Africa has made significant progress in digital financial services, propelled by the widespread mobile money rails and fintech innovations. These developments are contributing to improving financial inclusion, facilitating economic growth, and empowering individuals and businesses with greater access to financial services. In this paper, we will adapt the fintech definition by the WorldBank series ‘Fintech and the Future of Finance’. Here, fintech refers to advances in technology that have the potential to transform the provision of financial services, spurring the development of new business models, applications, processes, products, and services. Fintech therefore constitutes; firms specialised in technology-enabled financial innovation, big tech firms involving large technology companies whose primary activity is platform-based digital services, and incumbent financial service provider institutions transitioning to platform models. The ongoing collaboration between fintech entities and regulatory authorities is expected to further drive the expansion and impact of digital finance in Africa.
Despite the advancement of DFS, payment scheme decisions are dominated by central banks and commercial banks and in many countries, scheme governance largely rests with these two entities types only, thereby excluding non-bank participants e.g. fintech entities, and therefore the scheme playing field is largely not yet open and level. Across the continent, banks and mobile money operators (MMOs) are key IPS participants. Fintech entities are fewer but with growing participation as direct participants, third-party service providers, or aggregators.
The majority of IPS are not inclusive. While the rise in the number of IPS is a substantial achievement, the analysis of the IPS landscape shows significant constraints to inclusivity. Not all IPS offer access to most in-demand channels; most do not yet enable cross-domain interoperability for the greatest end-user choice, and the majority of them do not allow non-banks (fintech) to participate in decisions. Many of them also only offer limited use cases, and only a handful have integrated B2P, P2G, and G2P payments. These limitations are challenging the ability of IPS to scale in Africa.
How might fintech enable the inclusivity of IPS in Africa?
Fintech is revolutionising the financial services space by driving innovation and development in several areas including payments, marketplace lending and alternative underwriting platforms, insurance, capital markets, and wealth management, among others. As investment in fintech initiatives targeting payments continues to boom, There are several ways in which fintech could be leveraged to drive the inclusivity of instant payment systems in Africa. These are:
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Augmenting the capabilities of regulating authorities, and influencing regulatory reforms.
As the market continues to grow driven by fintech innovation, regulators and financial services supervisors continue to face challenges in effecting optimal regulation and supervision, considering the rapidly changing and increasingly digital remit, as well as emerging financial globalisation and cross-border solutions. Increasingly, regulators are taking up technology solutions – regtech and suptech to enhance their capabilities and commitment to meet the challenges posed by increased digitization and expansion of their mandates.
Increased use of fintech solutions could improve oversight into payments by enhancing several aspects, including regulatory reporting, risk management, identity management and control transaction monitoring and compliance, among others. Examples of the emerging use of regtech and suptech in Africa include data-driven financial system stability in Rwanda and Nigeria. The National Bank of Rwanda uses an electronic data warehouse to automate and streamline reporting processes for the supervision of more than 600 financial institutions. Data is automatically pulled every 24 hours or even every 15 minutes in the case of mobile money and money-transfer operators. The Central Bank of Nigeria (CBN), the Nigeria Inter-Bank Settlement System Plc (NIBSS), partnered with the BFA team to redesign their data infrastructure to guide supervision and policy-making more effectively and generate richer open datasets for public and private use.
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Propelling infrastructure development to enhance IPS functionality.
Common payment system barriers include technological inefficiencies, costly delays, vulnerabilities to fraud and cybercrime, and compliance challenges, among other issues. Standards are therefore necessary to unify how these systems ‘speak with each other’, present and interpret data and information and process payment transactions, to minimise the risks associated with the key challenges. Fintech is providing the necessary direction in implementing standards for infrastructure and security controls for instant payment systems. Technological advancements could further support the enhancement of the baseline architecture, the technical framework, and a set of standard messaging protocols to facilitate the sending of enhanced data in a richer, more structured format, that all together form the backbone of instant payment systems.
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Enhancing domestic and regional interoperability.
Full interoperability of retail payment systems is necessary to improve efficiencies in payment processing, improve competition and innovation, expand the availability of financial services access points and improve transparency and regulatory oversight. However, this is yet to be achieved in several markets and regions in Africa. This is because of the complexities and moot nature of the processes involved in forging the three key interoperability elements, i.e. a clear and fair payment system governance model to deliver cooperation among payment system participants, robust incentives to encourage participation by all participants and safe and reliable operational models including the technology infrastructure for efficient integration. At both the domestic/country and regional levels, many of these payment systems operate as closed-loop systems with slow progress in interoperability through bilateral agreements, multilateral agreements or through third-party solutions. There is a growing opportunity for fintech to standardise how payment systems connect and promote the enforcement of common technical standards, data architecture and terminology at the scheme levels. This is through fintech entities playing the role of intermediaries along the IPS value chains by offering optimal Application Programming Interfaces (API) solutions and or playing the role of API aggregators. Since the ecosystem of API deployments is not yet mature there is a need for improvement in building more user-centric APIs, strengthening FSP middleware as an on-ramp to APIs, enhancing the capacity of technical teams especially in bank FSPs and staying abreast of perceived regulatory risks.
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Alleviating cost constraints as well as frictions related to scaling instant payment systems and reducing time to market.
Fintech is enabling reduced costs and facilitating economies of scale through enhanced connectivity and computing power. These have reduced the costs of data and information transfers as well as processes. Enhanced connectivity and scalable infrastructure for data storage all enable the development of cloud-based services which are cheaper options than servers. As technology advancements increase data and information exchange and reduce transaction costs, the production of financial services continues to be disaggregated introducing FSPs offering unbundled financial services, which promote product, service and channel choices to end users. Non-bank FSPs are increasingly gaining exceptional competitive advantage by applying data analytics to optimise their operations. Core operations such as account opening, product innovation, risk assessment, etc. are constantly being reinvented and the the scale and pace of these changes often lead to new business models, which attract low-tier licensing requirements e.g. offering-specific licences like payment-related licences, and easier as well as reduced time to market.
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Improving consumer redress mechanisms.
Africa is among the fastest-growing smartphone adoption markets in the world, due to increased affordability from falling average selling smartphone prices, and because most new phone users rely on devices for multiple activities beyond traditional voice calls and SMS. It is against this backdrop that FSPs are introducing the use of chatbots to enhance financial services products and service delivery. Increasingly, FSPs are leveraging artificial intelligence (AI) to redefine chatbots to engage and delight customers with human-like interactions and enhanced personalised experiences. Examples of these deployments in Africa include; Proto AICX by the Bank of Ghana, which is an automated consumer protection solution that collects and analyses complaints across multiple FSPs and channels; Kudi AI in Nigeria, which allows users to conduct funds transfers, track account details, buy airtime, and pay recurrent utility bills e.g. DSTV payments and the Pesakit Smart Agent App by an FSP in Kenya, which has an AI-based chatbot to improve liquidity management for mobile money agents through responding to agent queries about a variety of liquidity management issues, as well as carrying out predictive analysis tasks for mobile money float management. One of the mature IPS inclusivity level requirements is transparent and efficient consumer mechanisms. The above chatbot deployments present opportunities for IPS to leverage fintech to make provisions for and enforce transparent and efficient consumer resource mechanisms through chatbots, in addition to other consumer protection structures.
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Delivery of more and enhanced digital payments use cases.
Fintech is expanding the use cases for digital financial services by supporting innovation across various sectors, leveraging emerging technologies, and increasingly addressing the specific needs of households and businesses. Through increased accessibility, automation, and customization, fintech solutions are transforming the way financial services are delivered, making them more inclusive, efficient, and tailored to user requirements. Here are some key ways fintech is driving these additional use cases:
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Enhancing financial health through improving personal finance and budgeting, wealth management, digital lending and crowd-funding – This is through allowing individuals and small businesses to invest low-value funds in diversified portfolios, empower users through intuitive tools such as apps and robo-advisors, monitor investments and goals, expense tracking, customised financial insights, provide alternative capital leveraging enhanced data analytics, among others.
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Improving the gig economy and providing rails for e-commerce – Fintech caters to the needs of the growing gig economy workforce by providing specialised financial services. Fintech offers features like income tracking, tax management, instant payments, and financial tools tailored to the unique requirements of gig economy participants and accelerating e-commerce
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Promoting cross-border payments – Fintech is addressing the challenges of costly and time-consuming cross-border digital payments. Leveraging digital payment systems and fintech enables faster, more affordable, and transparent international funds transfers, promoting the resilience of households and businesses
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Promoting open finance – Fintech is promoting the concept of open finance, which allows authorised third-party providers to access FSP financial data securely with user consent. This opens the door to diverse products and services that can leverage financial transaction data to provide personalised recommendations, financial insights, and customised solutions
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Fintech can support Government-to-Person (G2P) digital payment use cases by providing innovative technology solutions that enhance the efficiency, transparency, and accessibility of government payments, improve choices for beneficiaries in handling funds, and benefits, as well as to ensure a seamless and inclusive experience for individuals.
