Networking the world

In recent times, the provision and consumption of financial services in Africa has gone through tremendous transition, ably supported by the properties of digitization, and accelerated by the COVID-19 pandemic. This transition has led to several innovative financial services aiming at giving agility and convenience to consumers, especially the SMEs and underserved communities in rural Africa.

Globally, Fintechs market is growing but with an uneven performance across regions. The performance is even more pronounced and varied between emerging markets and developed markets. In emerging markets like Africa, Fintechs start-ups have gained momentous traction and funding. Fintechs have innovative financial solutions aiming at reaching the underserved, informal and financially excluded masses. Fintechs explore the use of alternative data for financial services ideation, prototyping, and full scale implementation. Rapid response survey conducted by the IFC revealed that, about 60% of global Fintechs are launching new financial products, services and features. Value-added Non-Financial Services (NFS) were also among the top choices being considered by Fintechs. Fintechs however have a challenge of accessing large customer data, e-KYC issues, and also prone to cyber attacks. As start-up disrupters in the financial ecosystem, Fintechs are generally grubbing with the issue of user-confidence, as more SMEs are apprehensive about digital platforms which give rise to fraud and scammer activities.

Telcos on the other hand have strong footprint in Africa and greater adoption rate. They have large customer data pools, and cover wider and larger geographical areas in rural Africa. With their innovative digital payment platform mobile money, they dominate the e-payment subsector in terms of volume and number of transactions. Around half of the World’s mobile money providers operate in Africa. Of the 77 mobile money markets in the world that have reached 1million 90-day active accounts, more than half are in Africa. This makes the region an enduring epicenter for mobile money innovation and promotion, giving rise to greater levels of financial inclusion for SMEs and underserved communities in rural Africa.  According to the GSMA, about 481million adults in Africa own mobile money accounts, representing 46% of the global mobile money accounts. Telcos however like Fintechs, face risk of cyber attacks, mobile money fraudsters, and e-KYC issues, etc.

Traditional banks (including rural and community banks, microfinance, and credit union associations, etc) also have strong public confidence on delivering financial services in Africa. They have large data pools on customers, strong physical presence in communities, and organized systems, structures, and controls for providing financial services. They occupy very important place in the minds of bankable adults in Africa. Traditional banks however lack scalable innovations on the use of data pools at their disposal to deliver nimble financial solutions to SMEs. For example, many microfinance firms and banks still rely on the use of traditional sources of financial data for lending decisions, checkable account services, remittance services, etc. Traditional sources of financial data such customer’s bank statement, sales and purchases invoices, bills payables etc, when used, have greater tendencies to slow down and sometimes refract lending decisions for SMEs. Even though, many traditional banks are making giant strides to adopt innovative financial solutions for their customers, much more still need to be done.

The insurance subsector is also very pivotal in Africa’s financial inclusion drive. They have large “patient” funds, large data pool on customers, strong brand and physical presence in the indigenous markets they operate.  They however suffer setback of providing nimble insurance services to the public, particularly the SMEs and small-holder farmer in rural Africa. Generally, there exist insurance-policy literacy deficit for SMEs and underserved communities in the informal sector. For example, wrong perceptions prevail that, insurance services are reserved for the rich and the formal sector. The informal sector, particularly the SME segments are most times not interested in insurance products, or rather have limited products/services options from the insurance firms which best address their insurable interests. Major risks faced by SMEs which require insurance solutions include; burglary and theft, fire, delayed receivables, health (illness of key-man), post-harvest losses, road accidents in transporting farm produce, flood, and recently cyber risk. SMEs need micro-insurance services to cover these risks. It is estimated that, about 4billion of the world’s population are not using insurance services (un/under-insured), many of whom are Africans. Insurance penetration in Africa still remains abysmally low at 2.8% against the global average of 6.3%. According to the World Bank, Africa’s agricultural insurance premium volume accounts for roughly US$200m, representing less than 1% of the global agricultural premiums of US$25bn. These statistics although worrying, present huge economic potentials and opportunities to scale in the sector.

 It must however be stressed at this juncture that, key players in the financial ecosystem discussed above have distinctive characteristics in their mode of operations, corporate goals, structure, and risk appetites. This makes it somewhat difficult to promote wholesale partnerships deals amongst them. Hence promoting strategic partnerships among players would require a surgical approach rather than random advertisement. The approach must first of all begin by identifying the strengths and weaknesses of each potential partner, and thereafter developing compelling proposals to strike strategic deals. Such partnership should also cover the vulnerabilities of each potential partner, whilst leveraging on their respective strength. For example, insurance firms could partner Fintechs for innovative, nimble, and user-friendly insurance solutions to the doorsteps of SMEs and underserved communities. Banks and microfinance institutions could, in like manner partner Insurance firms, Telcos and Fintechs, for scalable innovative solutions. Such strategic partnerships invariably generate enormous benefits to the participating institutions. Benefits include, increase in corporate sales, improved corporate image/brand, wider service coverage, and access to cheap funding from Development Financial Institutions (DFIs). Mastercard Foundation, United Nations Capital Development Fund (UNCDF), IFC-World Bank, GIZ-German Cooperation, etc have already allocated large chuck of support funds in this regard.  

At this juncture, it is ripe for me to mention that, Fitechs or Telcos disrupters should not be seen as existential threats to incumbent financial institutions (as somehow perceived), but rather are vital partners in development, for acceleration of the financial inclusion agenda, and consequently the SDGs1,2, 8 and 17.

But effective and resilient strategic partnerships would require equally effective regulatory environment. Regulatory authorities would ensure fair play, supervise clean market conduct and uphold consumer protection principles in the eco-system. The authority would again support and promote avenues for interoperability of financial services. Interoperability provides seamless customer-journey and experience from one service provider to another, derived only from strategic partnerships.

For effective regulatory environment to occur, cross-authority regulation or collaborative regulation from different sister regulators would be required. Thus, for example, collaboration between the central banks (responsible for banking firms), National Communication Authority (responsible for Telcos), and National Insurance Commission/Authority (responsible for Insurance firms) would be needed. The cross-authority regulation would help harmonize the activities of Digital Financial Service (DFS) platforms provided by the financial institutions. Cross-authority regulation should also aim at developing a specialized policy framework for Digital Financial Services. This may be done through the lenses of consumer protection principles, market conducts, e-money & mobile money policy, data protection & privacy, consumer awareness/literacy, cyber-security, disclosures, transparency etc. Some experts have even argued that, a dedicated authority should be created to regulate the Digital Financial Service (DFS) space, instead of cross-authority regulation. This is essentially because the DFS sub-sector is complex and diverse, with evolving innovative financial products and services. In a global study conducted by Alliance for Financial Inclusion (AFI), it found that, 63% of regulators (in different countries), are still regulating the DFS sub-sector with existing old policy framework established during cash-dominated periods, 28% less are also updating the old policies to take care of DFS complexities. Only 9% (Belarus, Russia, Thailand, and Timor-Leste) have designed a specialized regulatory framework for DFS subsector.

It suffices that regulators in Africa must scale up to design a specialized regulatory framework for the Digital Financial Services (DFS) subsector. Regulators should also foster and advocate for strategic partnerships among key players.

 Indeed strategic partnerships among players in the financial service eco-system would beget multi-faceted benefits to consumers, financial services providers, economies, and the acceleration of SDGs 1, 2, 8 and 17. Time to act is now, what are you waiting for?

Author:

Samuel Kojo Darko

Senior SME Training Consultant & Research Analyst

Research Desk Consulting Ltd

Accra, Ghana

Email: sasdarko@gmail.com

Tel: +233 549847220

28 COMMENTS

  1. Hi I am so thrilled I found your blog, I really found you by error,
    while I was browsing on Yahoo for something else, Anyhow I am here now and
    would just like to say kudos for a incredible post and
    a all round entertaining blog (I also love the theme/design), I don’t have time to look over it all at the minute but I have book-marked it and also
    added your RSS feeds, so when I have time I will be back to read a lot more, Please do keep up the excellent job. http://harmonyhomesltd.com/Ivermectinum-side-effects.html

LEAVE A REPLY

Please enter your comment!
Please enter your name here