FinTech Takes on East Africa

Introduction: Leapfrogging Sub Saharan Style

remittances

Leapfrog – is commonly associated with East Africa.  Sub Saharan Africa’s potential to overcome persistent challenges in novel ways abound in heaps –attributable to a convergence of forces i.e. a rapid technological boon and a resurgence of SSA development activity. As an example, the wild success of a simple communication tool, the mobile phone transformed traditional banking models and prompted thoughts on next generation financial services. SSA is poised to ride on technology rails and in a truly unique fashion leveraging technology to break down traditional barriers to financial access.

Bright B. Simons, on a past post for the Harvard Business Review

“In much the same way that Africa’s lack of significant telecom capacity was a boon rather than a hindrance to the emergence of mobile telephony, its lack of legacy infrastructure for everything ranging from waste management to energy utilities could provide the appetite — non-existent in the West — for genuinely transformative, future-friendly reconceptualization of the very notion of infrastructure”

Breaking Banks: Mobile Money Operators redefine financial services

Take financial services in East Africa which are increasingly offered through a simple communication tool, the mobile phone. The far reaching implications of fusing technology and financial synergies to address developmental challenges are of a grand scale. For the unbanked, access to financial services, credit, savings accounts, investment schemes and innovative financial products are now feasible en masse through last mile cellular network channels.

Financial Access Hurdles in SSA Remittances 

Sub Saharan Africa receives inflows totaling $ 32 billion in remittances annually from Africans living and working abroad. Their role in supporting Sub Saharan economies is evident; remittances contribute 5.5% and 5.3% of the respective GDPs of Kenya and Uganda. Whilst FDI and capital inflows into SSA significantly diminished in the wake of the 2008 financial crisis, remittances displayed resilience and grew year on year. It comes as no surprise that the World Bank characterizes diaspora remittances as “a potent force for development in developing countries.”

In April this year, the Overseas Development Institute, a leading UK developmental think tank released a report that identified the dire state of the Sub Saharan remittance industry. Choosing to focus on Sub Saharan African workers’ remittances, the report highlighted ghastly fees averaging over 20% as a major challenge. An instance of sending money from Ghana to Nigeria for example, costs 39% in fees. Similarly, within East Africa, money transfer from Kenya to neighboring Tanzania costs 25% in fees. Strategic prohibitive fees structures further inhibit sending small amounts by imposing discriminative higher fees. The same is true of inbound remittances from North America and Europe. Transfers take days to arrive and cash out and fees are packaged per product. For example, a $ 200 transfer into Kenya from the UK costs 12% in fees. Access to services is limited by a paucity of cash out agents leading to mile long trips by recipients to find appropriate agents to cash out.

remittacnes ecobank

The SSA remittance market is largely an oligopoly of incumbent MTOs (Money Transfer Operators) and Banks. It is no surprise therefore, that MoneyGram and Western Union together account for 63% of the market. This glaring lack of competition has culminated in a carefully crafted raw deal for unwitting consumers. The nature of African financial regulation has unfavorably perpetuated this dominance by locking out new entrants who offer cost effective and accessible services such as Post Office banks and Micro Finance Institutions. In typical anticompetitive fashion, MTOs and Banks have signed agent exclusivity agreements further exerting their sway by raising barriers to entry. As a result, the industry imposes a massive super tax on remittances.

Here is a slide on the state of Remittances in SSA [here]

Breaking Barriers – Technology knows no boundaries

As in most industries, technology has stepped in to address this market failure in the form of Bitcoin. The Bank of England describes Bitcoin as an innovative decentralized payment network. By using Bitcoin as a back-end BitPesa, a Kenyan based FinTech startup has drastically lowered the time, fees and accessibility challenges of cross border remittances. The remittance service lets users send any value amounts for a flat 3% fee, in 5 minutes and into a receiver’s mobile wallet in East Africa from anywhere in the world. A remitter can send $ 10 from Glasgow to a relative’s mobile wallet in Nairobi instantly. The service albeit fairly new, is fully functional and reliable. Because it is a purely software based service, it is easily scalable to multiple remittance corridors. Basically,

“a remittance vehicle pegged to bitcoin. A customer buys a bitcoin and sends it to BitPesa – which then converts it to local currency and sends it along to the recipient. Initially, remitters are in the UK, and those who receive remittances are Kenyans using their mobile phone-based M-Pesa technology.”

Similar services riding on the Bitcoin network are highly touted as disruptive alternatives to traditional remittance models. Prospective markets in Mexico and the Philippines play host to similar FinTech startups, however. The unique characteristic of the East African payments market is a perfect match for this service; because of the proliferation of mobile wallets, there is no need for a bank account. Every mobile wallet is automatically a mobile bank. Already in place is a vast non-exclusive Cash in – Cash Out agency network for mobile financial services that aids a great deal in lending cashing out points.

Bitcoin turns the remittance service model completely on its head and offers value for money, time and access.

Final Thoughts

Going forward, FinTech will be central in enabling the unbanked and bottom of the pyramid groups access a plethora of financial services. The last mile reach of mobile networks and ubiquity of mobile phones are the back bone infrastructure for digital finance. On these cellular platforms, expertly designed user centric financial products and sustainable business models around these products will chart the path to a tech driven future Sub Saharan Africa.

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