How Digitalization Is Impacting The African Payment Landscape

Written by Staff
An increase in the digitization of financial services has transformed the African payments landscape, particularly in Sub-Saharan Africa. Photo by Nathan Dumlao on Unsplash

Digitalization: Corrie Bakker, Head of Business Development & Strategy, PayU, Africa discusses the impact of digitalization on the African payment and finance.

Around 31 percent of adults globally remain unbanked, according to the Global Findex Database. In fact, 66% of Sub-Saharan Africans did not have a bank account as recently as 2014. 

However, an increase in the digitalization of financial services has transformed the African payments landscape, particularly in Sub-Saharan Africa where a focus on technological innovation has seen mobile money become a considerable part of the payment ecosystem. The rise of smartphones and mobile wallets in the continent has seen cross-border payments capabilities expand, in turn facilitating growth in cross-border commerce and e-commerce activity. There are currently around 65.4 million e-commerce users in Africa and the number is expected to rise by another 20 million over the next two years. 

Story From Africa Business Chief. Story by Corrie Bakker.

McKinsey asserts that global business leaders who don’t understand this potential run the risk of missing out on one of the greatest growth opportunities of the 21st century. 

Africa hasn’t been sitting on the sidelines as the rest of the world had gained e-commerce capabilities and access to new services through technology; the continent has had to overcome some significant hurdles in infrastructure and access to technology for underserved communities. 

The cross-border payments landscape in Africa is increasingly changing due to technological transformation. McKinsey’s found that, of the top 200 US merchants, over 60 percent do business in at least two cross-border markets. In particular, Africa has witnessed a rapid growth in cross-border trade, led by the expansion of financial services through fintech innovation. 

Yet, cross-border commerce and the payments facilitating it certainly does not come without challenges. Cross-border payments have long battled with issues caused by legacy systems such as a lack of transparency, complex regulations and legalities, system inefficiencies and limited access to reliable and recognizable payment options. Indeed, due to these complexities, over 80% of Africa’s trade is exported outside the continent, which is the opposite scenario to what occurs in most other parts of the world (Brookings). As the African Free Trade agreement works to overcome these complexities, the region will see challenges such as conflicting currencies transactions (previously converted to dollars) streamlined and the speed of cross-border payments increases, making trade and e-commerce easier for merchants and consumers alike. 

Another challenge faced by many cross-border merchants is a reliance on traditional methods of credit authorizations. Understandably, many merchants from mature markets are hesitant to lower their risk threshold by relying on non-traditional payment verification models. Yet, this means that it can be incredibly difficult for businesses and customers to connect with each other.

Fortunately, the rise in smartphones brings with it a rise in data and corresponding new techniques that are being used to build credit intelligence and more accurately understand an individual’s credit rating. 

The challenge is to determine a credit score and, further to that, trust between the lender and borrower. Traditional measurements employ factors such as payment history and length of borrowing, many of which are unattainable for unbanked populations. This entanglement of rules and traditions ignores the market context of the individuals and business owners involved. Simply put, it ignores the new resources that are readily available. 

Payments providers should look to work with the available information on the unbanked population in this region and adapt financial models accordingly, in order to create equal opportunity and fair evaluations. Digitalization grows. Mobile wallets, for example, are creating a treasure trove of information that was previously a mystery for businesses. Where companies are already acknowledging and flexing to the specific market opportunities, PayU’s research reports that those surveyed in Africa were twice as likely to say they have access to credit than other regions, and was the only region where people used mobile money providers more than traditional banks for credit. 

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