It is no news that over the years, Africa’s financial sector has experienced consistent growth and transformation. The banking system is not left out from the recent digital pandemic – digital channels, mobile banking, as well as cryptocurrency (digital currency) are a few of the many ways financial services have been reinvented to enable a more convenient and accessible user experience.
But this remodeling has also introduced fully digital banking systems that pose as notable contenders to traditional banks with physical touchpoints. For many of these fully digital FinTechs such as ALAT, Kuda Bank, Tyme Bank, and Bank Zero, the ultimate goal is financial inclusion, affordable banking (via reduced bank charges), or as Kuda Bank calls it ‘free banking‘, and most importantly, convenience. However, as exciting as all these sound, digital banking systems do not seem to have all the tools at their disposal to overthrow pre-existing commercial banks. While considering their attractively-packaged advantages, it is important to ask ourselves important questions.
In the long-term, are these benefits they offer sustainable?
Can fully digital banks drive financial inclusion for the majority at the bottom of Africa’s income class?
What leverage does the traditional banking model have over the more convenient digital banks?
And most importantly, what banking system can drive sustainable growth for Africa in the future?
Banking the unbanked
Research shows that for sustainable economic growth and poverty reduction of any nation, access to basic financial services is critical. In essence, it means a large percentage of the population must be banked. but not without first having adequate funds. Thus bearing the question Yele Okeremi, CEO of Precise Financial Systems asked, “How do you bank a financially disempowered population?” In a country like Nigeria, where 87 million people live under $1 a day, financial inclusion sounds almost impossible. You would need to first increase the earning power of these 87 million people before the issue of financial inclusion can arise.
The reach of digital banks can only extend to the majority – Africa’s young and internet-savvy demographic. A majority that is already banked, already conversant with financial services. Most even holders of bank accounts with traditional banks. The unbanked, however, cannot be banked because they lack access to smartphones, fast internet connection, adequate funds, and an overall lack of digital financial knowledge.
As much as emerging Fintechs hope to help people across the region access reliable, affordable, and sustainable financial services, the earning potential of the masses remain the true determinant of the level of financial inclusion any nation can attain.
Traditional Banks uptake of digital financial services? Too much or too little
When USSD and mobile banking were introduced in commercial banks, it was enough. But in our current era of fast-paced growth, will it be enough to keep customers?
According to GSMA’S 2020 report, mobile internet users in Sub-Saharan Africa stands at 26% in contrast to the 77% of the population with sim connections.
In the last three years, mobile money has spread from East to West Africa. In Senegal, mobile money ownership jumped from 6% to 32%, with similar gains reported in Burkina Faso. 39% of adults in Ghana now have a mobile money account, up from 13%, on par with Tanzania. In Kenya, more than 70% of adults use a mobile money account; also, over 30% of adults use mobile phones to make payments from a traditional bank account. The rise of mobile money has led to an increase in bank accounts; overall, account ownership now exceeds 50% in seven sub-Saharan African countries and 80% in three regional economies.
Mobile money has actively expanded financial inclusion in the region due to its convenience. However, traditional banks are constrained by regulations and the limitations placed by the government on banking and financial systems.
Loan and Credit Accessibility
When digital banks first entered the scene, they were confronted with the problem of granting loans, an advantage traditional banks have over them and wield to retain customers.
However, Micro-lending platforms like Branch, Carbon, or Aella Credit eased the problem of getting personal loans digitally for many individuals pushing commercial banks like Guaranty Trust Bank and Access Bank to follow with cheaper interest rates. But these digital platforms cannot offer higher loan amounts. Branch, a Nigerian online moneylending platform, has a maximum loan amount of 150,000 naira in contrast to the much higher limits offered by many commercial banks. But there’s another challenge.
Providing a BVN is a prerequisite for using any of these services. This means those without a bank account are unable to access these services.Once again making loans and credit opportunities accessible only to those already banked.
Trust-based banking for a skeptical populace
Adoption of digital banking services came with the initial setback of a cultural challenge – lack of trust. For most Africans, physical human interaction is a prerequisite. The older demographic who are less internet-savvy are more likely to gravitate towards banking services with a physical touchpoint than with completely online financial systems. This older demographic makes up a significant percentage of the unbanked population.
Consequently, the low uptake of digital financial services in Nigeria means that people may be missing opportunities to participate in the economy and improve prosperity. Nigeria’s financial inclusion rates have also stagnated since 2014; only 40% of adults have a formal bank account.
Perhaps this is what still keeps traditional banking systems more relevant than ever. A physical touchpoint that works to improve customer experience more humanely and provide the much-needed assurance of, ‘we will not run away with your money’.
Another major challenge that has hindered the rapid adoption of digital banks is financial literacy. Despite the overall significantly decent literacy rates in Sub-Saharan Africa – around 65%, the majority lack digital financial literacy. The fast-paced growth of the global financial sector has made it pertinent that people are educated on how to use digital channels for a convenient banking experience. But as much as digital banks may try to explain some of these technical concepts, most end up incomprehensible. And with no physical touchpoint of customer service to fall back to, they are more likely to lose customers.
Financial literacy is very essential to the human development of any nation and must be incorporated not just at the banking sector level, but from the early stages of the educational curriculum.
All in all, the possibilities and opportunities for growth are limitless. But for any growth to occur, digital banks must address underlying challenges that traditional banks are yet to tackle.