Cover Story: The Enormous Potential of Fintech

Looking back, it is amazing to realise how one technological leap could have had such a profound effect on people’s lives and brought about such a massive change in economic behaviour in such a short time. We mean the introduction of the mobile phone of course and more to the point, how the phone was adapted to act as a channel of all things financial. It was part of the great digital revolution that is still evolving and that has completely changed the way we conduct our economic activities.

The internet, which preceded the advent of the mobile phone, has also undergone an extraordinary transformation and in tandem with the mobile phone, become perhaps the most powerful channel of modern commercial activity. In Africa, cheaper smartphones and mobile data, a mobile money boom, and burgeoning e-commerce are spurring economic growth and creating jobs.

This technological leap is in fact, Africa’s greatest hope – some say its only hope – of making the huge leap into the 4th Industrial Revolution and generating the sort of economies that will provide decent jobs and a good future for its ever-increasing population.

Africa, by accident or design, is already well placed to take full advantage of the digital age but a good deal more still needs doing. In this comprehensive Cover Story, Raji Rafiq details how electronic banking and commerce is changing the entire African economic landscape.

The nexus between internet adoption and infrastructure, foreign direct investment, financial development, economic growth and job creation in African countries and elsewhere is well established.

The internet is a net job creator. For every one job lost to the internet, about three new jobs are created. The internet is either creating new jobs, transforming existing jobs, or enabling outsourcing of jobs to cheaper but more productive locations . It is also making some jobs redundant.

Access to the internet via mobile phones is having a huge economic impact around the world. Because of the ubiquity of mobile phones and their relative affordability, more and more citizens of poor countries are using the internet to avail themselves of the myriad opportunities on the global communication platform.² Human capital development, ease of access to finance, robust infrastructure, and a conducive business environment underpin the job creation thesis of the internet, however.

Small and medium-sized enterprises (SMEs) record increases in productivity of at least 10% from using the internet. Research also finds that SMEs that are using web technologies aggressively, grow and export twice as much as their counterparts which do not. It has also been found that 75% of the internet’s impact are in traditional industries. Digital payments are already huge in many African countries. M-Pesa, a Kenyan mobile money service, is a prominent example. Africans also already trade and make purchases with cryptocurrencies like Bitcoin. Facebook is about to disrupt even this laudable progress in digital payments with its soon-to-be-launched digital currency called Libra.

Unsurprisingly, African governments are beginning to realise the potential of internet technology and its associated ecosystems for boosting economic growth, creating jobs and thus alleviating poverty. Interestingly, even for supposedly advanced spheres of information technology like artificial intelligence, Africa is increasingly seen as the new frontier.

Cheaper internet and smartphones

According to the International Telecommunication Union (ITU), only about a quarter of Africans currently use the internet. While this figure is relatively low, it is twice the number of African internet users five years ago. With 76% of Africans currently having a mobile cellular phone subscription, the likelihood of greater internet use of about the same rate in the not-too-distant future seems feasible.

It makes sense then that mobile phones are increasingly used as a means to deliver services. Mobile data remains relatively expensive, though.

Africans can now do most of their non-physical banking transactions online via their mobile phones. Online shopping is certainly no longer a novelty in many African countries. African firms are also increasingly using the internet to improve their productivity.

Adoption varies by country. Kenya is ahead of most in the use of the internet for managing inventory, online sales and purchases and marketing. Ghana and Zambia come second and third respectively. And this applies to both manufacturing and service firms.

Mobile telephony is engendering the formalisation of the informal economy in many African countries. Informal economic agents need to be documented and acquire some formal identification to secure mobile phone lines. With a mobile phone line, they are able to use mobile money for business transactions and remittances; thus increasing financial inclusion.

Kenya and Uganda are prominent examples. Africans are increasingly able to join in because the cost of acquiring a smartphone and using the internet, though still expensive, is declining. In 2012-17, the average sales price of smartphones in Kenya, Nigeria and Tanzania declined by 44%, 35%, and 52% to $118, $121, and $117 respectively.

Smartphone adoption in sub-Saharan Africa, which was 39% in 2018, is expected to reach 66% by 2025. Still, while cheaper smartphones and increasingly less expensive internet access for social networking offer new and constantly evolving opportunities for Africans, a digital divide with the developed countries clearly remains. For massive economic and jobs impact, more Africans must use the internet. And if that is to be the case, smartphones and mobile data have to become much cheaper. There are already several cheap smartphone initiatives in a number of African countries.

In June 2019, Google announced it was building a subsea cable connecting Africa to Europe. Subsea cables carry 99% of the world’s internet data traffic. Facebook, another global tech firm, is working on a low-cost to free African internet access initiative of its own. So, in a couple of years, African internet data rates could become much cheaper as well.

Digital IDs would be key

According to a recent study, most Africans use the internet for online social activities. However, this is not unique to African countries. Most of the world’s poor use the internet for leisure. That is not as bad as it seems. With about half a billion Africans without official identification, online social activity could become a credible source of information for personal identification, address, and credit scoring.

This is not a pie-in-the-sky idea: visa applicants to the United States are now required to submit their social media account details. Banks could easily do the same for know-your-customer (KYC) documentation for the opening of bank accounts and lending.

In any case, African countries are beginning to establish digital identification systems. With digital IDs, Africans would be better positioned to participate in the estimated $300bn continental digital economy by 2025.

As is already the case in India, there is evidence of economic benefits in the aftermath of digital ID schemes. In Ghana, physical addresses have been digitalised. Kenyans began registering for digital identification numbers in April 2019. In Nigeria, all mobile phone subscribers undergo biometric registration and all bank account holders have a so-called “bank verification number”.

So, there is a positive trend towards some form of national digital identification system in a host of African countries. Progress is slow, however. There are ongoing multilateral efforts to help African countries pick up the pace in a sustainable way.

Africa is leading global mobile money adoption

Seventy nine per cent of the growth in global e-commerce transactions in 2018 was via mobile money; 66% of the $40.8bn mobile money transactions in 2018 were in sub-Saharan Africa.

Africa’s lead in mobile money makes it well-placed for an e-commerce boom. There is a rising trend towards cashless transactions on the continent. Banking via mobile phones or mobile banking is now ubiquitous and normalised.

And with the unbanked able to use digital payment systems like mobile money, they are also increasingly financially included. In other words, both formal and supposedly informal economic agents in African countries are increasingly able to participate in the digital economy.

If the trend continues, as it seems likely, much of the informal economy will become formalised in due course. The ubiquity and increasing affordability of mobile phones makes the potential of mobile money to formalise the over 300m adult Africans who are currently financially excluded (without any account) great indeed.

Of the more than 866m registered mobile money accounts in 90 countries around the world, 46% are owned by Africans. 54% of the adult population in Ghana, Côte d’Ivoire, Benin and Senegal use their mobile money accounts regularly.

The same cannot be said of the three most populous African countries, Nigeria, Ethiopia, and Egypt, where only 30-40% of their combined 242m adult population have mobile money accounts.

That may be about to change. It is expected that more than 110m mobile money accounts could be created in the three continental behemoths over the next five years. There is good reason for this expectation. In October 2018, for instance, Nigeria’s central bank issued guidelines for the licensing and regulation of non-bank firms (including telecommunication firms) as “payment service banks”. 

Still, there are constraints. Taxation, KYC requirements, cross-border remittances and data regulation are some of them. Almost all African mobile money service providers pay three layers of taxes: value-added tax, general tax, and a mobile sector-specific tax.

Uganda, Kenya, Zimbabwe, and Gabon tax mobile money transactions specifically, for instance. Digital IDs allow for electronic KYC (e-KYC). But not all African countries have digital ID systems.

Although it is still expensive to remit funds across borders, the cost is reducing. For instance, while a mobile money customer is currently charged 1.7% on average to send $200 across borders, it is still 40% less than the rate in 2016.

More internationally compatible operating models would almost certainly push the cost down even further. New data regulation frameworks, while welcome, add to costs. Still, objective collaboration between regulators and other stakeholders could allow for just the right balance between strong regulation and unbridled innovation.

E-commerce to boost growth in retail,  transport, and hospitality industries

Online marketplaces are digital platforms that match suppliers of goods and services with customers. They are generally classified into four types: business-to-consumer (B2C), business-to-business (B2B), consumer-to-consumer (C2C), and consumer-to-business (C2B).

Jumia, an Africa-focused online retail marketplace is an example of a B2C and B2B platform. Uber, an online ride-hailing, ride-sharing and food delivery marketplace, and Airbnb, an online hospitality brokerage marketplace, are C2C platforms. Thundafund, a South African online crowdfunding marketplace for entrepreneurs is an example of a C2B platform.

These few examples of online marketplaces and others are disrupting the retail, transportation and banking industries on the continent. And they are doing so for the better. Not only are they rendering legacy services in these sectors more efficiently, there are also tapping hitherto sub-optimal opportunities in profitable ways and creating new jobs in the process. Some are especially African. In Angola, there is a service for the online purchase and delivery of goats, for instance.

Commerce on these digital platforms, generally termed ‘electronic commerce’ or ‘e-commerce’, could create as much as 3m jobs by 2025. That is one new job opportunity for every 15 unemployed African youths. Only 100,000 Africans would be directly employed by these online marketplaces, though. So, the real effect would be in the increased economic activities and efficiencies they instigate in other sectors.

These are the creation of new products, reduction or elimination of supply chain bottlenecks, and the expansion of customer bases. 1.7m (60%) of these new jobs would be in the consumer goods sector, 500,000 in mobility services, and 300,000 in the travel & hospitality industry. As some jobs would also be lost in the process, these are clearly net estimates.

The African opportunity is underpinned by the still- early lifecycle stages of its economic sectors. In retail, for instance, there are 15 formal stores for every 1m Africans. (Compare with 930 per million Americans, 568 per million Europeans and 136 per 1 million Latin Americans.)

Online retail marketplaces could easily increase the coverage at less cost and without the need for as much bricks-and-mortar. Additionally, because almost 40% of sub-Saharan Africa’s economy is informal, there is an ample portion of the labour force that is not unionised or organised. So they are more amenable to new employment norms.

Of course, this varies by country and industry. For example, established taxi services are unionised and well-organised in most African countries. So naturally, there has been resistance to digital taxi services, resulting in bans or partial bans, in at least seven African countries.

The forms of this resistance in the various African countries are noteworthy. It is mild and increasingly collaborative in Nigeria. In South Africa, however, the resistance is strong and sometimes violent. In other words, the expected jobs boost from e-Commerce would likely vary from country to country. Thus, culture and attitudes in each country are huge factors.

Prospects of gig economy are huge but mixed

Online gig work is short-term paid labour via online or digital employment platforms. The resultant ecosystem is referred to variously as the ‘on-demand economy’, ‘gig economy’, ‘sharing economy’, or ‘platform economy. Online gig work is enabling Africans to participate in the global economy, with the resultant effects of increased incomes and poverty alleviation.

Still, there are reservations. Wages are relatively lower, working hours are longer, and labour protections are weak or non-existent. Because of the enormity of the unemployment problem in most African countries, these factors are not likely to be much of a concern for their eager labour force. The gig economy would be crucial to creating the more than 18m new jobs Africa needs per year for its expected 1.3bn working population by 2050.

Digital labour takes various forms. One example is the area of online freelance contracting work, like web development, book editing, and reporting. Crowdsourcing is another example, whereby firms get external personnel to do certain jobs for them via the internet.

Freelance contracting and crowdsourcing differ in the number of contractors involved. A firm could hire just one freelance contractor but it would only be deemed to be crowdsourcing if the contractors are more than one. Both are outsourcing in any case.

Crowdsourcing can be classified into the following forms: ‘intelligence, crowd content creation, crowd voting, funding and microwork’. Major crowdsourcing platforms include Amazon Mechanical Turk, CrowdFlower and Microworkers. Crowdsourcing tasks include online customer services, data processing, content reviewing and tagging.

There are 10-12m new African workers every year. Only about 30-40% would get a job. That 77% of African workers in non-agricultural employment is informal lends itself to the burgeoning African digital on-demand or gig economy.

And even though gig economy jobs are still considered vulnerable employment, being as they lack labour protections, they are relatively better organised and formalised. In any case, there are increasing calls for a fit-for-purpose “social contract” to address some of the current shortcomings of digital employment. 

As more jobs become on-demand, a lot are also increasingly technology-based in tandem. Consequently, job profiles are constantly changing. Unsurprisingly, many new vacancies go unfilled for lack of skills. While the disruption is global, it is happening in African countries as well.

The extent to which African jobs rely on internet technologies is rising but varies from country to country. For instance, 18% of formal jobs in Kenya have a high ICT focus, while only 7% do in Ghana. While many of the current ICT-intensive jobs in Africa are low-skilled, research shows greater benefits are to be garnered from advanced ones in digital design and engineering.

African countries have to start positioning their labour forces for these opportunities. In this regard, curricula would have to be revamped. And a greater emphasis would need to be placed on science, technology, engineering and mathematics (STEM) education.

On-the-ground AI research to bridge knowledge gap & incorporate African factors

Artificial intelligence (AI) is the ability of a digital computer or computer-controlled robot to perform tasks commonly associated with intelligent beings.

AI research falls into three categories: Strong AI, applied AI or cognitive simulation. Strong AI aims to produce machines with human-like thinking abilities. Applied AI or “advanced information processing” seeks to build ‘smart’ systems for lucrative or life-saving vocations like medical diagnosis or stock-trading. Cognitive simulation involves using computers to test human cognition theories.

Global tech firms IBM and Google have established AI research labs in Africa; the former in Nairobi, Kenya and Johannesburg, South Africa and the latter in Accra, Ghana. They are largely applied AI research ventures. These AI initiatives mitigate fears about the likelihood of Western-designed AI systems excluding African preferences and cultures. They also help ensure African researchers participate in global AI efforts; which were hitherto all based outside Africa.

Some African AI researchers abroad are seizing the opportunity to return to their homeland. And a next generation of African AI researchers would also now be able to avail themselves of the knowledge and experience without having to venture afar. African governments should be mindful of the ethical motivations of these AI research ventures by global tech firms, however.

Challenges and constraints

The infrastructure remains inadequate, data costs are high, and internet penetration remains relatively low, so logistics can be nightmarish; many Africans also remain relatively digitally illiterate, and the regulatory environment is uncertain or even antagonistic.

In any case, calls are being made for some form of global regulation of internet activities. And despite the obvious drawbacks of overregulation and censorship, some African governments are undaunted. They are increasingly looking to tax online activity or have some form of regulatory oversight over the internet in their jurisdictions. For example, Uganda has imposed a social media tax. More recently, Uganda announced plans to nationalise its internet data exchange service, raising fears of inefficiency and likely regulatory overreach in the aftermath.

A net job creator

The internet is a net job creator. Cheaper smartphones and mobile data, a mobile money boom, and burgeoning e-commerce on the African continent are spurring incremental economic growth and creating jobs.

Digital IDs, smart and balanced regulation, and certainly much cheaper smartphones and internet would be key elements to achieving these goals at scale. African governments should ensure all their citizens have digital IDs, can make payments digitally, and in collaboration with global tech giants, are able to acquire low-cost smartphones and use the internet cheaply. In the aftermath, they would all be able to participate in online marketplaces as suppliers or consumers.

There is already an example of how private enterprise and governments can accelerate the process. In India, a largely cash-based society, an entrepreneur is already leveraging on the country’s now well-established digital identity system to include all Indians in the digital economy.

Recognising high data costs are a constraint for poor people, the entrepreneur is offering data services on his mobile telecommunication network almost for free and almost certainly at a loss in the interim. His strategy is clearly to formalise all Indians, irrespective of class, in a digital ecosystem that enables them to conduct almost all their daily activities, from socialising to buying groceries, online.

While his ambition is not an ideal scenario, in light of obvious antitrust issues, it exemplifies the potential of the internet and how the digital ecosystem it creates can spur incremental economic activities and create jobs. African governments have a good example in this Indian case for how the internet opportunity can be operationalised on the one hand, and of the potential monopolistic drawbacks on the other.

In tandem, government policies should prioritise human capital and infrastructural development. Entrepreneurs should also be able to secure financing easily. This will only be possible if African governments create a conducive business environment in their respective jurisdictions. The job creation thesis of the internet rests on these foundations.

This study is published courtesy of the NTU-SBF Centre for African Studies at the Nanyang Technological Centre, Singapore.