How technology can promote financial inclusion in Africa
Technology has emerged as a powerful catalyst, offering transformative solutions in the financial sector. Discover how technology is driving financial inclusion and creating opportunities in Africa’s Banking, Finance, and Insurance Landscape.
As the world’s second-most populous continent, Africa boasts the lowest median age by quite a margin – 19.7 years old. The expectation that the continent will have the largest youth population in the world by 2025 (around 362 million people between 15 and 24) provides an incredible opportunity for the Banking, Financial Services, and Insurance Industries to bring this group into the formal financial services fold.
of the adults in Africa had a financial services or money account in 2021
of all digital financial services users live in Africa
of the world’s mobile money transaction value is generated in Africa
But with a major proportion of Africans still unbanked, driving financial inclusion will be key to achieving this.
Read on to learn how technology plays an integral role in driving financial inclusion and the latest trends, challenges and opportunities in Africa’s Banking, Finance and Insurance Landscape.
Technology and financial inclusion
But with a major proportion of Africans still unbanked, driving financial inclusion will be key to achieving this.
Over the past few decades, Africa has witnessed a significant decrease in the percentage of its unbanked citizens, largely driven by the rise of financial technology (FinTech) and insurance technology (InsurTech) companies in the region.
The International Monetary Fund reports that Africa is now home to nearly half of the 700 million users of digital financial services worldwide. This progress can be attributed to adopting digital infrastructure and finance, bypassing traditional brick-and-mortar financial systems.
Mobile money providers, digital wallets, neo- or digital banks, and online payment platforms have emerged as key players in expanding financial inclusion in Africa. These technologies overcome geographical barriers and reduce transaction costs, enabling underserved individuals to enter and navigate the world of financial services.
Technological advancements also create opportunities for savings, credit, and insurance, empowering previously excluded populations to participate in the formal financial system. As a result, social inclusion is enhanced, addressing the broader goal of integrating marginalized individuals into society.
The steady increase in mobile phone penetration on the continent, projected to surpass 50% by 2025, further amplifies the accessibility of banking, finance, and insurance services, particularly in remote and rural areas. By leveraging digital communication technologies, physical infrastructure limitations are breached, and a wider customer base gains access to financial services.
The role of banks
With vibrant innovation fuelling growth in the Fintech and InsurTech space, many incumbent banks could ask themselves how they will remain relevant to their customers. However, these financial institutions continue to play a pivotal role in lifting the level of financial inclusion on the continent. They already have the infrastructure that can help with rapid customer acquisition, they have established corporate governance in place, and their relationships with regulators provide a clear benefit.
Bank initiatives to promote financial inclusion
Traditional banks could adopt several strategies to bank the unbanked. Here are a few:
- Enhance physical branches’ or agent networks’ reach in underserved areas.
- Provide accessibility and convenience to customers through online banking services with mobile banking applications.
- Adopt new digital tools to enable secure digital transactions
Banks can also cater to specific needs by offering specialized microfinance or -insurance products for small businesses and low-income individuals. Collaborations with NGOs and government agencies can extend their reach, allowing for a more inclusive approach to financial services.
In the Fintech in Africa: The End of the Beginning report, McKinsey highlights the importance for traditional banks to partner with FinTechs. Partnerships, rather than cut-throat competition, will be critical for long-term business success and financial inclusion levels on the continent.
By implementing these initiatives, banks can effectively lower transaction costs, including the high cost of minimum deposit requirements for new accounts.
Expansion of accessible banking services
The availability of communication technology, particularly internet connectivity, and mobile networks, has been the cornerstone of the expansion of accessible banking services in Africa. Without connectivity, growth in FinTech and digital banking would be impossible.
The continent has come a long way, but internet penetration remains quite low compared to the rest of the world. However, according to World Bank data, it has grown by four percent from 2020 to 2021 (Sub-Saharan Africa).
Internet connectivity allows financial institutions to establish digital platforms and online banking services and elevates access for individuals to manage their finances. Mobile networks extend the reach of financial services into the palm of consumers’ hands and support the rise of agent banking, where local businesses act as intermediaries for banking services in areas where physical bank branches are absent.
Where it is prevalent, digital communication channels, such as email, messaging apps, and social media platforms, facilitate efficient and effective communication between financial institutions and their customers and improve financial literacy.
Mobile money services: An innovative solution
A state of the industry report by GMSA shows that the global mobile money industry now has 316 live services and more than 1.35 billion registered accounts, with over US$1 trillion in transaction value. Africa alone contributes more than 54% of the live services and 70% of the transaction value.
Mobile money vs mobile banking
Many people use the two terms, mobile money and mobile banking interchangeably. They are, however, very different.
- Mobile money is a pay-as-you-go digital medium of exchange facilitated by a network of mobile money agents. A bank account is not required to use mobile money services, you only need a mobile phone and network coverage.
- Mobile banking provides a suite of financial services through a mobile app, including credit card payments, opening new accounts, exchange services, and others. This can be done through the network operator in partnership with the financial services provider, traditional banks who are venturing into the digital sphere, or neo-banks who exist solely in the non-physical world.
Since the 2000s when agent networks were first used exclusively for mobile money support in Africa, these networks have now extended their services beyond cash-in and cash-out. They have also outgrown their exclusive home under telecom providers – examples are SANEF in Nigeria, Mukuru in Southern Africa and Fawry in Egypt.
SANEF is an example of how an initiative driven by government regulators can change a country’s landscape of financial innovation and inclusion. In 2018 Nigeria introduced its payment service bank license, allowing mobile money providers to offer payment and remittance services.
Expansion of digital finance in Africa
The World Bank states in its Global Findex Database of 2021 that mobile phones could overcome many of the barriers that currently unbanked individuals say are keeping them from accessing financial services. Leveraging mobile phone ownership, which is rising sharply on the continent, could also assist in narrowing the gender gap evident in financial inclusion.
Digitization and increased use of mobile technology in Africa
Data shows that 86% of men in Sub-Saharan Africa own a phone; the percentage for women is slightly lower at 77%. In some countries, however, women are almost as likely to own a phone as men (Cameroon and Zambia, according to the Findex Database). In Zimbabwe, women are more likely to own a phone than men in the community.
This presents an opportunity for financial services providers to ensure penetration of the formal financial sector and the offered services.
One way mobile phones can expand financial inclusion is through the use of digital identification facilitated by these devices.
Identification is typically required for opening a bank account or purchasing and registering a SIM card for the use of a mobile phone. Around 83% of the countries in Sub-Saharan Africa still require a government-issued identification document. Renewed efforts through initiatives such as the World Bank’s Identification for Development (ID4D) make a case for digital identifications using mobile phones, to pave the way for increased account ownership.
Mobile ID is a form of digital identification that allows individuals to use their mobile devices to prove their identity in various contexts, such as accessing government services, making online purchases, or signing documents electronically.
It could involve storing a digital version of an individual’s government-issued ID, such as a driver’s license or passport, on their mobile device. It could also mean using biometric authentication via smartphone technology, such as facial recognition or fingerprint scanning, to verify their identity. This allows for a more convenient and secure way to prove one’s identity compared to traditional physical identification documents.
Infobip offers a set of mobile identity services in cooperation with mobile network operators (MNOs). We try to leverage the vast amount of data that MNOs have about their subscribers for silent mobile authentication to verify national identity numbers or check for previous sim swaps.
Growing financial transaction volumes through digital payments
Digital payments have transformed financial transactions in Africa, driving economic growth and development.
The Central Bank of Nigeria has been driving an initiative to reduce the use of cash in the country. The Cashless Policy has been effective since January 2023, and introduced limitations on daily physical cash withdrawals, for example.
The latest figures released by Nigeria’s Inter-Bank Settlement System have shown that the volume of transactions via e-Payment channels already surged 613% before the introduction of the policy, with further growth expected.
A study by Visa shows that Kenyans, with their digital and mobile money history firmly rooted in the M-Pesa story, prefer to use cashless payments to conduct business more than their South African and Nigerian counterparts.
The benefits of digital payments for consumers and businesses
The benefits of digital payments for consumers and businesses. Such benefits include:
- Convenience, customers can transact anytime and anywhere, reducing the risk associated with carrying cash.
- Lower transaction cost due to lower risk
- Detailed customer insights gained from data generated by digital transactions – be it on consumer behavior, market trends, or customer preferences.
And other potential challenges include:
- Cyber-security concerns are a global challenge and digital payment systems can be vulnerable to data breaches unless BFSI companies partner with the right security suppliers.
- Limited digital infrastructure and low internet penetration still curb the speed at which digital payments can grow in Africa.
- Technological literacy and a regulatory environment that is often trying to catch up with what is happening on the ground.
Regulatory challenges for digital finance in Africa
McKinsey highlights the challenges digital finance face on the continent when it states that Africa has a fragmented regulatory framework around financial services innovation. The most pointed regulatory challenge is licensing – which determines whether a business can even operate.
Some players will find they can’t adapt fast enough to the rate of regulatory change. Others will find that they are way ahead of the regulatory curve.
Capitalize and benefit from the opportunities with the right technology partner
Banking, Financial Services and Insurance players who want to benefit from the opportunities presented by digital financial inclusion in Africa need the right technology partner to seamlessly connect them with customers.
Companies that specialize in digital and omnichannel customer engagement, digital identity, and security will thrive in this environment and play a critical role in banking the unbanked.
Infobip provides scalable full-stack solutions that can digitally transform financial institutions on a single platform while keeping businesses and their customers protected with various authentication methods that are unsusceptible to external attacks.
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