May 31, 2018//-A decade after the launch of M-PESA, the use of digital financial services (DFS) is an established part of the daily routines of millions of Africans, providing employment to hundreds of thousands of agents, an important contribution to the business of banks, mobile network operators (MNOs) and microfinance institutions (MFIs), as well as national economies.
The remarkable growth of DFS in Sub-Saharan Africa has created an entirely new market for affordable, accessible and sustainable financial services. This has led to huge expansion in financial inclusion, helping to improve the livelihoods and lives of millions.
DFS has also catalyzed the growth of completely new services that previously lacked a charging mechanism, not least for micro-entrepreneurs. Some trail-blazing organisations with cultures open to innovation have been fast to benefit from the opportunities DFS brings.
Many others are only now beginning to explore its potential to provide services and products tailored specifically to low-income people. Across Africa, people live in a mainly cash economy, and the potential benefits that DFS can bring to people, business and government is prodigious.
It is estimated that widespread use of digital finance has the potential to boost the annual GDP of emerging economies by US$ 3.7 trillion by 2025, with a third coming from additional investment in the Micro, small and medium enterprises (MSMEs) sector, and two-thirds from increased productivity of larger businesses and government.
The question is, how do we get there? To get an idea of where the future may take us, it is helpful to first look backwards at what has been achieved to date, and how it all happened.
The rise of DFS in Sub-Saharan Africa
Despite earlier attempts by several providers, the DFS revolution really started to gain traction with the launch of the M-PESA mobile money service in Kenya by Safaricom in 2007.
At launch, M-PESA was a very simple service, offering person-to-person transfers, airtime top-up and cash-in and cash-out services via a network of agents. The major innovation that it brought was to decouple the financial service from the accepted financial infrastructure.
The business model was based on transaction fees and supporting the core MNO business, with low transaction charges (and revenue) per user. This model has been adopted by many new DFS providers from all sectors since then.
The Kenyan banking sector was also innovating around this time. Capitalization allowed Equity Bank to develop innovative lower-cost products for consumers, MSMEs and the agriculture sector, and by 2011 it provided over a million loans worth US$ 1.45 billion to them.
By 2017 the Kenyan mobile money market had grown to 37 million registered accounts and Kenyan Shilling (KES) 3.6 trillion (US$ 36 billion) in transactions.
Regionally there were 276 services across 90 markets, with over 690 million registered customers making US$ one million worth of transactions every day.
Sub-Saharan Africa continues to lead the world, with nearly half of all registrations and more DFS accounts than bank accounts.
Progressive banks and MFIs soon began to understand the potential of DFS to improve their businesses, usually focusing on agent services to extend reach and mobile access to improve customer convenience.
As competition increased for traditional high value customers, many began to consider reaching down the pyramid to higher value unbanked individuals and SMEs that might individually be less attractive, but cumulatively presented a sizable source of new deposits.
However, key to DFS evolution is partnership. Whilst many services started as closed-loop systems, even those provided by banks and MFIs soon needed to interconnect with other accounts in their own organisations and with other financial institutions to widen the offering.
Interoperability is a precursor to most sophisticated services, and this is becoming increasingly common in all markets. It underpins the development of digital payments across value chains, and enables salaries and social payments to be paid digitally to recipients using a range of DFS.
Increasingly, partnerships between banks and MNOs are arising, and interconnected services are needed to support the resulting services. Banks have financial expertise that can be coupled with the enormous data sets of MNOs to map customer behavior to create new types of financial services.
An excellent example of such a partnership is M-Shwari, the first DFS enabled micro-savings and loan service developed specifically for the unbanked, using telecoms and DFS data, from the Commercial Bank of Africa (CBA) and Safaricom.
This complex service is fronted by a simple, easily understood customer proposition that has proved enormously successful: within four years M-Shwari had 14 million customers, was holding US$ 81 million in deposits, and had disbursed nearly a billion US dollars in loans.
This initiative has transformed CBA, which was principally a commercial bank, into the largest retail bank in the country in terms of registered customer numbers.
In 2014, CBA went on to partner with Vodacom in Tanzania to create a similar service, named M-Pawa, that by 2017 was issuing over 350,000 loans per month valued at over TZS 5 billion (US$ 2.5 million).
Similar partnerships with MTN in Uganda and Rwanda, branded MoKash, have resulted in over 2.5 million registered customers in the first year.
It is reasonable to speculate that across Africa many similar partnerships between MNOs and financial institutions are being formed to roll out this obviously popular and potentially attractive new type of service.
Tanzania was the first market to offer market-led mobile money interoperability between DFS providers for domestic P2P transactions.
Fierce competition between DFS providers presented challenges in engendering the level of trust needed for such a partnership, and each was concerned that interoperability would reduce revenue.
Establishing ‘scheme rules’ and revenue sharing models required careful negotiation. Far from reducing revenue, interoperability has increased the number of P2P transactions for all providers.
This can be seen as a proof of concept, demonstrating that competing commercial organisations can work together to develop the market without the need for a mandate from the central bank.
Many providers are taking partnership a stage further, adopting an ICT approach and opening APIs to the fintech community. An Application Programming Interface (API) is a set of rules that define how two systems are allowed to talk to each other in a rigorously controlled manner, which enables third-party innovators to build new systems and products that integrate the provider’s proprietary information securely into their own services and applications.
As well as allowing businesses direct access to digital payments, the M-PESA API enables startups to experiment with new business ideas that have inbuilt payment capability.
How customers use DFS
Similar DFS usage patterns can be seen across many markets, depending on maturity. The key competitor remains cash. For most MNO wallets ‘cash-in’ is the most common precursor to other transactions, and ‘cash-out’ the most likely result of receiving a remittance.
The digital service most commonly provided by MFIs is savings accounts designed to increase deposits by encouraging clients to deposit their spare cash. Advanced service portfolios may be growing in the leading DFS markets, but for many the range of services on offer is still limited.
Airtime top-up, where offered, is usually the highest volume transaction, but low in value (and revenue), because most purchases are sub-US$ 1.
For example, in 2016, aside from cash-in and cash-out, airtime purchases constituted over 60 percent of transaction volume worldwide, but less than 6 percent of value.
By contrast, domestic peer to peer (P2P) transfers accounted for one-fifth of transaction volume but over two-thirds of value. Whilst the commonly publicized P2P remittance use cases involve supporting family members, in practice the P2P service has a wide range of uses, including significant numbers of informal business transactions (B2B and P2B).
Whilst ‘urban to rural’ certainly is an important corridor, there is little evidence that this is the key driver of P2P volume, and much anecdotal evidence of high transfer volumes between and within cities, as well as some activity from rural to urban areas.
The P2P wallet transfer is such a useful general purpose transaction that it is used for a huge variety of reasons; if a specific transaction is not available, customers simply use P2P instead.
As new, relevant use cases and transaction types become available, customers embrace them. DFS enabled savings and loans demonstrate this point well, and it can also be seen in the evolution of MFI digital offerings.
In an IFC four-year study of nine African MFIs deploying DFS and agent networks, most saw a large proportion of their business become digital, with high adoption by both new and existing clients.
As their services matured, many successfully extended these digital offerings to include services such as bill payments and P2P transfers.
Some of these MFIs are now planning to go completely digital. Consumers consistently express the benefits of DFS as a combination of fast, safe, easy-to-use, affordable and convenient.
But despite these benefits, DFS remains a secondary option compared to cash. Across the world, only about one-third of mobile wallet accounts are active at any given time.
Activity levels vary by market. For example, in Tanzania, one of the most successful DFS markets, 87 percent of DFS registered users were active in 2015 (the same study showed just 65 percent of bank accounts were active).
Côte d’Ivoire has a thriving, although smaller DFS market, where half of the registered DFS accounts were inactive in 2014. Research revealed that the most commonly cited reasons for inactivity in Côte d’Ivoire were irregular income, and a lack of perceived need for the service.
Respondents were also concerned about the cost of transactions (DFS is markedly more expensive in West Africa than East) and insufficient agent outlets.
World Bank estimates suggest that, on average, 25 percent of bank accounts in East Africa were dormant in 2014, with that number rising to 37 percent in some markets.
Challenges to successful services
Operating a successful DFS is neither cheap nor easy, and certainly not a ‘quick win’. Unfortunately, the mercurial growth in Kenya led many organisations to believe the opposite and enter the market without sufficient preparation and with unrealistic expectations about resources required and the likely returns.
One of the biggest risks to any new service is the disillusionment of the senior management team if it fails to deliver as expected, and the performance gap can be very wide in the face of unreasonable KPIs.
This results in pressure to reduce support for DFS and return to focusing on the core business. As the DFS market matures, the need to invest has become much better understood, but there are still many live services that suffer from under-resourcing and inappropriate technology as a direct result of early strategic mistakes.
It is estimated that in the early years of DFS, of more than 200 services launched, only ten achieved anything close to success in the first five years, usually due to inadequate planning and resource.
Not all potential DFS providers are ready to go digital, but many feel pressured to do so by investors or competitor activity. There are also different levels of entry into DFS, and good advice for new entrants is to take time to get the strategy and plan right; start small with a limited service and/or geographical reach, and grow the DFS as the business gains the experience to cope with the new challenges and opportunities it brings.
There is a largely untapped opportunity for organisations to treat high quality agents as a marketing asset as well as a sales channel.
In the face of relentless change, regulators have an increasingly tough job. In Kenya, the regulator decided to take a ‘wait and see’ approach commensurate with the perceived risk, learning about the technology and its implications, keeping a close watch on the market, then regulating when it decided that it had sufficient information and cause to act.
This is one reason why Kenya has been Africa’s leading DFS market, both in terms of size and innovation, for many years. By contrast, in those markets where the central banks decided to regulate first, typically imposing restrictive conditions, the result has often been limited services and low consumer uptake.
What is next for DFS in Africa?
The launch phase of this new industry can be considered complete with hundreds of established services, many of which are profitable. We are now moving into a new phase of development, with emerging technologies and widescale integration between DFS and other financial services providing a wealth of new opportunities.
Increasingly, banks are reviewing how they can transform to become more agile and compete, actively targeting the unbanked. DFS is often considered in some way ‘separate’ from conventional financial services, particularly given their unconventional origins and focus on the unbanked.
Of late there has been increasing support for the idea that they will evolve to become part of the mainstream financial service portfolio.
Effectively, DFS will become another tool in the box, to be used when it is the most appropriate means of performing a specific transaction. Making the choice to use DFS versus another type of account will depend on the circumstances of the customer, their whereabouts and what they want to do.
DFS will remain the more likely solution for low paid, rural customers to receive salaries and pay bills than for the urban rich. But affluent city dwellers may still find mobile banking or a wallet the most convenient way to pay in the local market.
The figure on the following page shows a simplified example of how accounts may be matched to consumer segments. Taking this model as an ideal future of financial services, a number of developments can be suggested to support it.
The first is convergence of point-of-sale devices for both merchants and agents. The largest number of transactions in any market happen at retail outlets, but in Africa, few retailers have a POS device. Conventional POS are good at performing a very narrow range of tasks, require manual upgrades, and are expensive to buy and to maintain.
As data networks are now widely available and smart devices are falling in price, it is possible that these oldfashioned POS devices will be replaced by smartphones and tablets that can accommodate apps to process transactions from multiple account providers.
Inexpensive printers and card readers can be connected as required, and many come with the capability for contactless transactions as standard, and software can be upgraded automatically ‘over the air’.
These are also ideal for customer registration, with the inbuilt capability to photograph people and identity documents and to create electronic forms.
Such unified smart devices are desperately needed across Africa to bring down costs for all financial service providers, and to encourage the move from cash to digital transactions.
The technology is available, but thus far there has not been a drive to make this change, which will be complex and involve cooperation between multiple parties.
For customers, too, the role of smartphones is going to grow and it is just a matter of time until a few ‘killer applications’ emerge from amongst the mass of enthusiastic fintech developments currently underway.
The figures for smartphone penetration and anticipated growth in Africa are impressive, with the 226 million smartphones present in 2015 expected to rise to 720 million by 2020.
However, developers should be aware that this does not mean that over half the population of Africa will have a smartphone. Even the cheap devices are relatively expensive for many, so smartphone users tend to be more affluent.
They upgrade regularly, and many smartphone users have more than one device. Because of this, smartphone penetration amongst the target unbanked DFS users is likely to be more limited.
Nevertheless, penetration is growing and opportunities exist to improve the DFS interfaces and provide associated financial services by mobile Internet and user-friendly apps.
The enormous amount of data produced by DFS has started to be harnessed by micro-loan providers, but this is just the tip of the iceberg that is the opportunity presented by Big Data, both in new customer services and improving operational efficiency.
As many DFS providers are under pressure to provide greater returns from their services, probably the most immediate need that Big Data can address is to identify efficiency improvements and cost savings.
Smart use of this data can show detailed financial behaviour patterns, providing an unprecedented opportunity to better understand customers, to provide robust segmentation, and tailor marketing and product development.
Big Data can also serve the SME community with improved DFS and related services. For example, DFS agents and merchants can be incentivized by business loans based on their DFS activity.
As the DFS provider holds their accounts, the risk is low, and the perceived negatives such as tax liability and transaction fees can be overcome by access to loans.
Another potential use is to provide inventory information and predictions, both for agent float and merchants’ stock-holding. Government can and should play a greater role in promoting DFS.
In many Latin American markets, DFS has been led by banks with agent networks, and government payments have proven an effective way to generate mass adoption of services.
In Mexico, Bansefi Development Bank makes regular digital social payments to 6.5 million people on the government’s Prospera program, using retailers as part of the distribution network.
The Brazilian Bolsa Familia program provides payments digitally to prepayment cards as well as bank accounts.19 Few African governments have yet given practical support to DFS in the form of social payment distribution, despite their stated support for financial inclusion.
Providing guaranteed regular transactions to millions of recipients would provide an enormous boost to the performance of both DFS providers and their agents.
Not ‘if’ but ‘when’
There is growing worldwide consumer demand for DFS, from on-line access to conventional banking services to prepaid cards and mobile wallets, and African consumers are no exception.
Increasingly, they appreciate the benefits of convenience, speed, security and affordable pricing that DFS can bring. Some are skeptical due to perceptions of risk, lack of consumer protection or technological failure, but the stellar growth of DFS to date indicates that it is only a matter of time until they are also onboard.
It is estimated that the financial opportunity from unbanked and under-banked customers across the globe is US$ 380 billion in annual revenues. Growing incomes at the base of the pyramid represents a spending market of US$ 3 trillion across the bottom 40 percent of the population in low- and middle-income economies.
Many financial institutions are still struggling to accept DFS as part of their core businesses. For example, banks often consider clients with prepaid cards as not being ‘real’ account holders, even though they issue these accounts and benefit from the deposits.
Similarly, they see DFS as not being ‘real’ financial services; indeed, some actually call funds transfer from their accounts to mobile wallets ‘bank to cash’, even when they know that the money is being used to perform transactions that could have been processed by the bank.
As they come to accept that products designed for the mass-market are as legitimate as conventional products, and can provide the bank with significant incremental revenue, DFS will enter a new phase of development.
Where MNOs kick-started the revolution, it is now up to financial institutions, supported by forwardthinking regulators, to take up the challenge of developing new products, partnerships and business models that can take DFS and financial inclusion to the next level.
By Susie Lonie DFS Specialist and IFC Consultant
Susie Lonie is a DFS Specialist working with IFC in Sub-Saharan Africa and a member of the founding team at M-PESA. In 2010 Susie was the co-winner of ‘The Economist Innovation Award for Social and Economic Innovation’ for her work on M-PESA.
Digital Access: The Future of Financial Inclusion in Africa, 2018 report
