How should banks respond to the digitization of consumer financial services in Africa? By Osahon Akpata
The payments landscape in Africa is competitive and quickly evolving. Over the last two decades, we have experienced the advent of mobile money services, digitization of banking services and the emergence of Fintech neo banks and payment services banks. It is estimated that consumer payments will top $2.1 trillion by 2025, however, majority of these transactions today are still in cash. As at 2019, according to McKinsey & Company, 93% of transactions were in cash and this is expected to reduce to 79% by 2025.
The opportunity to digitize transactions and earn a fee in the process is quite large and sustainable, hence, various players in the payment ecosystem are tapping into this. Last month, Kenya’s Mpesa, the pioneer in mobile money services in Africa, celebrated its 15 year anniversary. The company today has 51 million customers, 465,000 businesses and 600,000 agents. Half of Kenya’s GDP runs via Mpesa. It is difficult to imagine Africa without telco-led mobile money today. The region leads mobile money services across the world. Of the 346 million active mobile money accounts globally in 2021, there were 183 million accounts in sub-Saharan Africa generating $698 billion (almost 70% of all transaction value processed).
Payment Service Banks
As governments across the world seek to expand financial inclusion especially amongst the rural and low-income populations, some have enabled the launch of payment service banks. For example, in 2015, India’s government introduced specialized banks or ‘payments bank’ to cater to the lower income groups and small businesses by granting licenses to 11 banks out of 42 applicants.
Nigeria’s Central Bank introduced payment service bank licenses following a review of the 2012 National Financial Inclusion Strategy commenced issuing payment service bank (PSB) licenses a couple of years ago. Banking services in Nigeria are highly regulated and competitive with very low fees, however the cost of rolling out a traditional branch distribution network, has made it difficult for commercial banks to expand as rapidly and widely as required to cover the population. 36% of the Nigerians do not own a bank account according to an EFInA survey conducted in 2020 and only 51% of Nigerians use formal bank services.
There are 8 payment service banks in Nigeria today and notably In November 2021, the Central Bank of Nigeria granted approvals in principle for the PSB licenses of Airtel and MTN. Since these are the two largest mobile network operators in the country, much is expected about the impact they would have on the payments ecosystem when fully approved. MTN was granted a super-agent license in 2019 and reportedly have established a network of over 300,000 mobile money agents. Distribution is a critical lever for providing payment services and establishing an agency banking network is necessary. Even banks realize this and several of them have networks of 100,000+ agents including Ecobank Group, Access Bank Nigeria, Equity Bank Kenya, First Bank Nigeria, and others.
How are consumers responding to digitization?
The digitization of retail banking was catalyzed by the Covid-19 pandemic when the whole world saw a rapid shift to digital and contactless payments. This shift is likely to be permanent as consumers experienced the convenience of branchless banking. According to a PWC survey, 32% of the sample population in the US are digital natives with a preference for avoiding branches altogether. Additionally, there is a demographic shift. Nearly a third of millennials (ages 27–41) now call a digital bank their primary account.
The median age in sub-Saharan Africa is 19.5 years and a due to the mobile revolution over the last two decades on the continent are going to be looking at their devices for financial services. Thanks to the ongoing Fintech investing gold rush which has seen billions of dollars flow towards startups solving different problems in the financial services space, we can expect that the youth of Africa will be spoiled for choice. These players can put significant resources into developing smooth user experiences, acquiring customers at scale, and providing a strong value proposition.
For example, in Senegal, Wave launched a simple payment service with cost-effective funds transfers and bill payments and now reportedly has over 5 million active users (half of the adult population in Senegal). In Nigeria, Kuda Bank has quickly grown to over 1.7 million users, offering free transfers and continues to raise funding at higher valuations as they meet investor milestones. The incumbent traditional banks are not able to compete head-to-head with offers like this as they are driven by quarterly profits to shareholders and not valuation and the prospect of an exit in 5 to 7 years.
Banks are responding to the digitization of the retail banking space in several ways. Some have launched their own digital offering e.g. wallets and mobile banking apps that allow straight through account opening, freeing customers of the burden of paper forms. The growth of agency banking networks by traditional banks is an attempt to expand reach into the neighborhoods where customers live and work. However, as customers go fully digital, agent locations and indeed banks risk becoming a low margin utility for handling cash and safe deposits of Fintech and mobile money players.
Which way forward for retail banks?
There are three viable options for traditional banks in the current retail banking landscape which is increasingly digitized.
a. Launch separate digital only entity with different metrics and KPIs
b. Partner with leading Fintechs and MoMo operators by offering services they seek e.g. loans, credit cards, settlement and treasury services, etc
c. Push your customers to digital channels while scaling down physical infrastructure
The best answer for a bank might be a combination of the three and will be driven by the goals of the institution and its situation. The future of retail banking and provision of financial services to consumers via digital channels is quickly evolving. Time will tell who the winners and losers will be.