Only 55% of adults in sub-Saharan Africa have an account at a traditional bank or a regulated financial institution, with millions still financially excluded, according to recent research published as part of the Africa Connected campaign.

These excluded citizens haven’t engaged with formal financial institutions for many reasons, such as lack of branches in rural areas, excessive paperwork, and strict ID or income requirements to open an account.

The research paper, “Digital Finance Platforms to Empower All”, released by Vodafone Group, Vodacom Group, Safaricom and the United Nations Development Programme (UNDP), found that most sub-Saharan African countries have a high mobile-penetration rate, which extends the reach of mobile financial services to help those who are typically financially excluded.

“Particularly in countries with less-developed financial systems, we are seeing how these mobile services enable people to pay, save, and borrow money more easily, sometimes for the first time within a formal financial ecosystem,” the report noted.

The research, which examined 49 countries in Africa, Asia and Latin America, found that countries with successful mobile money services had an annual GDP per capita growth rate up to one percentage point higher than countries where mobile money platforms had not been successful or not introduced.

“As the post-pandemic economic recovery continues, with the cost of living and climate crises intensifying, governments are encouraged to leverage mobile financial services to strengthen financial inclusion, which increases economic resilience and furthers sustainable development,” the report noted.

When managed correctly, mobile financial services can not only drive financial inclusion, poverty reduction and economic growth but can also accelerate progress around the UN SDGs more broadly, the paper said.

Fintech on rise

The payments scene in Africa is increasingly seeing electronic payments replacing cash, and in many countries, digital currencies are now being promoted as alternatives, Vijay Valecha, Chief Investment Officer, Century Financial, told Zawya.

As a result, fintech is growing fast in Africa, he said, citing a Mastercard study showing that the number of startups rose from 311 in 2019 to 564 in 2021.

“Another study shows that the electronic payments market could witness a 20% revenue CAGR and reach a $40 billion revenue size by 2025. A major factor that has enabled the growth of financial services is the increase in the number of smartphone users to 650 million, which is now larger than the population of Europe. 

“With governments taking initiatives to spread the internet and increase smartphone penetration, Sub-Saharan Africa also is seeing a rise in the technologically driven population,” Valecha stated.

Other fundamental drivers of the growth are a predominantly young population willing to accept new ideas, better integration between payment channels of different countries and the rise of alternative payment channels like mobile money and wallets, he added.

Market potential

In 2020, Africa’s e-payments industry, across domestic and cross-border payments, generated approxi­mately $24 billion in revenues, of which about $15 billion was domestic electronic payments, according to a McKinsey survey. 

The domestic electronic-payments revenue of $15 billion was generated from 47 billion individual trans­actions totaling just over $800 billion of transaction values. However, on average, only 5% to 7% of all payment transactions in Africa were made via electronic or digital channels, compared with 50% or more in Turkey.

The survey found that e-payments are a major growth opportunity on the continent, especially as the convenience and scalability of payment methods improve and supporting infrastructure develops.

Around 80% of respondents to McKinsey’s survey across Africa believed that the shift to e-payments will not only endure but will accelerate, with 84% expecting e-payments to grow by at least 30% per year through 2025. 

Overall, McKinsey anticipates that between 2020 and 2025, the e-payments market will grow by around 150% to reach almost $40 billion in revenues from domestic payments alone, with about 188 billion in transaction volumes.

However, this growth is likely to be “uneven across the continent and will depend on infrastructure readiness, e-commerce penetration, mobile-money penetration, and regulation, among other factors, in each market”.

Egypt, Ghana, Kenya, Nigeria, and South Africa have managed the transition to digital faster than others. Mostly around half of future electronic-payments revenue will come from these five countries, with the fastest growth likely in Nigeria at 35 percent per year.

Other countries that will see strong growth above 20% per year include Ghana, Ivory Coast, Kenya, Senegal, and Uganda, McKinsey said. As other markets expand, South Africa is expected to represent a smaller share overall, while remaining the biggest e-payments market in Africa in 2025, with $5 billion in annual revenues.

While investments in real-time payments infrastruc­ture have been led mostly by central banks, regulators, or associations of banks and focused on domestic payments systems, a new breed of fintech and other players are also rapidly integrating end points across countries, developing modern rails that enable faster and cheaper intra-Africa cross-border payments. 

Valecha emphasized that the cost of developing new payment systems has come down as various institutions inside countries share the development cost.

“This has bought down the transaction costs,” he added.

Disruptive crypto 

Despite skepticism around cryptocurrencies, a wave of disruptive innovation enabled by regulation and central banks is already in motion in Africa. Currently, more than ten African countries are in the process of launching central bank digital currencies (CBDCs).

Three African countries - Kenya, Nigeria, and South Africa - already number in the top ten of Bitcoin trading volumes globally.

Although the influence of such innovations is difficult to predict, McKinsey expected cryptocurrencies, stablecoins, and CBDCs to have material effects on the outlook for e-payments in Africa, given the historical tendency of Africans to embrace innovation at scale and leapfrog into the future.

(Editing by Seban Scaria )