Bernard Ghartey is Principal Investor at Norrsken22, a venture capital firm providing local growth capital for future tech giants across the African continent
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Banking in Africa has undergone huge shifts in recent decades, with increased stability, regulation and globalisation bringing about tectonic change. Nevertheless, making a payment remains slow and expensive. Due to this friction, Africa has remained relatively isolated from the global economy, either as a workforce or partner for trade. As a result, many everyday transactions on the continent still take place outside of traditional, global banking infrastructure.
Facilitating payments is key to enabling Africans to join the global economy, especially in a digital world where the expectation is for trade to happen quickly and cheaply. The continent needs a 21st century payment solution, but rather than seeking to improve established banking, people are instead flocking to digital banks and reaping the benefits of leapfrogging institutional finance. Here’s why:
To bypass USD and keep transactions on the continent
Across Africa today, USD is still the necessary third-party currency through which to make payments. Transactions must first be converted to USD, which leads to a lot of demand for the dollar for the import of goods and services, leading to devaluation of local currencies.
As a result, Africa still trades with the rest of the world more than itself. Because trade happens when payments can be easily facilitated, local trade doesn’t flourish as fast, and one of the biggest challenges still not resolved is payment facilitation across local currencies. For example, Lagos is an hour flight from Accra, yet bank transactions between these two hubs still take a couple of days.
Digital payment platforms offer a way to bypass USD and make transactions directly between African currencies. This eases demand for USD, which is of particular and growing importance to countries with trade deficits. Consequently, there has been much conversation about helping Africa to trade with itself by setting up the African continental free trade area - similar to the EU - which creates a free trade zone for movement of goods and services. Digital payments unlock intra-Africa transactions in a way that traditional banks have struggled to facilitate.
Mobile banking unlocks financial control
Right now, mobile phone penetration in Africa is surpassing the West - with The World Bank and African Development Banking reporting 650 millions mobile users on the continent, more than in Europe or the US. Partly supported by a burgeoning tech savvy youth population, mobile banking has become the easiest way for Africans to take control of their finances.
This is due to the simplicity of access. Anyone can go to a local table top shop, where they are easily onboarded with just a phone number and national ID, and their phone becomes their bank. As a result, the adoption of mobile money has been massive.
For example, in Ghana and much of West Africa, uptake rates have been up to twice that of traditional bank accounts. What will unlock this further, will be once mobile networks work across nations. Individuals can pay their bills, and companies can purchase goods and services to run their businesses.
Mobile banking also unlocks international payments. Global employees can be paid from anywhere in the world directly to their mobile accounts, representing not just salaries but engagement in the global payment ecosystem. This helps more than employees of companies, but also freelancers or content creators who are now able to get paid by global clients.
Reducing the friction around remittance payments
Digital banking also places inbound remittance in the hands of its users. The African diaspora is able to send money home directly, saving erosion from the fees imposed by traditional banks. This makes a huge difference to everyday lives, helping families to pay for education and everyday expenses. The biggest mover of FX transactions are in Whatsapp groups - where users may not even know one another but they are still a better channel than traditional banking.
The challenge of regulation
What banks have traditionally done better is manage regulation. Regulation tends to support banks, and whilst fintechs are a totally new thing, regulation may struggle to keep up with new technologies. But with the influx of digital banks, there is a huge opportunity to adapt and make payments safer and securer than ever before.
Right now there are no globally integrated systems for identity checks, and in Africa in particular, it is very fragmented, relying heavily on physical documentation. With the coming integration of AI in KYC checks, digital banks are able to identify fraudulent documents accurately and at speed, cutting out the middleman to make a saving. These APIs are cheaper and more effective than any traditional bank can offer, demonstrating further proof that digital banks are leapfrogging their progenitors.
A business opportunity
The development of online banking is creating fertile ground for business on the continent. International digital banks like Revolut and Monzo have still not made their way to Africa, therefore African solutions have the opportunity to seize the market.
There is still a huge untapped market, and we are excited by the emerging technologies which make these transactions seamless, transparent, and secure.
