The rise of digital banking in Africa
Africa is witnessing a rapid transformation of its financial landscape, driven by the emergence and expansion of digital banking. This technological revolution is reshaping the way people access and use financial services, offering convenience, affordability, and personalisation. Digital banking refers to the provision of banking services through online platforms and mobile applications, often leveraging data and artificial intelligence to deliver tailored solutions. Digital banking platforms can offer a range of services, from loans and fund transfers to bill payments and investments.
Digital banking has been growing steadily in Africa since the early 2000s, when mobile money solutions such as M-Pesa in Kenya revolutionised the way people send and receive money. Today, Africa is home to some of the most innovative and successful digital banking platforms in the world, such as MNT-Halan in Egypt, which recently became the continent’s newest unicorn, valued at over $1 billion. According to a report by McKinsey, digital banking could generate up to $129 billion in annual revenues across Africa by 2025.
The potential of digital banking for financial inclusion
One of the main benefits of digital banking is its potential to address the challenge of financial exclusion, which affects millions of people across Africa. According to the World Bank’s Global Findex Report, only 55 per cent of adults in sub-Saharan Africa and 44 per cent in North Africa have access to formal banking, lagging behind the global average of 76 per cent. Financial exclusion limits people’s ability to save, invest, borrow, and protect themselves against shocks and emergencies.
Digital banking can help bridge this gap by providing accessible, convenient, and affordable financial services to those who are underserved or unbanked by traditional institutions. Digital banking platforms can reach customers in remote or rural areas, where physical branches are scarce or costly to operate. They can also lower the barriers to entry for customers who lack formal identification, credit history, or collateral. Moreover, they can offer lower fees, faster transactions, and more transparent information than conventional banks.
Digital banking can also empower customers by giving them more choice, control, and flexibility over their finances. Customers can access a variety of products and services that suit their needs and preferences, such as micro-loans, savings plans, insurance policies, or investment opportunities. They can also benefit from personalised recommendations and insights based on their data and behaviour. Furthermore, they can manage their accounts and transactions anytime and anywhere through their mobile devices.
The challenges and risks of digital banking for financial inclusion
However, digital banking is not a panacea for financial inclusion. It also faces several challenges and risks that could limit its impact or even create new forms of exclusion. Some of these challenges and risks are:
- Infrastructure: Digital banking relies on the availability and quality of infrastructure such as internet connectivity, mobile networks, electricity supply, and payment systems. However, many parts of Africa still suffer from poor or unreliable infrastructure that hampers the delivery and adoption of digital banking services. For instance, according to the World Bank, only 28 per cent of the population in sub-Saharan Africa has access to the internet, compared to 87 per cent in Europe.
- Regulation: Digital banking requires a supportive and enabling regulatory environment that fosters innovation, competition, and consumer protection. However, many African countries lack clear or consistent regulations for digital banking activities such as account information services (AIS) or payment initiation services (PIS). This creates uncertainty and confusion for both providers and customers, as well as potential loopholes for fraud or abuse. For example, in Morocco, there is no specific regulation for open banking, which allows customers to share their financial data with third-party providers.
- Literacy: Digital banking demands a certain level of literacy from customers, both in terms of financial literacy and digital literacy. Financial literacy refers to the knowledge and skills needed to make informed and responsible financial decisions. Digital literacy refers to the ability to use digital devices and platforms effectively and safely. However, many people in Africa lack adequate financial or digital literacy that would enable them to benefit from digital banking services. For instance, according to UNESCO, only 65 per cent of adults in sub-Saharan Africa are literate, compared to 86 per cent globally.
- Trust: Digital banking depends on the trust and confidence of customers in the security and reliability of digital platforms and providers. However, many people in Africa have low levels of trust in digital banking due to various factors such as lack of awareness, negative experiences, cultural norms, or social influences. For example, in Tunisia, there is a widespread distrust in the banking sector due to corruption scandals and poor performance.
- Inequality: Digital banking could potentially exacerbate existing inequalities or create new ones among different segments of society. For instance, digital banking could widen the gap between urban and rural areas, as urban customers have more access to infrastructure, information, and opportunities than rural customers. Digital banking could also reinforce the gender divide, as women face more barriers than men in accessing and using digital banking services, such as lower income, lower education, lower ownership of mobile phones, or social norms. For example, according to the World Bank, only 37 per cent of women in sub-Saharan Africa have a bank account, compared to 48 per cent of men.
The way forward for digital banking and financial inclusion in Africa
Digital banking is a powerful tool for financial inclusion in Africa, but it is not without challenges and risks. Therefore, it is important to adopt a holistic and inclusive approach that considers the needs, preferences, and realities of different customers and stakeholders. Some of the possible actions that could enhance the positive impact of digital banking and mitigate its negative effects are:
- Investing in infrastructure: There is a need to invest more in improving and expanding the infrastructure that supports digital banking, such as internet connectivity, mobile networks, electricity supply, and payment systems. This would increase the availability and quality of digital banking services, as well as reduce the costs and risks for both providers and customers.
- Harmonising regulation: There is a need to harmonise and streamline the regulation of digital banking across different countries and regions, based on international best practices and standards. This would create a level playing field for innovation and competition, as well as enhance consumer protection and financial stability.
- Enhancing literacy: There is a need to enhance the financial and digital literacy of customers, especially those who are unbanked or underserved by traditional institutions. This would enable them to make informed and responsible financial decisions, as well as use digital banking services effectively and safely.
- Building trust: There is a need to build trust and confidence in digital banking among customers, through various measures such as raising awareness, providing education, ensuring transparency, offering incentives, or soliciting feedback. This would increase the adoption and usage of digital banking services, as well as foster customer loyalty and satisfaction.
- Promoting equality: There is a need to promote equality and inclusion in digital banking, by addressing the barriers and challenges faced by different segments of society, such as rural customers, women customers, or low-income customers. This would ensure that digital banking benefits everyone equally, without leaving anyone behind.
Digital banking in Africa is a promising phenomenon that could transform the financial landscape and improve the lives of millions of people. However, it also poses significant challenges and risks that could undermine its potential or create new forms of exclusion. Therefore, it is essential to adopt a balanced and inclusive approach that maximises the opportunities and minimises the threats of digital banking for financial inclusion in Africa.
