African banks progress towards digitalisation

African Banker, in collaboration with banking technology developer Backbase, has recently released the latest edition of the African Digital Banking Transformation Report. This comprehensive 30-page document delves into the latest advancements in the African digital banking landscape, meticulously monitoring the rate of progress, key focus  areas for banks, and the strategies employed to establish mobile app and internet banking functionalities. Here is a selection of the most noteworthy insights gleaned from this publication.

Banking penetration rates on the rise with ongoing challenges

Banking access has increased in 2022, with 48% of the population having access to banking services, compared to 45% in 2017. This growth can be attributed to the popularity of mobile money and digital banking. Approximately 50% of the continent’s population, however, remains unbanked, indicating significant potential for further growth in the sector. McKinsey predicts a 10% annual growth rate in the African financial services market, generating $230bn in annual revenues by 2025.

Cash still dominates financial transactions in Africa, accounting for about 90% – while electronic or digital channels represent only 5% to 7%. In comparison, Asia and Latin America have a higher digital banking adoption rate of around 50%. 

Nonetheless, a new generation of urban, middle-class customers is emerging, who prefer conducting transactions online. Younger people are more inclined to adopt digital technology than are their parents and grandparents, suggesting that the uptake of digital banking services will continue to grow. The limited infrastructure for card payments and low usage of point-of-sale networks also contribute to the preference for digital banking.

Accessibility of digital banking is not solely dependent on the availability of digital platforms: it also requires potential customers to have the ability to access these, particularly through mobile phones. Mobile phones dominate online access in Africa, accounting for approximately 75% of all online traffic. Consequently, bank digital platforms are designed primarily with mobile use in mind, although it is essential for customers to switch seamlessly between devices.

The main obstacles to accessing digital services include high mobile handset purchase prices and data charges. According to the World Wide Web Foundation, mobile internet costs accounted for 5.8% of average income in Africa in 2020, making it the most expensive region of the world for digital access. The average costs of 1 GB of data and of smartphones have, however, decreased significantly between 2018 and 2021. This indicates a potential for increase in the number of people able to access mobile banking.

Fragmented markets

Kenya and Ghana have been leaders in adopting digital payments, with mobile wallet transactions in Kenya accounting for 87% of its GDP in 2021. Kenya has achieved one of the highest levels of fintech penetration globally, increasing access to banking services from 26% of the population in 2006 to 83% by 2021.

In South Africa, where 84% of the population had access to traditional banking services in 2021, digital banks such as Bank Zero, Discovery Bank and Tyme Bank face the challenge of demonstrating the advantages of their services over physical bank branches and ATMs, rather than solely focusing on unbanked individuals.

Despite this fragmentation, the digitalisation of banking services has significant potential across all African economies. In Somalia, 70% of adults regularly use mobile money services. This popularity is driven partly by the prevalence of counterfeit banknotes. Generally, countries with more stable economies and governments have made more progress in developing mobile money and digital banking services compared to more fragile nations such as the francophone states of the Sahel.

Banks could invest more in digital transformation

Most African banks recognise the importance of digital technology, with only 4% considering it unimportant or a minor factor. However, while 51% see it as the most important factor, many banks have yet to build their overall strategies around digital technology. 

Only 28% of respondents in a survey reported that their bank spends more than $3m annually on digital transformation and innovation. Furthermore, the proportion of banks allocating less than $300,000 per year has increased from 21% in 2021 to 27% in the current survey.

Among those who understand the significance of digitalisation, the focus is primarily on developing mobile technology. More banks offer mobile banking apps than internet banking services, reflecting the dominance of mobile technology not only in digital banking but also in digital access across Africa. 

In terms of priorities, 41.3% of respondents aim to build a digital payment mobile app, while 34.8% focus on an internet banking platform for 2023-2024. This is not surprising considering that mobile phones account for about 75% of all online traffic in Africa.

Artificial intelligence on the horizon

Cybersecurity was considered a crucial trend by 74% of banks surveyed last year; this score falls to 61% in the 2023 survey – overtaken by artificial intelligence (AI). 

Many believe that AI will be the most important technology trend this year. McKinsey’s research highlighted a European bank that increased its productivity by 25% through digitisation and adopting AI, including cognitive agents, digital assistants, advanced analytics-driven coaching, and robotic process automation.

To access the African Digital Banking Transformation Report, click here.