AFRRI AFRICAN FINANCIAL RETAIL READINESS INDEX A REVIEW AND ASSESSMENT OF THE READINESS OF SELECTED AFRICAN COUNTRIES FOR RETAIL BANKING SERVICES

Transcription

1 AFRRI AFRICAN FINANCIAL RETAIL READINESS INDEX 2017 A REVIEW AND ASSESSMENT OF THE READINESS OF SELECTED AFRICAN COUNTRIES FOR RETAIL BANKING SERVICES

2 TABLE OF CONTENTS Introduction: AFRRI 2017 page 1 What is AFRRI? page 1 What is Retail Banking? page 3 The Retail Banking Customer Life Cycle page 4 Challenges Facing Banking in Africa page 5 Population Demographics page 7 Economic Indicators page 10 Low Income Banking Solutions: The growth of Microfinance in Africa page 11 Literacy page 13 Financial literacy: Overcoming reluctance to formal banking channels page 14 Infrastructure page 16 Infrastructure Leapfrogging page 18 Banking page 19 Financial Services: Disruption vs Leapfrogging page 20 Fintech in Africa page 22 Banking the Unbanked: Banks Vs Fintech page 23 Finding an African Solution: Models for Financial Service Delivery page 23 The African Financial Retail Readiness Index 2017 page 25 AFRRI 2017 vs 2016 page 25

3 INTRODUCTION: AFRRI 2017 THE AFRICAN FINANCIAL RETAIL READINESS INDEX 2017 What is AFRRI? Retail banking in Africa faces a number of unique challenges. In 2016 iveri developed the African Financial Retail Readiness Index (AFRRI) in order to examine the retail banking environment in sub-saharan Africa and to better understand the unique needs, developments and challenges of the region. The purpose of AFRRI is to give the reader an indication of the current and future needs of countries in sub-saharan Africa when it comes to supplying retail banking services and to give an indication of the readiness of eight sample countries to provide widespread formal banking services. The AFRRI report identifies five basic areas within a country that are essential to the provision of robust and sustainable retail financial services. Population: A suitable population to create a baseline of customers Economic Indicators: Sound economic indicators to show the viability and potential growth of financial services. Literacy: Adequate levels of both basic and finical literacy to enable the provision and understanding of financial services. Infrastructure: Adequate infrastructure to enable the supply of financial services. Banking: An existing banking infrastructure and ecosystem from which to grow. Banking Infrastructure In this report, we will examine these five areas and how they are necessary for successful retail banking. By looking at population demographics, economic indicators, literacy, infrastructure and current banking penetration, we can gain insight into the broader retail financial landscape, across the various countries. Literacy Economic Indicators FINANCIAL RETAIL READINESS Population Demographics 1

4 In short, The African Financial Retail Readiness Index rates the capability of a country to provide retail banking services. This report will take a comparative look at a selection of countries in Sub-Saharan Africa and assess them according to the basic tenants that are needed to provide financial services. By looking at a selection of indices for each country across these five areas, we are able to create an AFRRI score to assess the Financial Retail Readiness of each country. Each of the metrics is given a weighted score according to its importance to retail banking services. A number of indices are evaluated across each metric and the sample countries are scored comparatively in each metric according to these indices, resulting in a final AFFRI score out of 100 for each country. The purpose of AFRRI is to provide a basis to compare these ecosystems across the various countries and develop an understanding of the various stages of development necessary to create a robust retail financial banking ecosystem. The AFRRI report focuses exclusively on sub-saharan Africa. North African countries and Indian Ocean nations are therefore not included. The eight focus countries from sub-saharan Africa have been chosen as examples covering Eastern, Western and Southern Africa. These countries are South Africa, Kenya, Nigeria, Ghana, Uganda, Tanzania, Zambia and Zimbabwe. Windhoek 2

5 South Africa is included in the sample because while it has a more mature banking sector than the rest of sub-saharan Africa, it still suffers from many of the problems around providing widespread retail banking that are seen in other African countries. It can also be used to compare and contrast with the development levels seen in the other countries, or the region as a whole. What is Retail Banking? In this report, we will define Retail Banking as any financial service that provides banking products on a consumer level to the broader population. Retail banking services generally include: savings and transactional accounts, mortgages, personal loans, debit cards and credit cards. STRUCTURE OF RETAIL FINANCIAL SERVICES Typical retail financial service systems provide four main types of services: Accounts this is the primary relationship most clients have with a financial services provider. It is used to create a secure and accessible store of value and can include current or chequing accounts, savings accounts or even mobile money accounts. Cash-in-cash-out systems this is any place where account holders can deposit or withdraw cash in and out of their accounts. These include bank branches, ATMs or other agents or networks, such as mobile money agents. Transactions this covers the ability to transfer money from one account to another, without having to withdraw cash and deposit it again. It includes all types of electronic payments such as debit and credit card payments, credit transfers, direct debits and mobile money transfers. Adjacencies these are additional features that a financial services provider can offer customers in order to create greater value for the customer and earn greater revenue. This includes interest earned on balances held, savings and loans products, and other financial services. In order to operate effectively and viably, a retail bank requires certain key elements. These include a sustainable customer base that needs and utilises its products and physical infrastructure that enables it to supply these products. To successful supply retail banking, the customers must need, want and understand the utility and benefits of the financial services being offered to them. The infrastructure requirements for a traditional retail bank include a wide range of features such as branches, ATMs, Point of Sale (POS) devices that enable it to provide services to its customers. On top of this, banks also need an underlying level of physical infrastructure such 3

6 as reliable electricity and Internet connectivity in order to successfully operate. While most banks have introduced online and mobile platforms that enable them to provide 24/7 services to an increasingly digital clientele, this also requires customers to have sufficient Internet access, either through a broadband connection or through their mobile phones. While most banks have introduced online and mobile platforms that enable them to provide 24/7 services to an increasingly digital clientele, this also requires customers to have sufficient Internet access, either through a broadband connection or through their mobile phones. Regulations also require that financial services products be properly explained to customers. This can be an additional challenge for banks, as financial products can be fairly complex, particularly for customers with no prior interaction with formal financial services. Because of this, literacy, and in particular financial literacy, plays an important role in growing financial services. When utilising retail banking products, a financial services customer usually goes through three different stages as part of the customer life cycle: On-boarding - on-boarding a client requires a process of application, processing, verification, notification and initiation. In order to do this, customers must supply positive proof of identification, as well as a reliable way for the financial services provider to contact them in order to satisfy Know your Customer (KYC) requirements. The provider meanwhile has to capture customers details on its system and process the creation of their accounts so that they can begin transacting. At this point, the services must also be adequately explained to the customer, in accordance with financial regulations. Mother tongue explanations of products can be crucial at this point, and broader financial literacy is important to ensure it goes smoothly. For longterm maintenance of a financial relationship with the customer, a trusted relationship is established at the time of on-boarding. Period of use - During the period of use, the client must have access to the financial services facilities. This could be in the form of a branch, ATM or other agent that provides transactional and cash-in-cash-out services; it can also include usage via a mobile phone or Internet banking channel. During this time, the financial services provider must not only provide these channels to the client but must also ensure that all back-office processing is working efficiently and effectively. This includes transaction processing, channel maintenance, IT maintenance and support. The Retail Banking Customer Life Cycle 4

7 Dormancy - If accounts go dormant, the financial services provider needs a way to communicate with clients, either directly, or through broader marketing efforts, to encourage them to re-activate their accounts and continue using them. They also need to address the reasons for why the account went dormant (e.g. not enough access to banking facilities) in order to improve systems and increase period of use. Challenges Facing Banking in Africa When looking at banking in Africa, however, providing even these basic key elements can be a challenge for many banks. According to a recent African development bank report, with the exception of South Africa, Namibia and Botswana, less than 40% of the adult population in Africa has access to formal financial institutions. In many parts of Africa, basic infrastructure and services are severely lacking, or are only available in major urban centres, which means that many people who live in rural areas across sub-saharan Africa are extremely underserviced when it comes to access to banking. Some of the main reasons for low retail banking penetration in Africa include: Institutional or Regulatory Challenges KYC requirements are often a barrier to financial services for people who do not have formal identification documents or traditional street addresses. Several countries in Africa do not have the required regulatory framework to handle emerging technology-based banking solutions. Considerations such as electronic signatures and KYC requirements can be difficult to regulate. Often there is also a lack of adequate supervisory oversight on a country level. Regulations in many countries are not yet in line with global best practices, with weak implementation of the regulatory framework. Governments need to work on strengthening the supervisory capacity and enforcement powers and should carefully monitor the risk around non-viable financial institutions. Infrastructure Challenges it is difficult to roll out financial services to rural areas with little or no infrastructure to support branches or ATMs. Reliable access to electricity as well as communication services and connectivity are essential for running a formal retail banking environment. Interoperability while mobile and fintech solutions might have great potential in Africa, they need some level of interoperability if they are ever going to rival a formal banking sector. 5

8 Barriers to Entry in low-income areas, features such as a minimum opening balance can be a barrier to entry for formal financial services, as can the long distances that many of the rural populations would have to travel to reach a bank branch. A lack of financial literacy can also inhibit people s ability to fully understand and engage with financial services. Skills due to the low levels of financial literacy across Africa, it can be difficult to find banking agents who have the necessary skills to not only understand the financial products, but explain and sell them to their customers. Investment in education and training is therefore essential. Macro-Economic Challenges and Low Income Levels High levels of poverty have excluded a number of people in sub-saharan Africa from retail financial services. Lowincome customers have a diminished ability to partake in financial services, where account fees and minimum balances may be prohibitive. Moreover, low income levels can also prevent access to digital channels as technology such as smartphones are still unfordable to a large percentage of the population. Low-income population segments are also particularly vulnerable to chronic debt, and financial supervisors need to monitor the financial solutions being offered to them. These challenges highlight an urgent need to develop a wider range of workable alternative financial services infrastructures in sub-saharan Africa. To overcome these challenges and improve the retail financial landscape across Africa, countries must focus on the areas and indicators discussed in the following sections. 6

9 POPULATION DEMOGRAPHICS Population total Population density (people per sq km) Population growth (annual %) Population 2020 (projected) Ghana Kenya Nigeria South Africa Tanzania Uganda Zambia Zimbabwe Sub-Saharan Africa World Table 1: Source - World Bank Data 2015 Urban population (% of total) Urban population growth (annual %) Urban population (% of total population) 2020 (projected) Ghana Kenya Nigeria South Africa Tanzania Uganda Zambia Zimbabwe Sub-Saharan Africa World Table 2: Source - World Bank Data 2015 Rural population (% of total population) Rural population growth (annual %) Rural population (% of total population) 2020 (projected) Ghana Kenya Nigeria South Africa Tanzania Uganda Zambia Zimbabwe Sub-Saharan Africa World Table 3: Source - World Bank Data

10 One of the first considerations to providing a retail banking solution is the size of the potential customer base. It is therefore important to consider the population demographics of the area to get an idea of the scope of financial services needed. Sub-Saharan Africa has a large population, but due to the size of the continent, the population is very widely dispersed with many different urban hubs and a large rural population. Most importantly though, is the strong growth seen in population numbers across the continent. Collectively, sub-saharan Africa s population is growing at more than twice the global average. Tanzania, Uganda and Zambia are all growing at an even higher rate than that. According to a UN report, the population of Africa is set to grow by 1.3 billion by 2050 and will account for more than half of the total global population growth. This projection is mainly attributed to Africa s current age structure. Some 60% of the population in Africa is under the age of 25. Over the next 30 years, there will be a massive surge of people growing up, starting families and entering the workforce. This will create increased demand for all kinds of goods and services, including financial services. Not only is the population growing, but it is also urbanising. Sub-Saharan Africa s urbanisation rate is again double the global average, with several of the example countries having higher than average urban growth rates. The strength of urbanisation means that by 2020 the overall percent of the population living in rural areas will decrease. The overall population growth, however, also means that the rural population is also growing, again far outstripping the global average. In 2020, the rural population in sub-saharan Africa will still be higher than the global average and will still account for 60% of the total population. Because of this massive growth and urbanisation many companies, including banks, take a city focus in regard to Africa. They look at how to provide products and services to the main large cities, where the highest number of people are situated. This can often leave rural populations lacking a number of services as companies are put off trying to reach them due to the high costs, large areas and lack of infrastructure. Much of the untapped financial service market is therefore in rural areas. 8

11 Population Demographics: AFRRI 2017 Scoring Ghana Kenya Nigeria South Africa Tanzania Uganda Zambia Zimbabwe Out of a possible total of 10 points, Nigeria and South Africa score the best when looking at demographic indicators of Financial Retail Readiness. This is due to their large populations and high rates of urbanisation. Kenya, Tanzania, Uganda and Zambia have slightly lower scores due to still having high urban growth numbers. While scores all round were improved by the strong population growth and general urbanisation in the region. Zimbabwe is low due the stagnant growth and negative urbanisation, as it is the only country where the rural population is increasing more than the urban. 9

12 ECONOMIC INDICATORS GDP (US$) GDP growth (annual %) Ghana Kenya Nigeria South Africa Tanzania Uganda Zambia Zimbabwe Sub-Saharan Africa World Table 4: Source - World Bank Data 2015 GDP per capita (US$) Income per capita (US$) Household consumption expenditure per capita (US$) Employment to population ratio (2013 estimate) Labour force participation rate Ghana Kenya Nigeria South Africa Tanzania Uganda Zambia Zimbabwe Sub-Saharan Africa World Table 5: Source - World Bank Data

13 Looking at some broader economic indicators, one can see that while sub-saharan Africa makes up 14% of the wold population, it only contributes 2% to the global GDP. The region as a whole has fairly low economic maturity, with underdeveloped production and services sectors. This leads to comparatively low income ratios. Nigeria has the largest economy in Africa, with a GDP far higher than any of the other comparison countries, with only South Africa coming close to its size. The large population in Nigeria, however, means that the GDP per capita is significantly lower than South Africa s where the financial consumption and household expenditure point to it as the most advanced economy of the sample set. This is despite having the lowest employment to population ratio and labour force participation rate. Kenya, Tanzania, and Uganda meanwhile have all seen massive growth, especially when compared to the global average. It is important to remember, however, that this is growth off a small base and the per capita income is still very low, especially when compared to the global average. South Africa conversely, has seen comparatively poor growth, lower than all the others, except Zimbabwe, which is shown to have a severely depressed economy. Low Income Banking Solutions: The growth of Microfinance in Africa Low Income Banking Solutions: The growth of Microfinance in Africa These stats show that there is still a very large number of low-income households across sub- Saharan Africa. These households, particularly in the rural parts of Africa, have often been left behind by technological and economic developments that have been seen in many parts of the continent recently. Low-income customers will generally conduct few financial transactions and in small amounts. This makes them unprofitable for many banking and payment services providers, which rely on high transaction volumes and large account balances to generate revenue. It has reached a point that by including more poor people in the banking or payments system it could lead to greater losses by the financial institutions, leading them to exclude these sectors entirely. Therefore, in order to serve these sectors, financial services providers need to create a model that enables financial inclusion in a profitable manner. 11

14 Many groups are therefore looking at how to provide appropriate financial services to these vastly underserved low-income populations. Microfinance has grown rapidly as an emerging solution by providing finance to customers at the lowest end of the wage spectrum. Microfinance works by providing credit and loans in very small increments to a large base of people. Microfinance has therefore become an important complement to financial services in many parts of sub-saharan Africa. It is well adapted to rural, low-income households with little or no collateral and enhances financial inclusion through savings mobilisation and credit provision. By improving the accessibility and efficiency of financial services it is possible to deepen financial development, increasing deposits and loans and creating and promoting economic growth. Ghana Kenya Nigeria i South Africa Economic Indicators: AFRRI 2017 Scoring Tanzania Uganda Zambia Zimbabwe The strong growth and employment numbers allow fairly uniform scores on economic indicators with all sample countries scoring between five and ten out of a possible 15 points. The comparative maturity of the South African market means that it still comes out ahead, despite its poor growth and employment numbers. 12

15 LITERACY Literacy (% of population) Financial literacy (% of population) Ghana Kenya Nigeria South Africa Tanzania Uganda Zambia Zimbabwe Sub-Saharan Africa World Table 6: Source - World Bank Data 2015, Standard & Poor 2015 Literacy within the focus countries is fairly high, with Zambia, Zimbabwe, Tanzania and South Africa all reporting literacy levels close to the global average. The Average for the rest of sub- Saharan Africa is, however, significantly lower, with Nigeria exemplifying this trend. Financial literacy is also not as widespread. In South Africa, a financial literacy score of only 42% is almost half that of the general literacy, while in Nigeria only 26% of the population are financially literate. This shows that while much of the population in sub-saharan Africa receives rudimentary schooling, it is not at a level to provide proficient numeracy and create a broader understanding of finances. This is particularly important when providing financial services, as one of the key requirements is the ability to explain the various products and services to customers and have them understand how they work. Banks are obligated to not only provide comprehensive information on all financial products, but also to ensure that their customers understand the products that are offered to them. Financial literacy is, therefore, an issue that must be actively tacked by the financial sector. An essential component of the empowerment of consumers is a comprehensive understanding of how to manage their finances and avoid unnecessary risks or excessive debt. Even relatively straightforward financial products can appear complex and confusing to customers with little or no financial schooling. This results in consumers either opting out of the system entirely or choosing products that do not adequately meet their needs. Good financial literacy improves consumers understanding of financial opportunities and the various products that are available to them. 13

16 One of the results of low financial literacy is a reluctance to join formal banking channels. The lack of understanding around banking and how it works creates a barrier to entry that the financial service providers need to overcome. There are several key factors that financial institutions must overcome when promoting banking services and encouraging and educating people to use them. Lack of exposure and knowledge - Many consumers do not have reliable access to banking channels. This makes them unfamiliar with how financial services work and how to utilise them for their benefit Established behaviour - While customers may be aware of formal banking options, they are still more comfortable managing their finances in the way they are accustomed to (such as cash or community networks) and are not interested in switching to a formal bank account. Cost - Particularly for low-income individuals, the cost of switching from cash to formal financial services can be prohibitive. Digital channels can also introduce additional costs, for example the cost of mobile data to access the channel Negative experience - If a customer has tried a formal banking channel and had a negative experience either because it was too confusing, difficult to use, difficult to access, or any other reason, he/she is likely to stop using it and will be more difficult to convert into a customer in the future. Fraud and security issues - Because customers are not familiar with traditional banking channels, they are more wary of fraud and security issues. There are an entrenched credibility and trust associated with cash and moving people away from it can be difficult. Access - Many people do not have access to banking infrastructure or digital banking channels. Rural populations, in particular, often have to travel long distances to reach a bank branch and will often not have the infrastructure or digital capabilities to use online and mobile channels. By broadening financial literacy and educating people about banking services, how they work and their benefits to customers, it is possible to overcome many of these barriers for formal banking inclusion. This means that consumers will be more receptive to financial services as they will have a greater understanding of how they work and why they are necessary. It also means that the banks have lower investment and marketing costs in terms of consumer education. Financial literacy: Overcoming reluctance to formal banking channels 14

17 Literacy: AFRRI 2017 Scores Ghana Kenya Nigeria South Africa Tanzania Uganda Zambia Zimbabwe South Africa s high literacy rate once again puts it at the front of the pack in terms of favourability for retail financial services. It is closely followed by Zimbabwe, which has a strong schooling system and therefore higher literacy rates than many other sub-saharan African countries. These are the only two to score more than 15 out of a possible 20 points in this area. Nigeria on the other hand has the lowest score in both general and financial literacy. This can be a huge barrier to providing financial services as it will require the banks to provide a large amount of consumer education around their products and services. 15

18 INFRASTRUCTURE Population without electricity (millions) National electrification rate % Urban Electrification rate % Rural Electrification rate % Ghana Kenya Nigeria South Africa Tanzania Uganda Zambia Zimbabwe Sub-Saharan Africa World Table 7: Source - World Energy Outlook 2014 Fixed telephone subscriptions (per 100 people) Mobile cellular subscriptions (per 100 people) Mobile broadband (% of population) Ghana Kenya Nigeria South Africa Tanzania Uganda Zambia Zimbabwe Sub-Saharan Africa World Table 8: Source - World Bank Data 2015, GSMA Data 2015 Fixed broadband subscriptions (per 100 people) Individuals using the Internet (% of population) Internet Users 1 Year change (%) Ghana Kenya Nigeria South Africa Tanzania Uganda Zambia Zimbabwe Sub-Saharan Africa World Table 9: Source - World Bank data 2015, Internet Live Stats Data

19 Completed Shopping Centre Space in Major Cities (m 2 ) Ghana Kenya Nigeria South Africa Tanzania Uganda Zambia Zimbabwe Sub-Saharan Africa World - Table 10: Source - Knight Frank 2016 One of the key elements of providing retail financial services is having the underlying infrastructure available to support those services. The key infrastructure elements that enable traditional banking services are physical infrastructure (such as a shopping centre) to house the bank branch, and access to reliable electricity and Internet in order to run banking services. More than half of the global population living without electricity reside in sub-saharan Africa. With the exception of South Africa, the national electrification rate is significantly lower than the global average. This low level is similarly seen in the low fixed line and broadband penetration rates. Mobile subscriptions, however, are much closer to global standards across the sample countries with only Uganda seeing a significant gap. This means that while there is still a low number of people using the Internet, growth in mobile broadband access is leading to a growing trend of increased Internet usage across Africa. By rolling out wider access to infrastructure and technology, it is possible to increase the availability and uptake of financial services. It also enables the development of new use cases and products for users. It is also important to look at what infrastructure is available and adjust the services and how they are deployed to enable them to operate within the constraints of the environment. Mobile First Africa Africa is a mobile first continent. In Africa, consumers are spending more and more time on their mobile phones as the use of social media, mobile commerce and mobile video is accelerating. According to a recent report from We Are Social, 78% of Web pages served to Web browsers in South Africa are served to mobile devices while in West and East Africa the number is greater than 80%. The mobile is therefore outpacing a number of traditional channels such as television and print as the primary source of information and entertainment for a lot of users. It is also cannibalising traditional desktop-based online activity, due to the low broadband penetration rates across Africa. 17

20 The growth and spread of digital technology are enabling the leapfrogging of many traditional services in Africa. The most notable example of this is telecoms. While in many parts of the developed world, there is a strong fixed line telecoms infrastructure, With the exception of South Africa, there is very minimal fixed line telecoms infrastructure in most sub-saharan African countries. This has a knock-on effect that very negatively impacted broadband Internet roll-out in most countries as there was no established network to build on. The development of mobile phones and mobile Internet has circumvented this problem, however. With mobile penetration rates that are much closer to the rest of the world, it has been possible to leapfrog the idea of having a fixed line. By foregoing fixed line telecoms and broadband infrastructure and moving directly on to mobile connectivity, it is becoming increasingly possible to close the technology gap between Africa and the rest of the world. As people began using their mobiles as their primary phone, service providers are also learning to take a mobile first mindset, which has also led to some unique digital African solutions. Ghana Kenya Nigeria Infrastructure Leapfrogging Infrastructure: AFRRI 2017 Scoring South Africa Tanzania Uganda Zambia Zimbabwe South Africa is the stand-out leader when it comes to infrastructure needed for formal financial services and is the only sample country to score more than 20 out of a possible 25 points in this area. Ghana comes in second due to its high electronification rate and mobile penetration, while Zimbabwe s strong legacy infrastructure gives it an edge over the remaining sample countries, which are uniformly low, scoring less than 10 out of

21 BANKING Bank Branches/ People Bank Branches/ km² Number of Bank Branches Number of Commercial Banks Ghana Kenya Nigeria South Africa Tanzania Uganda Zambia Zimbabwe Sub-Saharan Africa World Table 11: Source - African Development Bank Data 2015 % Account (Any Kind) % Account at a Financial Institution Mobile Account % of Population Ghana Kenya Nigeria South Africa Tanzania Uganda Zambia Zimbabwe Sub-Saharan Africa World Table 12: Source - World Bank Data 2014 Number of ATMs ATMs per 10,000 Km 2 No. of ATMs/ Adults Ghana Kenya Nigeria South Africa Tanzania Uganda Zambia Zimbabwe Sub-Saharan Africa 6.13 World Table 13: Source - World Bank Data 2015, African Development Bank Data

22 Access to banking and financial services in sub-saharan Africa is expanding, but it remains one of the lowest in the word. While South Africa has a fairly developed retail banking sector, the rest of sub-saharan Africa still has a long way to go towards financial inclusion and formal retail banking. Less than 30% of people in sub-saharan Africa have an account at a financial institution, which is half the global average. This gap has been partially bridged by mobile banking accounts, which are much higher across the board than the global penetration, except in Nigeria where mobile money penetration has been suppressed by unfavourable financial regulations. Disruption has become a common buzzword in today s global business landscape. In the world of financial services, Fintech in particular, has gotten a lot of attention for its potential to disrupt existing, established financial service models. Disruption of this type occurs when digital-first start-ups, i.e. companies with online-based products and services, and little to no physical infrastructure, begin to displace traditional businesses in a given vertical. Examples include Uber in the transport vertical, Amazon in the retail vertical, or Airbnb in the Hospitality vertical. These companies are generally able to disrupt established service models, due to their high agility and low infrastructure set-up that enables them to provide more targeted services with a focus on better customer service and lower costs. They are also able to take advantage of advanced data analytics to develop smarter customer profiling. In the financial services sector globally, this has meant that banks are having to respond to a rise in disruptive Fintech start-ups that provide niche financial services that are available online to a digital customer base. It is not only start-ups that have seen the potential of the Fintech sector. Many large global digital companies are also looking at banking and payments services as a viable growth area. These digital giants already have massive client bases that enable them to move into any number of industries with ease, providing disruptive digital solutions to their client base and moving people away from traditional incumbents. Apple, Google, Facebook and Samsung, for example, are all now offering some kind of payments service to their customers. The standard model for disruption is to draw people away from a traditional incumbent service, while changing the nature of how the service is provided. In Africa, however, this model is slightly different because the biggest market is also the underserved one. In Africa, it is estimated that up to 80% of the population lack access to formal financial services. This means that the majority of customers are unclaimed, and any disruptive financial service will not draw them away from traditional incumbents, but rather provide them with services for the first time. Financial Services: Disruption vs Leapfrogging 20

23 Banks have consistently failed to reach low-income consumers in informal markets, and even consumers served by traditional banking infrastructure often lack credit services as the banks do not have enough information on them to confidently extend credit. Many consumers in poor and rural areas are not even targeted by banks as potential customers as they could not afford even the most basic of traditional financial services, or would not be depositing significant enough amounts of money. But the same thing that makes fintech so disruptive in developed financial service sectors, makes it ideal for proving services to low-income, previously unbanked populations. - Low cost - Low infrastructure - Mobile first - Location, security and identity are all attached to the phone - Low transaction amounts offset by high volume - Scalable without being inhibited by location or infrastructure Fintech in Africa therefore has the opportunity to build the financial services industry in a whole new way, essentially leapfrogging the need for traditional incumbent banks in many places. It is fintechs that will decide what financial services will look like in Africa. With the high mobile penetration in Africa, Fintech provided through mobile phones cannot only offer services to these customers but also build up an identification profile for each account and a customer history that would aid credit decisions in the future. Globally, digitalisation is seen as a disruptor, but in Africa digitalisation has become an enabler of development. Innovation comes out of necessity and the solution must fit the needs of the people it serves. 21

24 The fintech industry in Africa is attracting ample attention from venture capitalists with funding of the tech sector expected to rise from $414 million in 2014 to $608 million in One of the first and most widely known fintech solutions in Africa is Mpesa, a mobile money solution that allows users to send and receive money via their mobile phones. The service now boasts 19 million mobile subscribers in Kenya and 6 million in Tanzania and has made a significant impact on basic financial inclusion in the area. Without a strong distribution strategy, a fintech solution may work successfully in one country but fail in another. For example, while Mpesa took off in Kenya, it has failed to launch in South Africa, with only one million subscribers and 76,000 active users taking advantage of the service. Beyond Mpesa and mobile money, a wide range of payments technologies is evolving at a rapid rate across the continent. While mobile money began as simple person-to-person transfer service, there are now a range of financial services available on the mobile platform. Mobile wallets are already branching out into other financial services, including insurance and loans, and mobile phone-based micro-lending and micro-credit have experienced major success. Beyond this, Utility bills, tax payments, savings vehicles and credit and insurance products are only some examples of products and services gaining momentum via mobile services across Africa. There have also been a number of targeted solutions that use mobile technology to solve particular needs in Africa. For example, a mobile application that allows farmers to buy framing supplies and receive payments for their harvests, or one that enables the payment of school fees. Taking the innovation a step further, the M-Kopa Solar company sells small solar panels to low-income households, which are then paid off through daily mobile micropayments. This allows the low-income population to acquire assets with their micro-savings, while using the customers repayment records as a way of assessing their creditworthiness for future lending. Cross border remittances enabled by mobile phone have also gained huge ground, with an estimated 20% of all cross-border transactions occurring via mobile remittances. Fintech in Africa 22

25 Fintech in Africa In order to successfully penetrate the unbanked market, it is essential that the solution is low cost, convenient and easy to use. While fintechs are seeing the gap in financial inclusion Africa, in order to provide more comprehensive financial services they should not discount partnerships with existing financial institutions. Banks have the licenses, understand complex regulatory compliance and have access to a large customer base that fintechs would find nearly impossible to build for themselves, especially with no existing brand and little capital. Incumbent financial service providers are also generally more trusted, and compliance with financial service regulations can be a complex and in-depth process. Established incumbent service providers will generally already be fully compliant with any regulations and have a deeper knowledge of what is required to ensure client security and secure internal processes. By collaborating with the incumbents in the market, it is possible to promote financial and commercial interaction. Fintech start-ups are more agile and lean, allowing for faster innovation and a more responsive approach to customer needs. They are also able to focus on underserved segments that the banks are not currently looking at. Finding an African Solution: Models for Financial Service Delivery Traditional financial services need to develop new business models in order to work in Africa. Banks are acknowledging that they need to work more closely with fintechs with many developing accelerator programmes or internal incubators to grow and acquire fintech-like services. Three of the potential models that banks can explore with fintechs include: Bank-Focused Models a traditional bank uses non-traditional low-cost delivery channels to provide banking services to its existing customers. Examples of this include using ATMs as a remote branch, providing Internet or mobile banking channels. This model is a natural extension of traditional branch-based banking and can be limited in its attempts to promote financial inclusion. Bank-Led Models these offer a distinct alternative to conventional branch-based banking. Customers are able to perform financial transactions using a distributed network of banking agents. The customer s account is still held by the bank, but the agent, which may be a spaza shop, post office, petrol station, or grocery store, is the one that interacts with the customer and is enabled to facilitate a number of different transactions. This model has a higher rate of financial inclusion as it enables deeper and more widespread penetration into rural areas. 23

26 Non-Bank-Led Models this typically refers to a model where a bank has a limited role in the day-to-day account management. While the bank may be charged with the safekeeping of funds, the general account management functions are conducted by a non-bank entity, often a telecoms operator. These mobile money deployments do not require a formal bank account and are generally lower cost than traditional banking services. This model has caused the greatest impact on financial inclusion, as it is it most convenient and widespread for rural and underserved populations. To provide successful retail banking in Africa, it is important to assess the various models and explore what will work best with the existing infrastructure, channels and consumer habits in a given country. Ghana Kenya Nigeria Banking: AFRRI 2017 Scoring South Africa Tanzania Uganda Zambia Zimbabwe South Africa is again the top performer when looking at current financial services penetration across the sample countries, scoring over 20 out of a possible 30 points. Kenya is in second place mostly due to the high mobile money penetration in the country, which has pushed forward financial inclusion. Nigeria on the other hand, scores well on branch and ATM numbers, which have presumably been driven up by its large population numbers. But Zambia scores very poorly as it has low formal banking channels and very low mobile account penetration. 24

27 THE AFRICAN FINANCIAL RETAIL READINESS INDEX 2017 Looking at the many challenges that face retail financial services in sub-saharan Africa, we have developed the African Retail Financial Readiness Index (AFRRI) which can be used to gauge at what stage of development a country is in terms of its feasibility and readiness for widespread retail financial services. By combining the individual scores across each metric, the sample countries are given score out of 100, which gives an indication of their ability to provide formal retail banking services. The 2017 AFRRI Scores are as follows: 2017 AFRRI SCORES SOUTH AFRICA GHANA ZIMBABWE KENYA TANZANIA NIGERIA ZAMBIA UGANDA Once again South Africa comes out as a clear leader in the final AFRRI scoring, with uniformly good scores across all metrics. South Africa has a well-developed banking sector, supported by good infrastructure and literacy scores. South Africa therefore rises above the other countries in this comparison. There is, however, room for improvement as demographic and economic indicators do not stand out significantly from the rest of the group. Ghana has the second highest score of the group, as can be seen in the graph below, a strong performance in infrastructure is giving it a significant boost compared with the other focus countries. 25

28 Zimbabwe comes in third, it also shows above-average infrastructure, but its main boost is from having some of the highest literacy levels across the comparison countries. The failing economy in Zimbabwe means that it has the lowest overall demographic and economic scores. Future improvement in these areas would have a substantial effect on its overall score. Closely following in fourth position is Kenya. While Kenya is low in both demographics and literacy, but the pervasive usage of mobile money and the shift towards greater formal banking and financial inclusion it has created boost its banking score significantly. Tanzania, Nigeria and Zambia are fifth, sixth and seventh respectively. Tanzania and Zambia show similar profiles with a solid baseline of demographics, economics and literacy that is held back by a lack of infrastructure and banking services. Nigeria, on the other hand, suffers from an extremely low literacy score. Improvements in this area would put it on par with Ghana, Kenya and Zimbabwe. Uganda comes up last of the at the bottom of the pack with fairly low scores across the board. While it does well on mobile banking penetration, the highly rural population and low levels of literacy and infrastructure mean that it will struggle to support retail financial services on a large scale. Finally, there are a few key insights that can be gained from looking back at the 2016 AFRRI scores and comparing them to this year s. AFRRI 2017 vs Ghana Kenya Nigeria South Tanzania Uganda Zambia Zimbabwe Africa 26

29 Ghana Looking at the 2016 AFRRI scores versus the 2017 AFRRI scores, we see that Ghana has jumped up from a score of 41 to 50. This was mostly caused by the strong improvement in infrastructure metrics. The mobile subscription rate, for example, is almost 130%, up approximately 15% from 2016 and second only to South Africa. This makes cellphones practically ubiquitous in Ghana. About 30% of the population also have access to mobile broadband and 25% of the population are using the Internet, with a 14% growth in Internet users, year on year, much higher than any of the other focus countries. There have also been significant improvements in electrification rates, with over 70% of the total population and 90% of the urban population having access to electricity, a significant growth from the 2016 report and much higher than the other example countries except South Africa. Uganda Uganda, on the other hand, saw a significant drop in its score from 42 to 35, putting it in last place for the 2017 ranking. This drop is mostly categorised by a lack of growth or development across the indicators. With no significant improvements from 2016 to 2017, Uganda has actually seen its score for banking drop significantly. While demographics and economics may be expected to remain stable from year to year, there have been no improvements in areas such as mobile penetration, access to the Internet, electrification rates, or the number of bank accounts. This has caused Uganda to be outstripped by the other countries that have generally made improvements across at least one of these areas, even if they have fallen down in others. This shows that countries need to make solid improvements across all the indicators in order to improve their financial retail readiness and enable solid and sustainable formal retail banking. 27