On February 6-7, Egypt hosted the Seamless North Africa Fintech conference, which gathered key regional players to tackle three topics: Fintech, e-payments, and e-commerce. As more and more of such events are taking place in the region, and as more and more people consider Africa as having vast untapped potential in payments, it is worthwhile taking a look at where the continent stands in terms of electronic payments and Fintech outlook and who’s doing what.‍

What does the African consumer look like?

‍The African payment ecosystem is shaped by low access to financial services and high mobile phone penetration, resulting in low usage of traditional card solutions and the emergence of new digital solutions.

• Less than 30% of the population above 15 years of age has a bank account¹

• Only 10% of the population has a debit or credit card¹
• Card PCE penetration is still less than 3%²
• Mobile phone penetration will reach 90% by 2020, of which 40% will be smartphones³
• 10-15% of the population is using a mobile banking solution¹
• MEA accounts for 20% of global international remittances¹
• There is a total credit gap of 181-220 bil. USD and only about 17% of all Micro-SMEs in Africa have credit⁴

The average African consumer needs cheap financial solutions to send money to his relatives, receive international remittances, get access to micro-credit, pay the bills and make savings. He makes an average payment transaction of 3-4 USD¹, most often in cash. Making electronic payments is not his number one worry, because he’s actually fine with cash. He has been using cash forever, and most merchants he buys from have been using cash forever too. So, getting everyone to use electronic payments is not straightforward, unless you actually address some of the consumer’s main needs, as identified above.

‍What have traditional card players achieved?

‍International Card Schemes (ICS) have seen a significant uptake in their business across Africa over the last decade, seeing higher growth rates than in more developed economies, yet card usage in most African countries remains very low.

The ICS have invested a lot of effort in bringing cheaper, adapted payment solutions to Africa, such as mVisa, a mobile push-payment solution, in Kenya and Egypt or 2KUZ launched by MasterCard in Kenya, Uganda and Tanzania that allows small-plot farmers to go digital.

Addressing financial inclusion is, however, less profitable and a lot more complex than growing card payments in mature markets. The need to build an entire new ecosystem for (virtual) card distribution, acceptance development, wide cash-in / cash-out presence, addressing low-value payment economics and developing an appealing value proposition for both consumers and merchants requires long-term investments with low short-term returns. Yet, with global operational margins of between 55% and 65%, shareholders continue to expect high returns, so often ICS investments focus more on quick returns, targeting international and every day card spend for existing cardholders.

On the other hand, card-based National Payment Schemes (NPS) have been gaining momentum globally, as an increasing number of countries consider alternative solutions to the (US-based) ICSs, seeking strategic independence and control over the cost of their domestic payments solutions. Recent NPS launches include MIR/NSPK in Russia (launched in 2015) and TROY in Turkey (launched in 2016). In Africa, Egypt is considering launching a new scheme and Verve in Nigeria has recently secured an agreement with Discover for international acceptance. Yet, so far none of Verve, Multicaixa in Angola, e-Zwich in Ghana or CMI in Morocco, have been significantly more successful than the ICSs (from whom they often face fierce competition) in displacing cash.

Difficulties in doing business in many countries (e.g. fragmentation, stage of market development, NPSs, local regulation & mandates, etc.) are challenging the ability to scale a standardised solution across the region for card-based players and are driving the emergence of multiple local mobile and digital solutions across the continent.‍

What can local mobile & digital solutions bring?

‍Mobile Financial Services (MFS) operators, which typically start by addressing P2P money transfers and mobile top up, are moving into merchant payments and more complex financial solutions.

However, MFS success didn’t happen overnight. M-PESA, which was launched by Vodafone in 2007 in Kenya, is generally regarded as the reference case, yet even they found it difficult to successfully replicate their success in other countries. And others have tried and failed as well, some after multiple tries.

Learning from failed attempts due to high and/or inappropriate pricing, poor consumer experience or limited product differentiation, more and more MNOs are starting to find better business models and economics that enable the displacement of cash.

Mobile money now represents over 6.5%¹of telco revenues in Africa and the number of mobile money accounts have surpassed retail bank accounts. Even though most mobile transactions remain P2P payments and international remittances, the volumes of mobile payments, and especially, bill payments are growing.

Telcos are also growing their share in payments through Direct Carrier Billing (DCB). These solutions

have greater conversion rates than credit cards (56-68% vs. 2-3%)¹and allow end users to access online content and pay for products and services using their MSISDN. In Africa, DCB has greater consumer reach than traditional card and mobile wallet payment solutions and is growing fast.

MEA share of global DCB transactions should grow to 6.1% by 2022⁶ driven by the high attractiveness of DCB vs. other payment means in countries with low financial inclusion and high mobile penetration.

Finally, telcos are also growing their share in international remittances, where MEA accounts for over 20%¹ of global value.

MNOs currently provide the cheapest solutions for receiving money in Africa, significantly lower than traditional banks and Money Transfer Operators (MTOs).

While large MTOs such as MoneyGram and Western Union remain market leaders across Africa, 2.6%¹ of remittances in 2016 flowed through mobile money wallets, primarily in East & West Africa. By 2021, mobile money wallets are forecast to account for 4.5%¹ of the total value of international remittances.

The increase of local MNOs presence in payments wasn’t easy, but it was strongly supported by Fintech who brought expertise and solutions to key gaps in the region.

‍Which are the key Fintechs for growing electronic payments?

‍The African payments ecosystem has seen the emergence of new Fintech players addressing local financial services needs and facilitating payments. Whether they are Africa-based or operating from abroad, they are present in all parts of the payments value chain.

While all of the Fintech solutions contribute through bringing solutions to market to address opportunities in payments, one set of Fintech solutions has proven to be particularly important. To change people’s attitude to using electronic payments, the key Fintechs are those that address the number one need of consumers and SMEs: access to credit.

Through monitoring electronic transactions, the Fintechs can build a profile of consumer and merchant behavior. Consumers can prove they are creditworthy by paying their bills on time, while SMEs can prove their income base. Both can use this to get better access to (micro-) loans. By providing consumers and SMEs with access to credit through electronic payments, these solutions provide a strong incentive to start using them. So, which Fintechs are really driving payments?

• Merchant aggregators: They have a key role in payments as they have the business relationship with SMEs, which typically don’t accept card payments. Kopo Kopo, for instance, has expanded its services in Kenya by providing micro-lending solutions to their merchant base. The more digital transactions a merchant processes, the higher the value of loans he will eligible for, where the loan can be repaid as part of his merchant commission. As a result, merchants typically prefer electronic payments and advocate consumers to use them.
• Credit scoring solution providers: Cignify and inVenture provide alternative credit scoring technologies based on consumer mobile phone behaviour and social media networking. With limited centralised credit bureaus, this allows micro-finance institutions to rate consumers that would otherwise have no credit rating, and provide loans through having funds credited to a mobile wallet or virtual prepaid card.

In Summary

‍The African payments ecosystem is currently undergoing a transformation which has seen the emergence of a multitude of new local players in all areas of the value chain. Growth over the next few years will continue to be driven mainly by the large International Card Schemes, but these are likely to be outperformed in terms of growth rate by local telco-based solutions.

Despite all of the payments industry focus and investments, electronic payments PCE penetration is only expected to marginally grow from 4% currently to 6% by 2022, which leaves on a long way before financial inclusion reaches the levels seen in more developed economies. Which therefore means that a major breakthrough can only be achieved by adopting long-term strategies and not only focusing on short-term results.

‍¹Source: World Bank²Source: Lafferty, Euromonitor³Source: Mega Trends Africa, Frost & Sullivan⁴Source: IFC, McKinsey, MIX Market MFI information exchange⁵Source: GSMA⁶Source: Ovum