Africa: A Hub of Fintech Innovation

Africa has emerged as a hub for fintech innovation. Multiple factors have converged to catalyse transformative change within the financial services sector, with South Africa serving as an entry point into the continent for numerous providers.

The FinTech in Africa report¹https://www.ftpartners.com/fintech-research/fintech-africa-momentum compiled by FT Partners highlights various factors supporting the robust fintech ecosystem on the continent, including:

• a massive, young, unbanked, and underbanked, tech-savvy population
• a population with traditionally heavy cash usage
• a rapid shift from informal to formal sectors
• a market increasing in mobile penetration
• a generally favourable regulatory environment
• governments lobbying for greater financial inclusion and digitisation.

In South Africa, additional factors at play include fintech disruption, supportive regulations, customer demands for convenience and personalised experiences, cost savings through automation, enhanced risk management and cross-border transaction facilitation. These are all aimed at making banking services more accessible and efficient for the broader population.

“The absence of traditional banking infrastructure in many regions has paved the way for innovative fintech solutions to fill the gaps and meet the diverse financial needs of the population, with mobile penetration rates supporting a digital-first shift in how Africans transact and bank,” says Mia Pieterse, Partner and fintech specialist at Mazars in South Africa.

As a result, Africa stands at the forefront of global fintech innovation, with five key themes playing out.

Mobile money

World Bank data shows that around 45% of people living in Sub-Saharan do not have a bank account. While South Africa compares favourably to other regional nations in terms of access to financial services, around 24% of the population remains underbanked, according to a 2022 analysis by the Oxford Business Group.²https://oxfordbusinessgroup.com/reports/south-africa/2016-report/economy/the-final-20-reaching-the-unbanked-population-is-a-complex-task

According to World Economic Forum data³https://www.weforum.org/agenda/2017/05/making-everyone-count-the-case-for-national-identification-systems/, various factors exclude these individuals from the formal banking system. A lack of valid documentation is a major issue, with approximately 500 million people in Sub-Saharan Africa living without proof of legal identity. In addition, most people who live in rural areas or informal settlements in South Africa do not have an address or paperwork that serves as proof of residence.

As such, these individuals are unable to meet the Financial Intelligence Centre Act (FICA), Know Your Customer (KYC), and Anti-Money Laundering (AML) regulatory compliance requirements needed to open a bank account.

Other significant factors that sustain financial exclusion among the economically marginalised in South Africa include low education levels, age, home language, number of dependents and a lack of income due to the country’s high unemployment rate.

“Broadening access to affordable, relevant and sustainable financial products and services that cater to the everyday transactional needs of the underbanked and traditionally marginalised groups in society (like women), is a critical step towards improving inclusivity to address the poverty and inequality that persists today,” explains Pieterse.

Mobile money solutions meet this need by offering a viable means for the underbanked to transact while also addressing other uniquely African financial requirements, like cost-effective and reliable cross-border remittance.

Despite the financial challenges faced by the majority of South Africans, the smartphone penetration rate surpassed 90% in 2019, according to the State of the ICT Sector⁴https://www.icasa.org.za/legislation-and-regulations/state-of-ict-sector-in-south-africa-2019-report report compiled by the Independent Communications Authority of SA (Icasa).

Growth in the Vodafone-owned M-Pesa mobile payment platform offers greater insight into the relevance of mobile money services in Africa. Launched initially in Kenya in 2007, the platform now supports approximately 56 million⁵https://www.vodafone.com/news/services/m-pesa-celebrates-reaching-50-million-customers active customers across Kenya, Tanzania, Mozambique, the Democratic Republic of Congo, Lesotho, Ghana and Egypt.

M-Pesa helps many Africans access financial services for the first time and transact easily in the informal economy.

“The ubiquity of M-Pesa in these regions allows users to send and receive peer-to-peer (P2P) payments, while widespread merchant acceptance allows consumers to pay businesses (P2B) for goods and services via a mobile device,” elaborates Wiehann Olivier, Partner and Fintech & Digital Assets Lead for Mazars in South Africa.

“In South Africa’s more fragmented financial services ecosystem, M-Pesa never reached the critical mass needed for widespread merchant acceptance and consumer adoption” Olivier explains that when a single supplier such as M-Pesa fails to achieve mass adoption, it creates interoperability issues for merchants and users.

“Utilising distributed ledger technology and digital currencies could potentially address this interoperability issue due to the technology’s unique characteristics, such as offering a trustless means of payment able to facilitate programable money.”

According to Pieterse, other mobile payment and e-wallet services have also gained traction as mobile network penetration provides the infrastructure needed to facilitate payments in areas where banks have yet to invest to expand infrastructure and reach underserved communities.

“This is particularly prevalent in remote rural areas, where isolated communities lack access to basic banking services,” she says.

Resistance to traditional banking services in informal townships in urban hubs also exists due to the perception that bank accounts are exclusively available to the middle and upper classes, despite significant growth in low-cost, low-barrier banking services from emerging challenger and digital-only neo banks.

“Available solutions also meet specific utilitarian needs, with applications in the informal economy, which is vital to determine buy-in. Without community buy-in, mass adoption cannot happen. ” continues Pieterse.

 Cross-border remittance

The ubiquity of platforms like payment apps or financial services enabled over platforms like WhatsApp also facilitates cross-border payments, which is an important feature for Sub-Saharan Africa’s large migrant workforce.

Market research firm Statista predicts that South Africa’s digital remittance transaction volume will reach US$273.30m by the end of the 2023 year.

“These transactions are driven mainly by the many non-residents working in South Africa,” says Olivier.

According to the latest census data from Stats SA6, more than 2.4 million immigrants work and live in the country, which equates to around 3% of the total population.

Popular digital platform remittance services include uKheshe, Mukuru and Mama Money. Mukuru is primarily a money transfer service that allows people in South Africa to send money at an affordable rate to 17 countries within Africa, the UK, China, India, Pakistan, and Bangladesh. Other services include mobile payments to other digital wallets and an enterprise payment platform.

Mama Money is an app-based platform that enables local or cross-border mobile remittance using a feature phone, smartphone, or computer.

Key drivers necessary for the adoption and usage of these digital cross-border remittance payments include ease of use, transaction costs and trust.

According to Olivier, “distributed ledger technology could significantly increase the execution speed of cross-border transactions, and at a fraction of the cost associated with legacy platforms. “These features make the technology fundamental to emerging markets such as South Africa and the rest of Africa”.

Traditional remittance wire transfers in Africa are expensive, which erodes the money families receive, and disproportionately impacts low-income earners by making traditional services unaffordable for the vast majority.”

In terms of trust, digital remittance services need to address numerous legacy issues to boost adoption and usage. For example, Mama Money built trust by establishing local agents who could assist individuals face-to-face, to expose consumers to more technology and assist them with their transactions.

As adoption has grown, financial sector regulators in countries like Tanzania and Ghana have bolstered the legitimacy of these services by allowing users to earn interest on mobile money, with more Southern African Development Community (SADC) countries set to adopt this approach.

As consumer trust in the service grows, clients become empowered to bank, transact and even save directly on their phones without ever opening a bank account, which will help to enrich customers with increased access to more financial services.

 Digital financial services

As more people across Africa embrace mobile banking, transactions and cross-border remittance, opportunities for exponential growth in the broader digital financial services sector will continue to emerge. This includes everything from cashless transactions and access to credit and lending, to investment platforms and low-cost insurance products from insurtech providers.

Emerging markets like Africa offer higher growth rates, new users and an untapped market opportunity for global financial services companies to support their expansion plans. According to a McKinsey report⁶https://www.mckinsey.com/~/media/mckinsey/industries/financial%20services/our%20insights/african%20retail%20bankings%20next%20growth%20frontier/roaring-to-life-growth-and-innovation- in-african-retail-banking-web-final.ashx, Africa is the world’s second-fastest-growing and most profitable payments and banking market after Latin America.

In this regard, South Africa boasts a thriving innovation pipeline as the country’s vibrant fintech ecosystem develops services around banking and other financial products.

Non-traditional neo banks like Tyme and Bank Zero in South Africa are breaking down barriers to entry for banking and a broader set of financial services with no-fee products and digital-only accounts that consumers can open via a paperless process from any internet-enabled device without going into a branch.

The major area of innovation relates to instant cardless payments and an expansion in payment mechanisms as the sector moves to support a cashless society.

One example is the Rapid Payments Programme (RPP), which forms part of the South African Reserve Bank’s (SARB) Vision 2025 plan. The industry-led payments modernisation initiative aims to revamp and renew the country’s ageing payment rails for low-value transactions.

“In line with its strategy, the SARB announced the launch of PayShap in March 2023, a real-time fast payments platform designed to offer South Africans safer, faster and significantly more convenient payment options.”

“All the major banks have adopted the PayShap service to combat the disruption and fragmentation caused by smaller mobile money and fintech providers entering the market, while also building out their digital payment solution ecosystem,” explains Olivier.

The major banks in South Africa are also partnering with innovative fintechs to address the competitive market pressures and craft relevant digital financial services in a rapidly evolving industry.

“In terms of payment processing and digital transactions, bank account holders can integrate their accounts with services like Ozow to process secure, instant online payments,” continues Olivier.

The 6 million plus registered Ozow users can use the service to make fast bank-to-bank payments with their smart devices for truly cashless, cardless and contactless digital payments. Businesses can also use the service to facilitate payment options like QR codes, eCommerce, e-billing, and payment links to offer customers greater convenience and a seamless payment experience.

“With regard to international payments, banks are leveraging BankservAfrica’s comprehensive SWIFT solution and infrastructure to offer customers a high-quality, uninterrupted and secure international payments service,” states Olivier.

Moreover, digital currencies are playing a role in shaping the cashless society of the future, with the emergence of various Central Bank Digital Currencies (CBDC) an important development.

According to the IMF Virtual Handbook⁷https://www.mckinsey.com/~/media/mckinsey/industries/financial%20services/our%20insights/african%20retail%20bankings%20next%20growth%20frontier/roaring-to-life-growth-and-innovation- in-african-retail-banking-web-final.ashx, CBDCs “offer a safe store of value and efficient means of payment, which can increase competition for deposit funding, raise banks’ share of wholesale funding, and lower bank profits. A CBDC also could bolster financial inclusion.”

Beyond payments, neo banks like Tyme and Bank Zero also offer attractive interest rates on deposits, helping to promote saving and wealth creation in a country where the gross savings rate is just 14.8% (June 2023, CEIC Data⁸https://www.ceicdata.com/en/indicator/south-africa/gross-savings-rate#:~:text=Key%20information%20about%20South%20Africa,an%20average%20rate%20of%2014.8%25.).

“Furthermore, banks are also building out other capabilities that leverage their growing digital channels with partnerships in the insurtech space to provide more personalised insurance products that are easily accessible, relevant and cost-effective,” says Olivier.

Open banking

According to Olivier, open banking is an emerging trend that will play an increasingly vital role in the personalisation of financial services, with banks leveraging application programming interfaces (APIs) to grant secure third-party access to financial data.

“Clients want the ability to integrate their digital lives by connecting various applications with bank accounts and other financial institutions. This functionality enables them to get quotes on insurance or apply for loans, with the ability to pre-populate application forms to streamline the application process and reduce the friction inherent in traditional financial processes,” explains Olivier.

Integrating bank accounts with third-party services will also benefit related sectors, with auditors able to gain direct and secure access to client banking information.

“With the ability to access banking information via an API key, auditors would gain access to transactional data for an entire year to utilise as part of the audit process,” continues Olivier.

Furthermore, open banking models enable programmable banking, which Pieterse says is a growing trend.

“Modern consumers and business clients want to take charge of their finances, with the ability to hyper-personalise their experience at the individual level,” explains Pieterse.

“Programmable banking allows tech-savvy businesses and consumers to customise their banking interfaces using simple code to create bespoke rules, such as payment scheduling or card payment parameters, and craft individualised banking experiences.”

In this regard, leading South African private bank Investec has partnered with OfferZen to deliver programmable banking. Through this innovative open banking initiative, Investec private and corporate clients can use programmable banking to programme their bank cards, setting limits or usage parameters. The private bank also has a partnership with OneCart, which allows cardholders to programme cards to only work with specific retailers and set limits on those cards for specific transactions.

 Machine learning and AI

“While the application of artificial intelligence (AI) and machine learning (ML) is still nascent in the local financial services sector, these technologies are already revolutionising multiple aspects of the industry,” explains Olivier.

Current applications include automated customer engagement and customer service, lending, fraud detection, insurance, investing and back-office process automation.

“AI-powered chatbots and virtual assistants give clients access to faster and more personalised services around the clock, while AI leverages data to help financial institutions make more informed decisions about lending or make personalised recommendations about investments,” says Olivier.

“AI and ML also support risk management and fraud prevention at scale, with the ability to identify trends and patterns and respond to potential fraud attempts in real-time.”

As ML algorithms become increasingly more sophisticated in detecting suspicious activity, this technology will reduce the risk of financial losses and improve customer security.

As adoption accelerates, Olivier says banks and financial services providers will need to invest in solutions that securely store larger data sets.

“AI tools require data cleanliness and ongoing hygiene to deliver valuable outcomes. Banks need to train AI models utilising years of historical transaction data to help the algorithms identify and generate patterns.”

According to Olivier, as more applications for the technology emerge, access to additional data sets will require more resources to sift through the information and sanitise the data sets to train models for the relevant outputs.

“Ultimately, AI models are only as good as the data used to train them. In this regard, open banking can help to grant access to clean data sources,” he concludes.

South Africa leads Africa’s fintech revolution In South Africa, the local fintech sector reflects a dynamic interplay of continued investment, a deep innovation pipeline, a favourable regulatory environment, and supportive digital infrastructure. This has firmly established the country as the major hub for fintech innovation within Africa.

With continued investment, the country is well positioned to maintain its leading role as the regional driver of fintech innovation, reshaping digital financial services across the continent while contributing positively to financial inclusion and economic growth in the country.