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FinTech in Africa

How Mobile Banking is Changing Africa's Economy and Influencing Others

Africa is becoming a particularly interesting FinTech innovation hub. It is estimated that about 80% of the continent is unbanked. In addition to 80% of Africa being unbanked, almost 90% of retail payments are made using cash. If we compare these numbers to Europe, the difference is staggering. More than 50% of the payments in most European countries are electronic. As a result, this opens the door to a variety of opportunities for FinTech companies to seize market share. It is no surprise then that companies in the FinTech space received almost 30% of all funding for African tech businesses.

In the U.S., we have an abundance of options to send money peer-to-peer: PayPal, Venmo, online banking, Facebook, Google Wallet, etc. Many people around the world, however, lack access to the financial services we take for granted. It is reported that two billion unbanked adults, mostly in developing countries, face barriers to tasks as simple as receiving wages or sending money to family members. Diana Brazzell details in an article that she did in consultation with Harvard University's John F. Kennedy School of Government that, "Without access to banking services, their finances are unstable because they don't have a good way to save for the future or borrow in times of need."

Brazzell highlights that by lowering the transaction costs and helping spread risk and capital across the economy, getting people access to formal financial services improves the livelihood of individual families and creates local and national economic growth. Such financial inclusion proves to have incredible impacts for women and other marginalized groups who have traditionally been excluded from the formal economy.

The problem is how to include a population that is mostly unbanked into a financial system that serves them and their communities. Well, if we look at East Africa, it seems they have found the solution: mobile banking. The majority of East African country's population is subscribed to a mobile payment service, and the most popular choice is M-PESA. "Pesa" means "money" in Swahili and has made a dramatic impact throughout East Africa.

The system was launched by Vodafone's Safaricom mobile operator in 2007 as a simple method of texting small payments between users. Currently there are 30 million users in 10 countries and a range of services including international transfers, loans, and health provision. The system processed around 6 billion transactions in 2016 as a peak rate of 529 per second.

M-PESA was originally designed as a system to allow microfinance-loan repayments to be made by phone, reducing the costs associated with handling cash and thus making possible lower interest rates. However, after initial testing, it was broadened to become a general money-transfer scheme. Once you have signed up, you pay money into the system by handing cash to one of Safaricom’s 40,000 agents (typically in a corner shop selling airtime), who credits the money to your M-PESA account. You withdraw money by visiting another agent, who checks that you have sufficient funds before debiting your account and handing over the cash. You can also transfer money to others using a menu on your phone. Cash can thus be sent one place to another more quickly, safely and easily than taking bundles of money in person, or asking others to carry it for you. This is particularly useful in a country where many workers in cities send money back home to their families in rural villages. Electronic transfers save people time, freeing them to do other, more productive things instead.

As a result, M-PESA is praised for its social value by offering opportunities for small businesses, and playing a significant role in reducing poverty. Since 2008, MIT economist Tavneet Suri has studied the financial and social impacts of Kenyan mobile-money services, which allow users to store and exchange monetary values via mobile phone. Her work has shown that these services have helped Kenyans save more money and weather financial storms, among other benefits.

The study estimates that, since 2008, access to mobile-money services increased daily per capita consumption levels of 194,000 — or 2 percent — of Kenyan households, lifting them out of extreme poverty (living on less than $1.25 per day). There’s also an interesting gender effect: Female-headed households saw far greater increases in consumption than male-headed households. Moreover, mobile-money services have helped an estimated 185,000 women move from farming to business occupations.

M-Pesa’s impact in Kenya put mobile money services on the map, and the subsequent proliferation of similar services can be credited to this success. By 2015, more than 270 mobile-money services were operating in 93 countries, with an estimated 411 million accounts. The Kenyan study is important, Suri says, because it shows that mobile-money services aren’t just conveniences but do, in fact, have a positive impact on people’s livelihoods. “[That] can be useful for regulators trying to figure out if they want to allow it in their country, or whether someone wants to start a service in their country as an entrepreneur,” Suri says.

In addition, the availability of a reliable mobile-payments platform has spawned a host of start-ups in Nairobi, whose business models build on M-PESA’s foundations. Mobile-money schemes in other countries, meanwhile, have been held up by opposition from banks and regulators and concerns over money-laundering. But M-PESA is starting to do well in other countries, including Tanzania and Afghanistan, and just recently it was launched in India. At the same time, operators in some other countries are doing an increasingly good job of imitating it.

Sub Saharan Africa is the region where mobile money is most widely spread, followed by Southeast Asia and Latin America. A few of the most successful examples include:

  • In the Philippines, Smart was the first to transfer person-to-person remittances beginning in 2000. By December 2007, 5.5 million Filipinos had used their mobile phones for personal finance, making the country a leader in mobile transactions.
  • In Bangladesh, which is quickly becoming a global leader in mobile banking, BRAC Bank’s subsidiary bKash accounts for 80 percent of market share. Dutch-owned Bangla Mobile as well as MCash, launched by Bangladesh’s largest private bank, are expected to make significant contributions.
  • In Pakistan, mobile banking is led by EasyPaisa, one of nine providers.  Tameer Bank and Telenor Pakistan launched EasyPaisa in 2009, and with 7.4 million users it is now the third largest mobile money service in the world.
  • In Afghanistan, the country’s largest telecommunications company Roshan launched M-Paisa in 2009 in collaboration with Vodafone and the Ministry of the Interior to pay police salaries using mobile money. Costs dropped by 10 percent as phantom payments to nonexistent police officers were eliminated and corruption was reduced. Now with over 1.2 million subscribers, M-Paisa’s success led other large telecommunications firms to launch mobile money platforms in Afghanistan in 2012.

It is important to keep in mind though that as FinTech companies strive to develop their technology in Africa and other emerging markets, an important consideration is there's no one-size-fits-all strategy. Developers and entrepreneurs should recognize that each FinTech solution, including mobile payments, cross-border payments and more, must be implemented to meet each country's needs. By understanding this, FinTech companies will garner success in Africa and other emerging markets.

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