The 21st century has seen a remarkable push towards digitalisation in virtually every aspect of daily life, not least of which is banking. Across the world millions of small and medium enterprises (SMEs) have massively streamlined their administrative tasks through the use of digital banking, which allows them to engage in complex financial operations without leaving the office.
Unfortunately, that is not true everywhere, with Africa somewhat trailing in the digitalisation race. Despite the crucial role of SMEs in the African economy and the advantages brought by digital banking, a recent study by African Banker magazine and Backbase shows that only a proportion of small businesses in Africa are making use of such services. African businesses might soon find it more and more difficult to operate in an increasingly digital world.
Several important computing milestones are turning 50 this year. The C programming language, floppy disks, the first international ARPANET connections and the seminal video game, Pong, all came about in 1972, which means that we are now comfortably half a century into the digital age. Claiming today that the future will be digital might not lend you the same reputation of being a prophet as making the same prediction in the early 1970s, but the statement is no less important in 2022.
The ever-increasing digitalisation of every aspect of daily life has created wonders beyond even the imagination of those computing pioneers. Entire industries have risen to dominate the world’s economy, while others crumbled in only a few short decades. The global coronavirus pandemic has only accelerated this process, turning digital services from a convenience to a necessity. But the process has been far from homogeneous across the globe, with many parts of Africa still absent from the digital conversation.
This is a worrying sign for the continent’s future, as the trend of digitalisation and industry shift shows no sign of slowing down. A report by the International Finance Corporation shows that by 2030, more than 230m jobs in sub-Saharan Africa will require digital skills.
To truly understand how fast the world’s economy is changing under the digital push, that same study estimates that two thirds of children now entering primary school “will end up working in a job that doesn’t yet exist”.
No rush on digital banks
The study conducted jointly by African Banker and banking platform Backbase, shows the stark realities of African digitalisation among independent businesses.
Small and medium-sized companies are the very backbone of Africa’s economy, making up 40% of the continent’s GDP and offering 60% of the employment. Despite this central role, less than half of SMEs use any sort of digital banking service, which is, perhaps surprisingly, even lower than the rate of digitalisation among individual clients.
African SMEs should embrace digital banking services and the benefits they bring. Digital banking appears particularly appealing for businesses operating out of rural or isolated areas which lack access to physical banks.
The authorities should encourage this as well, as digital infrastructure is infinitely faster and cheaper to build than other forms. Some encouraging developments came earlier this year, when the African Union launched its African Smart Finance and Digital Banking Initiative, which is meant to use digitalisation as a way of building the African SME market and bolstering investor confidence.
Digital banking is more than just a tool for efficiency, it is also a gateway to an entire digital market. The coronavirus pandemic has accelerated a process already underway, with 70% of the world’s SMEs having intensified their use of digital technologies on account of the pandemic.
As the marketplace is becoming more and more online, businesses without an online presence will likely struggle. Adopting digital banking is the first step towards an entire constellation of online opportunities.
Private and public
Independent companies are not solely responsible for the underwhelming rate of digitalisation among African businesses. Historically, SMEs have often been ignored by banks in favour of larger clients and retail customers, a trend that extends to the matter of digital access.
In addition, the banking sector also does a poor job at communicating
the benefits and the costs of digital services, leading many SME owners to believe them either useless or prohibitively expensive.
Some of those who show an interest in digital banking services are no doubt put off by the sometimes convoluted process that banks require clients to go through in order to open a corporate account. Convenience and efficiency are two of digital banking’s most appealing features, and requiring clients to jump through bureaucratic hoops in order to enjoy them is not only counterintuitive, but also serves as a major gatekeeper for digital services.
State actors should also do more to digitise Africa. Building better digital infrastructure and cutting red tape would no doubt facilitate the penetration of digital banking in the region.
Some places are improving in these regards, with the South African government recently announcing plans to increase the ease of doing business, while private pan-African companies like Cassava Technologies are improving internet access across the continent; but hurdles still remain.
A complex Issue
The digital divide that hampers SMEs in Africa is a complex issue, which stems from consumer hesitancy, faulty communication on the part of the banks and insufficient facilitation offered by authorities.
This is not a problem which can be solved overnight. But work must start today. All stakeholders must do more in order to better prepare the African economy for its digital present and its even more digital future.
Study shows size of digital gap for SMEs
The African Digital Banking Report is an initiative by African Banker magazine and Backbase that aims to provide a clear roadmap for digital transformation across the banking sector in Africa. To underpin the report, African Banker magazine developed an industry-wide survey to better understand how banks perceive and promote digital transformation. More than 100 banks participated in the survey.
It seems obvious that the digitalisation process is completely transforming the African banking sector but big questions remain over the speed of that transformation and the nature of the changes being implemented.
There is no longer any question that digital platforms will come to dominate African banking services. The benefits, both in terms of reduced costs for banks and faster, more convenient access to services for customers, have become abundantly clear. Mobile operators and fintech companies have entered the sector, providing competition for established banks, most of whom had already embarked upon the digital transformation prior to the outbreak of the Covid-19 pandemic.
Even before the pandemic, digital technology had helped turn Sub-Saharan Africa into the second fastest-growing regional banking territory.
The SME angle
In addition to broadly assessing the nature of the digital banking revolution, in this year’s report we decided to focus on the provision of services to African small and medium sized enterprises (SMEs). According to the results of our survey, the proportion of African SME customers who make use of digital platforms is even lower than for retail customers. This is partly because many SMEs use only retail bank accounts with a single named account holder, rather than a specific SME account, in order to avoid bank charges. However, the findings also suggest that many African small businesses make no use of any bank account, so there is clearly a gap in the market that banks can help fill.
Most surprisingly, of the banks surveyed, 79% reported that less than half of the SMEs who did bank with them made no use of any digital banking services, whether because of a perception that bank charges were prohibitively high or because they consider such offerings to be irrelevant.
This compares to 57% of banks reporting the same thing of their retail customers. There is clearly much more that the African banking sector as a whole can do to attract African small businesses into the banking sector.
Digitisation can do more than merely improve service provision for both banks and existing customers. It has the power to bring banking services to those who have never previously had a bank account.
Central banks and other regulators may fail to create a conducive environment for digital banking because they are not persuaded of the need for change, or perhaps because of fear that rapid change will allow unstable banking practices to emerge. They certainly have a challenge in encouraging innovation while ensuring market integrity.
To download the report, click here.
Cornel Dixon is Head of Africa at Backbase.