Digital banking boosts financial inclusion, new business models in Africa

In early 2021, a wave of digital innovation in the African financial sector, born out of a response to the tight grip of the pandemic, fuelled services and applications that had the potential to really shake up the banking sector. Over the past year, that wave has continued to grow and swell, unleashing a flood of change and innovation.

Banks, startups, and financial service providers across the continent have been announcing digital solutions designed for touchless and remote banking, unlocking opportunities for the millions of digitally connected Africans who remain formally unbanked but economically active.

In addition, investments in fintech startups suggest that new technology will continue to be produced on the continent, leading to an increasing number of innovative services. Of the US$4.9 billion in total estimated funding in 2021, 62% went to fintechs, according to a report from Briter Bridges. “Financial technology companies continue to capture the largest share of funding on the continent, capturing almost two thirds of total funding into technology companies across Africa,” according to the report. More specifically, financial inclusion—aimed at expanding access to financial services to a broad population, including the unbanked—is the main investment sector in Africa, according to a separate report by Partech Partners.

These investments are a massive vote of confidence in the future of the financial sector in Africa as it finds new ways to meet the unique needs of people in the region. Over the last decade, the sector has responded to real-world conditions by offering digital-bank services such as mobile banking, while also leveraging the advantage of not having to retool legacy telecommunications infrastructure.

Some governments in sub-Saharan Africa are encouraging new forms of financial technology, as they have seen the benefits firsthand inside their countries. “Most African central banks have strongly encouraged the population to use digital payments” in the past year, according to the Africa Development Dynamics report. For example, the National Bank of Rwanda and the country’s Ministry of Finance and Economic Planning have urged network operators and payment service providers to propose digital payment solutions to merchants.

African banks rush to offer new services

Many of the major lenders on the continent have taken note of the changing financial environment and are rushing to safeguard their territory and keep pace with the agile startups nipping at their heels.

In Kenya, the Standard Chartered Bank has launched a 100% digital investment application on its mobile app. Meanwhile in Botswana, the South African banking giant ABSA has partnered with PureSoftware to launch a digital wallet called Spark that lets users make and receive payments, pay bills, buy airtime, withdraw cash at any Absa ATM, and transfer cash from Spark to another bank account.

After years of stagnation, innovation is happening across the continent: The Kenyan government is reportedly considering a Central Bank digital currency; the Central Bank of Lesotho has reduced fees and raised transaction limits to encourage the use of mobile money; and the Bank of Central African States (BEAC) introduced regulations to encourage the interoperability of mobile money accounts across the region, to promote contactless payments.

These initiatives have further catalysed a new generation of digital products that are transforming access to financial services. With a combination of high smartphone penetration rates alongside a young demographic and a huge unbanked population, African markets have been ripe for a change to digital banking.

Fintech lowers costs for banks and consumers

Because digital accounts can reduce the cost of transactions by as much as 90%, financial institutions stand to make considerable profits while still keeping expenses low for customers. Many of the global tech giants, as well as leading investment firms around the world, are closely monitoring what is being developed for Africa. Corporations like Google and Amazon are sending signals that now is the right time to increase their exposure to African fintech entrepreneurs, as the continent bounces back confidently from the devastating Omicron wave of the COVID-19 pandemic. Google, for example, announced an Africa Investment Fund in October 2021 for fintech and e-commerce startups to the value of US$50 million, which includes preferential access to many Google resources and staff.

It’s not only forward-thinking investors that are taking notice. Established banks are as interested in African growth and innovation as the smaller, more agile fintech players.

British multinational bank Standard Chartered sees the African banking market as the second-fastest growing and second-most-profitable globally. Behind this trend is a retail banking sector booming with new business models which are emerging in response to low levels of banking penetration and heavy dependence on cash in sub-Saharan Africa. “A digital delivery model can bring affordable banking to many more people than a traditional physical branches-only model,” said Michael Gorriz, group CIO of Standard Chartered Bank.

This emphasis on digital transformation does not imply a widespread, indiscriminate killing of investments in the banking physical infrastructure for established providers. It instead implies a shift from an operations-based strategy to a customer-centric one, where reaching the widest possible number of clients and being able to offer them practical products are the main goals.

Mobile money systems take the lead

Mobile money payment systems have become particularly popular across sub-Saharan Africa. Using a mobile phone, and without the need of dealing with banks or opening a bank account, people are able to receive, store, send, and spend money using their mobile devices. The systems can also be used to pay for products or services at shops or restaurants in a fast, secure way.

In rural and less-developed areas, where traditional banks and financial services are not present or the service cost is out of reach for low-income households and small businesses, mobile money has emerged as a convenient and inexpensive solution. “Mobile money has underpinned a radical change in the delivery of financial services in sub-Saharan Africa. As a result, the region has become the global leader in mobile money innovation, adoption, and usage, with close to 40 out of 45 sub-Saharan African countries actively using this new financial technology,” according to a  report commissioned by the International Monetary Fund.

“Within sub-Saharan Africa, East Africa continues to lead in terms of adoption and usage rates. Whereas overall financial depth remains below other regions, fintech is emerging as an engine of growth and technological enabler that fosters financial inclusion and economic development,” the report said.

East Africa is providing the model for the rest of the continent to build on and adapt. The most famous provider of mobile money is Kenya’s M-Pesa (M for mobile and “pesa” for money in Swahili). It was introduced by Safaricom, a Kenyan telecommunications company associated with Vodafone, in 2007 as a phone-based payment scheme where users can transform messages into cash at authorized shops and agents across the country.

As the digitalisation of banking services continues its current trajectory in sub-Saharan Africa, countries in the continent where banking penetration rates are among the lowest in the world will most likely benefit from an improved and more widespread access to banking services, advancing financial inclusion among rural and underbanked populations, alongside a host of third-party applications linked to their digital services.

It appears that the millions of unbanked in Africa, who have remained unreachable and disempowered for so long, are about to feel the benefits of unique financial services that have been built for their specific needs.