s 33 million mobile users and in 2015 transacted $28m on her platform. Similar applications have metamorphosed across Africa, and Mobile Money services are today generating 6.7% of Africa’s GDP. Nigeria is no exception, with Fintechs such as Interswitch, CWG Plc, Paystack and Flutterwave holding sway. Take for instance, Diamond bank (now merged with Access Bank) with 7m accounts after 23 years was able to add an another significant 6m accounts in just one year after the launch of the Diamond Yello Account in collaboration with CWG and MTN.
The rather slow progress in Fintech uptake on the continent outside of Kenya starkly revealed the soft underbelly of Financial Exclusion during the Covid-19 lockdown. With pent-up demand and no opportunity to access financial services online and remotely, people swarmed the banks immediately the lockdown was eased to try desperately to put themselves on the inclusion ladder.
Twitter was filled with many posts warning Nigerians about the risks of visiting any bank branch due to the mammoth crowd“Customers besiege banks on first day of partial lifting of COVID-19 lockdown” was one of the screaming headlines on social media.
Scenes outside bank branches in Nigeria on the first day after lockdown
Even though a lot has been achieved by leveraging Fintechs for Financial Inclusion, a lot more must be done to tip the scales. According to Sofie Blakstad, chief executive of Hiveonline,“Banks just aren’t set up to understand small businesses.” There is an estimated $2tn gap between SME funding needs and what banks will provide.
China is the undisputed World leader in Fintech
For years, emerging economies have looked up to developed countries for ideas about how to manage their financial systems. When it comes to Fintech though, the rest of the world will be studying the experience of the emerging markets, especially China. By just about any measure of size, China is the world’s leader in Fintech. It is by far the biggest market for digital payments, accounting for half of the global market, according to the Economist Magazine. A ranking of the world’s most innovative Fintech firms gave Chinese companies four of the five top slots in 2016. The largest Chinese Fintech company, Ant Financial, and affiliate of the Alibaba Group, has been valued at about $60b, at par with UBS which is Switzerland’s biggest bank.
Jack Ma, Founder of Alibaba and Austin Okere
Today, digital payments account for nearly two-thirds of non-cash payments in China, far surpassing debit and credit cards. Peer-to-Peer (P2P) lenders in China grew from 214 to over 3,000 in 2015, and P2P loans increased 28-fold from 30b yuan in 2014 to 850b yuan in 2016. This shows what is possible in Africa.
The Ausso Leadership Academy (ALA) has been running for the past couple of years now, how does it help to make an impact on the financial technology sector?
Okey Enelama, former Minister, Industries,Trade & Investmentsand Austin Okere
The Ausso Leadership Academy was set up to mentor entrepreneurs and business leaders to optimize the jobs they create to enable shared prosperity, through institutionalizing and scaling their businesses geometrically. The goal is to create an Expanding Oasis of Outstanding Businesses through impacting at least 200 Entrepreneurs each year.
There is a huge leadership gap between the visionary entrepreneur cadre and the next management layer required for the journey of sustainable business in Africa. The Ausso Leadership Academy fills this huge vacuum by making practical and democratizing entrepreneurial and business mentorship through experiential skill transfer, emphasizing what has worked and the pitfalls to avoid. The huge success of the technology entrepreneurial ecosystem in Silicon Valley is largely due to such deep mentorship regime. This is the model that the Ausso Leadership Academy is replicating in our environment. The need for resourcefulness and an innovative mindset to reinvent oneself when disruption knocks is a key skill every business needs to survive present market realities. A lot of the Delegates to the Ausso Leadership Academy are from the Financial Sector including Companies seeking to test out innovative ideas in the fledging Fintech sector.
The Ausso Leadership Academy has had remarkable success in the past two years with over 65 “Champions of Business” with proven track record, sharing experiences and mentoring over 150 Business Leaders and Entrepreneurs across 15 Local and International MNCs and 54 Entrepreneurial Businesses.
What are your thoughts on the current digital banking environment and suggestions for improvement?
Regulatory gaps and security concerns
Security has been a major concern in the Fintech space. Last week Wirecard, a German Fintech company disclosed that some of its cash was missing, eventually admitting “that there is a prevailing likelihood that the bank trust account balances in the amount of 1.9 billion EUR do not exist.” Wirecard announced on June 22, 2020 that they would file for insolvency. Freelancers around the world are unable to access their money from their prepaid Payoneer card. Despite the security challenges, Regulators cannot wish away the coming disruption by Fintechs and so have to find proactive ways in which to remain relevant in policing the sector. The Central Bank of Nigeria (CBN) is finally wading in to create a form of oversight by releasing a draft framework for regulatory sandbox operations aimed at controlling innovation in the Fintech sector. The new sandbox will contain a formal process for firms and startups to conduct live tests of all-new, innovative products, services, delivery channels or business models. With the new system, all fintech innovation will have to go through a controlled environment with regulatory oversight, subject to appropriate conditions and safeguards set by the CBN. The sandbox application process is open to both existing CBN licensees such as financial institutions and other companies, including technology and telecom companies intending to test innovative payments products they want to be licensed. The regulatory body claims that the new framework will reduce time-to-market for innovative products, services, and business models. However, with the CBN having full control over innovation in the sector, there is a palpable concern that innovation could be stifled. It may seem however, that this an acceptable trade-off to ensure security and peace of mind for customers.
Where do you see the future of digital banking in Africa?
Austin’s Five Forces Model and the future of Banking
In the face of the fierce challenge facing banks, I developed a model for analyzing the future of banking called the Austin’s Five Forces Model. There are indeed five major forces at play here:
The Austin’s five forces model provides an experiential way to analyze the future of banking (as against banks)
• The banks – traditional and established, best with cash and ancillary instruments
• Fintechs – the new kid on the block, disrupter, mostly telecom roots, best with digital currencies and mobile services
• Regulators – Central Banks, regulating traditional banks; and Communication Commissions, responsible for telecoms regulation
• Currencies – traditional, such as cash and cheques; or Digital, including Bitcoin or other cryptocurrencies
• Customers, and the weight of their new-found voice. Typically, they clamour for whatever will give them convenience, security and lower costs.
Customers are the most significant force, represented by the outermost sector of the concentric circles. As they tend more towards a preference for digital currencies, the Fintechs will tend to assume a more prominent role in the new face of banking, and the Regulatory regime will inadvertently tend towards the Communication Commissions under whose purview the Fintechs fall. This will introduce a regulatory imbroglio, as future ‘Huge Banks’ may fall outside the regulatory ambit of Central Banks as seems to be the case with MPESA. Safaricom, the telecoms promoter of MPESA ironically falls under the regulation of the Communications Authority of Kenya rather than the Kenyan Central Bank.
If the customers, however, maintain a strong appetite for traditional instruments of financial transactions such as notes & coins, cheques etc. then the current status quo will remain. The face of banking will thus be more of the same, and the regulatory authority will continue to be Central Banks. Between these two positions is a wide spectrum, depending on the appetite and preferences of customers, and the pace at which they are willing to embrace change.
Will Retailers jumping into Financial Services help Financial Inclusion?
Fintechs are not the only ones challenging traditional banks for turf. Retailers are also jumping into the financial services fray. For instance, Amazon has launched Amazon Cash, a way to shop its site without a bank card. This product is meant to appeal to the those who get paid in cash, don’t have a bank account or debit card, and who don’t use credit cards.
Google is also rolling out a new integration on mobile called Google Tez, which allows audio QR Codes and thus opens the door for more basic phones other than smartphones. Users of the Gmail app on Android will be able to send or request money with anyone, including those who don’t have a Gmail address, with just a tap. Facebook has also launched WhatsApp Banking. Considering that WhatsApp reaches more than 1.5 billion people in over 180 countries, this could transcend many regulatory jurisdictions in one fell swoop. Unfortunately for Facebook, Brazil’s Central Bank and antitrust regulator suspended her WhatsApp messenger payment features in the country, the app’s second-biggest market with more than 120 million users;ostensibly to preserve an adequate competitive environment. Bank authorities requested that Mastercard Inc. and Visa Inc. stop payment and money transfer activities through the app.This headwind has considerably reduced the pace of advancement in the Fintech community.
The future of Fintechs
The future of Fintech seems bright. Accenture recently released a report which found that investment in Fintech around the world has increased dramatically from $930 million in 2008 to more than $12 billion by early 2015. Fintechs employ Artificial Intelligence, Big Data and Machine Learning to glean the credit habits of customers from their mobile usage, and so have mitigated against the risk of default. The homepage of LendingClub (NYSE: LC) advertises personal loans of up to $40,000. You can “apply online in minutes” and “get funded in as little as a few days,”. Another prominent Fintech lender Funding Circle claims that small businesses can get loans from between $25,000 and $500,000 in as little as 10 days. These innovative services seek to fill important niches in credit markets. They enable people who have historically been shunned by banks to get loans in order to expand their businesses.
Fintechs are now getting a lot of support from Governments, believing that Fintech firms are small enough for any problems to be manageable, and on the other hand, might produce useful innovation. The intention is to lower market entry barriers for fintech companies. For instance, France’s Central Bank has announced opening up a new innovation lab, aiming to collaborate with blockchain startups. In December 2015, Nasdaq executed its first trade on a blockchain, through its Linq ledger. The exchange said blockchain promises to expedite trade clearing and settlement, reducing all the steps needed to transfer the asset from seller to buyer including recording the transaction from three days to as little as 10 minutes. That’s because the trades remove many manual processes and bypass third parties. As such, “settlement risk exposure can be reduced by over 99%, dramatically lowering capital costs and systemic risk,”. Other stock exchanges tinkering with blockchain include Australia, Germany, Japan, Korea, London, Toronto and Myanmar.
The changes coming with Fintech and the underlining Blockchain technology will be as large as the original invention of the internet. Who would have imagined a decade ago that e-commerce, championed by Amazon and Alibaba will be displacing high street retailers, or that ride-hailing will be dominated by UBER, a technology platform? The corona virus pandemic has made the question of Financial Inclusion a more pressing imperative, and Fintech seems to be our best shot at it.
Austin Okere is the Founder of CWG Plc, the largest security in the technology sector of the Nigerian Stock Exchange, and Entrepreneur-in-Residence at CBS, New York. Austin also serves on the Advisory Board of the Global Business School Network, and on the World Economic Forum Global Agenda Council on Innovation and Intrapreneurship. Austin, a Non-Executive Director of Globus Bank now runs the Ausso Leadership Academy focused on Business and Entrepreneurial Mentorship