Digital banking in Africa: Brokering partnerships between Telecoms, Start-ups and traditional banks in an uneasy alliance
The permeation of Africa’s economy by digital banking could benefit from banks and technology companies teaming up. While the potentials of collaboration are evident, perhaps the characters in the plot are yet to read the script.
A huge section of Africa’s population is without access to financial services, a clog in the wheel of job creation, and economic development of the continent. These problems present an opportunity for telecommunications operators, banks and fintech companies to sidestep outdated banking structures for more affordable banking solutions which are reflective of the modern world.
According to Michael Jordaan, chairman and co-founder of Bank Zero, the South African digital banking institution: “In the broader African context, fintech companies and mobile operators have the advantage, as everything is leapfrogging to data-mobile solutions.” He continued, “whereas banks are still very much reliant on face-to-face processes, mostly branch-based, for acquisition and servicing.”
The GSMA (Mobile Operators trade Association) claims that sub-Saharan Africa has the fastest-growing subscriber base for mobile phone users, in its report titled The Mobile Economy: sub-Saharan Africa 2019. As at the end of 2018, 130 live mobile-money services reported signing up close to 400 million mobile money accounts in the region, and yet there are much more unreached.
Facilitating e-commerce and deepening the penetration of financial services in Africa is at the heart of the World Bank’s decision to invest $25 billion to fund digital transformation between now and 2030, an investment they hope the private sector will match. The International Monetary Fund and the World Bank in a joint fintech agenda encourage countries to develop innovative technologies to improve the financial services industry. Although there are inherent risks such as data breaches and customers exceeding their borrowing limit, the advantages of tech-based solutions outweigh them.
The GSMA reports that Tech platforms with the most potential to cause disruption are characteristically developed by local tech startups, and Alex Vines believes that “African innovation will become more significant globally in the long term.” Vines foresees established hubs like Lagos, Accra, Cape Town, and Nairobi widening the gap with their competitors due to their ability to attract human talent often developed elsewhere. These hubs are large enough to raise capital for startups to kickoff and grow robust enough to withstand draconian regulations in their respective countries. “This ‘critical mass’ is essential”, says Vines. “Many entrepreneurs in countries like Zambia and Tanzania don’t scale up, because that would only attract the unwanted attention of the political elite.” Alex Vines is the Risk, Ethics, and Resilience director at Chatham House, the London-based think tank. He heads the organisation’s program in Africa.
“For fintech companies to be successful and sustainable in the long term there needs to be a viable business model.” Just as with tech entrepreneurs in other parts of the world, with some tech start-ups, it’s not always clear where the revenue streams are coming from” says CEO of Alpha Africa Advisory, Sanyade Okoli. It is not enough that our local tech companies are good at creating local solutions or developing products that encourage inclusion in rural communities.
Opportunities vs. Challenges
Chris Steward; a portfolio manager at Cape Town-based Investec Asset Management believes the lower the level of financial inclusion, “the greater the opportunities for fintechs—and consequently the more likely that the regulator will take a tolerant view of the range of their activities.” but things have not always worked out fine for all parties.
Nine years ago, Safaricom, a telecoms giant in Kenya, teamed up with Equity Bank, Kenya’s second-largest lender, to launch M-Kesho, a mobile banking app, however, the initiative flopped amid disagreements over revenue percentages. More recently, Safaricom has pioneered mobile payments in Kenya and has successfully struck deals with KCB Bank and the Commercial Bank of Africa to allow them to use an M-Pesa platform to lend and accept money deposits.
This year, Equity Bank and Safaricom are reviving M-Keshothrough a new partnership to improve financial access for young people and rural communities. Equity Bank’s primary function in this partnership is to tackle regulatory barriers to the mobile platform’s ability to take deposits and make larger loans.
Safaricom hopes to extend M-Kesho into neighbouring Rwanda, Tanzania, and Uganda, where its rival M-Pesa has no presence. With more than twice the customer base of M-Pesa and a stronger regional presence, Safaricom has earned the position of senior partner in this partnership. The means to distribute these financial services belongs to Safaricom, and CEO of Equity Group James Mwangi faces “a humble acceptance that Equity is a subset of Safaricom.” Such is the potential that low levels of financial inclusion present to relatively new players.
The success of these alliances often relies on the size of the partners involved. This is hardly disputable when you consider that telecoms giant MTN has been granted a super agency license to offer a limited range of mobile payments and money transfers. MTN will pose a huge challenge to Nigeria’s traditional banks and Paga, its biggest fintech company, with its over 12 million users serviced by a system with about 14,000 licensed agents. With the ginormous pool of voice service subscribers and the financial firepower at its disposal, MTN has all it needs to compete with the big players in the Nigerian fintech space.
Most Central Banks in Africa have been wary of granting fintech companies broader licenses because, as Steward notes, “once deposit-taking is included in their suite of offerings, they effectively become custodians of the nation’s savings and therefore need to be regulated like any other bank.” In MTN’s case, “The super agency license permits only a restricted range of products and functionality,” says Steward. “To progress further, you need a full banking license from the central bank, which has made only slow progress, partly because of its bureaucratic processes but also because it may want to license several operators at the same time so as to create a competitive market.”
Since fintechs operate in the same financial services sector, they are positioned as competitors to these commercial banks. This means relationships between banks and new fintech start-ups are few and far between, says Bank Zero’s Jordaan. “The only exceptions are those where the fintech needs access to a banking license as it engages in a deposit-taking activity, or where the large banks effectively buy innovation.” Cultural reasons also contribute to the current standoff. “Big banks, like most corporations, have immune systems that attack outside ideas using antibodies,” Jordaan quips. “Small, informal, young, focused start-ups differ markedly from the typically more formal, process-driven, decision-by-meeting banks.”
In South Africa, the ascendancy of traditional banks has, for the most part, kept fintechs on the fringes, offering skeletal services like customer-friendly innovations in payments, money transfers, and remittances, says Steward. But recently the emergence of upstarts offering a compendium of revolutionary banking products has been like “a full-frontal assault” on the Big Four incumbent banks.
“The challengers have the potential to enjoy a significant cost advantage, as they can offer transactional banking services with an off-the-shelf core banking system quicker and cheaper than traditional banks,” Steward says. “This allows them to provide free or very low-cost banking while offering attractive levels of interest to customers that switch to them.”
Commercial banks have responded by reducing bank fees and, in certain cases, increasing interest paid on deposits. Jobs are being lost as they adopt financial technology and invest heavily in IT to keep up with the migration of their clients to digital banking. “They are under pressure,” says Steward, “as their revenues are currently being eroded faster than the cost savings are kicking in.”
The standard response by traditional banks in South Africa so far has been “either to emulate what [fintechs and challenger banks] are doing in-house, or to go out and acquire a fintech and bring its expertise in-house,” he says. Up till now, the result has been a couple of significant relationships between fintech companies and banks.
