Is African fintech really solving the financial inclusion gap?

Are African fintechs solving the financial inclusion gaps? Startup Lagos

Financial Inclusion! Owo ni koko!

Truly, money makes the world go round. For Africa, this is not far from the truth. It is quickly evident in a single weighty point: The business of managing money has attracted the most money. Yes. In recent years, the bulk of startup investments in Africa has been majorly towards the growth and scaling of fintech startups. While venture capitalists and investors are keen to observe sectors with the most promise, they are also interested in high returns on successful investments. As has become a common antiphon, most startups fail, so it is only wise for an investor to compensate the losses from failed investments with great returns from other investments.

In Africa, therefore, it is easy to see why fintech is selling hot. The successes of startups like Paystack, which have earned great exits, as well as the remarkable traction of certain shining lights in the fintech sector, have contributed to showing the sector to be filled with promise. Africa is also a high-growth region, ranking as the world’s second-fastest-growing region after Asia, with an annual GDP growth rate in excess of 5% over the last decade. While fintechs flood the list of Africa’s unicorns, even the majority of the continent’s soonicorns carry the fintech badge. Literally, these progenitors of success for fintech are serving as validation for the marketability and viability of fintech. The vast numbers of the unbanked in Africa also command the possibility of market growth. About 40% of Nigeria’s vast population is unbanked. In sub-Saharan Africa, the World Bank estimates the number of the unbanked at over 66%, and at an alarming 460 million people. And so, these trends also occur across Africa’s vast economic landscape.

A majority of Africa's glorious unicorns come from the blossoming fintech sector - Startup Lagos
A majority of Africa’s glorious unicorns come from the blossoming fintech sector.

Africa’s financial inclusion goal

Firstly, financial inclusion is a peculiar goal for Africa’s economies, because of a number of factors. On the one hand, it is observed that Africa’s banking systems are less inclusive than those outside of the continent. The World Bank’s Findex 2017 Financial Inclusion data reports that over 34.2 percent of adults in sub-Saharan Africa have opened a bank account. When contrasted with other parts of the globe, we find that this number pales the global average at 62 percent. Of this number of banked in sub-Saharan Africa, more than half utilize mobile money solutions. On the other hand, we find that financial services in Africa are clustered majorly around urban areas, and generally are available to middle-class citizens. Furthermore, we find that financial inclusion policies in Africa are not proactive, but as with many other policy directions, reactive.

Importantly, financial inclusion, here, covers the core indicators of ownership of a bank account and use of bank credit. Many pundits outline these as access (i.e. making financial services available and affordable to a majority of citizens), usage (i.e. making customers utilize financial services more frequently and regularly), and quality (i.e. making financial services tailored to the needs of citizens). Yet another aspect of financial inclusion is ensuring that financial services get to specific groups that are historically underserved. Some of these groups entail communities and localities, as well as gender-specific groups like women, who suffer from low literacy, and lower incomes and operate majorly in informal sectors with less focus on improvement. Literally, access to bank services evaluates the level of financial inclusion of any community, locality, or country. However, it is observed that in Africa over 80 percent of the potential market is to be found in rural areas. Here, a vast number of the populace are hindered from access to financial services, due to issues ranging from remoteness to banking infrastructure, low income relative to the cost of service, low literacy rates, lack of credit history, etc.

Through agency banking or branchless banking, it had become easier for many African countries to extend financial services to these remote regions even better, through authorized agents. By leveraging technology, the goal has always been to get these users to easily access loans and banking services, by merely swiping on smartphones. In spite of these efforts, a majority of rural dwellers are hindered from access to these technology-driven services, particularly because of the high costs of these mobile devices, low literacy rates in adapting to technology, and poor internet penetration. As such, interventions in the area of technology-enabled banking have had shortcomings in the overarching goal of financial inclusion on the continent.

Are we bridging the gap?

While there has been some remarkable progress towards financial inclusion, especially in Kenya, in electronic payments, there are yet other gap areas of financial inclusion. M-Pesa, launched in 2007 by the Kenyan mobile network operator, Safaricom, has grown prominence within the East African country, offering users a greater likelihood of being formally banked, and reducing the use of informal savings mechanisms. In Niger as well, the M-transfer system is providing citizens with more cost-effective means of transferring cash to remote areas. Mobile money or branchless banking has greatly helped with the goals of financial inclusion, especially as it has enabled millions of people on the continent that are excluded from the formal financial system to make financial transactions relatively cheaply, securely, and reliably. In sub-Saharan Africa, it is reported by the African Development Bank (AfDB), in 2013, that over 16% of adults reported having used a mobile phone in the past 12 months to pay bills or send or receive money. In Kenya particularly, where this growth has been phenomenal, over 68% of adults reported having used mobile money. To see all these in a greater context, globally, the share of adults using mobile money is less than 6% in all regions. In Nigeria, the future of mobile money appears quite promising, especially as MTN Nigeria received the nod recently to operate a payment services bank in the country. As GSMA reports, Africa presently accounts for over 70% of the world’s $1 trillion mobile money market.

Is African fintech solving the financial inclusion goal? Startup Lagos
Mobile money users in Africa. Source: Demigurc-Kunt and Klapper (2012).

In almost all parts of Africa, fintech has been performing phenomenally, with a good number of these companies pivoting as neobanks. Their entry into the emerging banking space is primarily through a credit-led model (offering credit or similar offerings to users before providing a bank account for them). These neobanks have also facilitated ease of doing business, with small businesses finding it easier to access credit to scale their businesses. While the proliferation of these fintech companies is offering salient solutions to points of the financial inclusion map in access, especially with the ubiquity of financial services and affordability, there are still parts of the population of Africa cut off from access due to paucity of infrastructure. It is critical to note that great steps are being taken by companies to assist in bridging this infrastructural gap. Just last month, Google and WIOCC announced that the Equiano subsea cable had landed in Lagos, Nigeria. Through this state-of-the-art Equiano subsea cable, Nigeria’s current and future international connectivity demands face a tangible solution. Other efforts being made by public and private stakeholders are crucial to enhancing connectivity across the continent.

In the aspect of usage, government policies need to be more deliberate in facilitating ease of use of financial services on the continent. While governments are becoming more proactive toward financial inclusion goals within their various countries, there is still much that needs to be done. While there are more structural challenges in resolving physical, bureaucratic, and financial barriers, governments can show renewed dedication to improving income levels and governance within their countries. Fintechs are already supporting remarkably with the right infrastructure and technology to enable payments across the African space seamlessly. And these will engender better trade among countries in Africa, especially on the back of the African Continental Free Trade Agreement.

Finally, in terms of quality, there is yet a lot that needs to be done to address specific groups that have peculiar financial needs. Farmers, entrepreneurs, teachers, etc. each have very specific financial needs that are tailored to the uniqueness of the work that they do. Apart from these professional groups, there are yet other groups that suffer historical exclusion, such as people living in rural areas, the poor, women, less-educated adults, young and older adults, etc. Financial inclusion efforts have to ensure that these groups are not merely bundled with the whole, but that tailor-made solutions are afforded to them to help them in getting quality services at their fingertips.

Fintechs everywhere

As many will observe, fintechs are sprouting all over the continent. Part of this is can be attributable to founders seeing gaps to fill in the overarching financial inclusion need. Some other parts of this may be due to the success that fintechs at the top of the growth trajectory have registered. Yet some other parts may be because founders realize that this may be the best way to court investors. Whichever it may be, it is important that founders are thinking critically about answers to the critical concerns of ‘banking the unbanked’. Without due attention paid to these concerns, founders may be missing the mark and shooting blindly. What this would mean is that the solutions that are provided may not be long-lasting and impactful.

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