By Osaze Omo-Ojo
Payment systems consist of the process, people, methods, technologies, rules, instruments and practices. Broadly speaking, there are two types of payment systems; traditional and modern. Traditional payment systems involve documentation credits (letters of credit) and negotiable instruments (cheques). The arrival of computers, electronic means of communication, and mobile devices gave rise to modern payment systems which utilise cash substitutes instead. They consist of internet banking, debit and credit cards, electronic funds transfer, e-commerce payment systems, as well as direct credits and debits.
Payment systems in Africa
Card Infrastructure and POS Payment Systems
Card transactions are one of the most popular forms of electronic payments. However, this cannot be exemplified by Africa. According to a 2018 world cash report published by CashEssentials, cards were not in extensive use across Africa. In all the African countries, cards per capita fell short of the 1.8 global average per capita. Majority of the countries showed a positive trend except Mozambique. On the receiving end, the card infrastructure also lags, with only 40-70 POS terminals for every 100,000 individuals of most of the African countries.
Most countries had depicted a positive growth during a course of five years except Nigeria. In December 2017, the Nigerian banking system had roughly 84.37 million active cards, which translates to 2% of POS terminals usage on a daily basis. Consequently, the low availability of POS terminals and cards resulted in a low number of credit and debit cards per capita. The figure below illustrates this phenomenon.
African banking is divided into two segments – Sub-Saharan Africa and North Africa. A survey conducted by Statista for the period 2012-2017, and which also included a forecast for 2022, disclosed how many adults owned a bank account, and speculated a rise by 2022, of 456 million adults being bank accounts holders.
Similarly, a map released by the World Bank in 2017, showed countries where less than 15% of the population had a bank account. According to the map, only 3.30% of the population of the Central African Republic held a bank account.
The Unbanked Continent
We could attribute the strained African banking system to any one of these factors: low income, trust issues, political wavering, weak judicial system, absence of financial literacy, small size of national markets, complexity of immediate payment service, Mobile POS being more affordable than traditional POS systems, Micro, small and medium Entrepreneurs (MSMEs) not being able to afford the opening and maintenance of a bank account.
The ‘Onboarding’ Problem
World Wide Worx CEO and ICT analyst Arthur Goldstuck claims financial success is determined by information and communication. Furthermore, banking apps do not increase access but still require the initial opening of an account to be carried out in a branch. One may argue the case for digital banking in Nigeria. However, these are still plagued by most of the constraints of the Brick & Mortar banks. Many Africans battle with the transportation costs of visiting a bank for this onboarding procedure. On the other hand FNB Easy CEO Pieter Woodhatch asserts that many macro-economic factors may determine whether owning a bank account would be feasible to African individuals.
This would translate to seasonal workers neglecting their bank accounts in the months where they have reduced income. The remainder of the clients generally live in a curtained economy which is cash-driven till now.
The rise in usage of mobile money accounts, mPOS and Fintech solutions jeopardizes traditional bank accounts and services.
mPOS and Mobile Money
Africa is known as the mobile continent for a reason. The World Bank asserts that the mobile money market is advancing in developing countries particularly. With only 2% of adults having a mobile money account worldwide, 12% of Sub Saharan adults have a mobile money account, half of these individuals have no other account. The countries showcasing the highest number of people with a mobile money account are also the ones who have a scarcity of commercial bank branches. For them, the ability to transfer money to a mobile device is revolutionary as traditional fund transfer may pose some security risks. As a result, several international payment brands, like Paypal, have also begun their extension to these regions.
It can be seen how more than 60% of people, over the age of 15 in Kenya are using mobile phones to receive money. Mobile Point of Sales have been a notable disruptor to the traditional bank payment systems in Africa, owing to the fact that they are relatively affordable compared to traditional POS systems available and consist of more consumer-friendly innovations. The Juniper report published in 2018 showed that currently, 1.7 million mPOS terminals were in use across Middle East and Africa. This number was expected to increase to 4.7 million by 2023, which is a 176% growth. Nigeria places fees on certain amounts of cash recalls, as a way to encourage citizens to make cashless payments. However, the implementation has had a number of challenges along the way.
A continent with an astounding 66% of unbanked, sub-Saharan population, has witnessed a notable increase in Fintech startups during the past few years. The end of 2017 saw a rise in nearly 300 Fintech startups across Africa. Fintech solutions have facilitated easier payments. Majority of the traditional banks are situated in commercial areas and cities, which makes it cumbersome for people in the remote areas to access them. The loss risks attached to cash and the cost of transportation increases affordability for the majority of the unbanked. All these issues have been eliminated with the help of Fintech solutions utilizing smartphones. The driving forces behind the success of Fintech solutions are listed below:
*Less regulations and strong competition
*Filling the gap between monetary services and people
*More Africans linked to the internet than to bank accounts
*Easy and quick payment
Solutions that are specially related to or are a result of mobile phone penetration will see greater growth as well as economic. This has brought about some notable partnerships with mobile payment companies and credit cards. Conclusively, Africa’s journey in the innovation of payments is and will continue to gain more momentum in the coming years.
*Omo-Ojo is an Intelligent Systems Engineer.