Financial inclusion on a continent where “Cash is King”

26 Jun 2017
According to a report from the African Development Bank (AfDB), Africa’s middle-class is flourishing, bringing endless opportunities for businesses on the continent. As a result, Africa is now home to at least nine of the fastest growing economies and host for the youngest people in the world. Yet, only 24% of adults have access to a bank account, showing that there is more room for economic growth.
 
To enable the continent to reach the golden state of economic stability, organisations such as the World Bank and the Alliance for Financial Inclusion (AFI) have been working on many financial inclusion initiatives to broaden access to financial services for unbanked Africans. These initiatives have been set-up to encourage savings, investment, entrepreneurship and enable social mobility by allowing more people to invest in themselves and their families.
 
In the past decade, technology has played a strong role in equipping the unbanked population with access to financial services through mobile money and mobile banking. With these tools now available to most African countries, there are still some unresolved issues setting back the progress that has been made.      
 
“Cash is King”
 
With 94 percent of consumer payments conducted in cash, it is clear that cash is king in both rural and urban parts of Africa. Alix Murphy, Senior Mobile Analyst at WorldRemit says that “ Africa's cash economy is exacerbated by the majority of the unbanked population who rely on remittances from overseas, as “90% is sent via offline channels to be collected as cash.”  
 
Murphy explains that “cash is a threat to financial inclusion because users have to store it away or keep it on their person. And when it comes to larger sums, cash does not provide a very flexible, mobile or safe way to carry out financial transactions. Yet, this lack of trust prohibits progress for these communities, as cash is a non-traceable payment method that can’t be utilised to secure loans and access other financial vehicles.”
 
“In reality, mobile money is incredibly safe for users as a record of every transaction and account balance is stored on the system which prevents funds from being lost even if the phone or SIM card is. And because a mobile money account is registered to the user and only accessible with their own secure pin code, it’s much harder for fraudsters to get hold of funds or use someone else’s account”, Murphy adds.
 
Breaking limitations for Mobile Money
The growth of mobile money on the African continent is undeniable. According to a report from the World Bank, 12% of adults in the region now have a mobile money account compared to just 2% for the rest of the world. In Kenya alone, ownership is at 58%, where more than half of adults who pay utility bills use a mobile phone to do so. In some countries like Cote d’Ivoire, Somalia, Tanzania, Uganda, and Zimbabwe, more adults have a mobile money account than a current account.
As a result we have seen a rise in the number of mobile money suppliers who are providing their services as a complementary or alternative option to traditional banking services. Proving mobile money’s ability to provide safe, secure, and affordable financial services, which is an extraordinary achievement on its own.
 
Alix Murphy of WorldRemit agrees, adding that “these days, mobile money providers are moving far ahead of banks in finding innovative ways to serve unbanked customers with much needed financial services beyond sending and receiving money. For example, MTN launched MoKash, a service which allows unbanked customers in Uganda and Zambia to save money and take out small loans using their MTN Mobile Money account. Econet in Zimbabwe offers farmers a way to insure their crops against drought or failure using EcoFarmer, a service which lets them pay a tiny amount each month through their EcoCash mobile money account. These and other similar services are helping millions of people to manage their financial lives more effectively and play a role in the formal financial sector.”
 
Network Interoperability
To further ensure economic growth, businesses need the ability to scale their services. However, the level of market fragmentation is having an impact on user adoption and inhibiting growth as services remain confined to a domestic market.
 
 
Battling the issue of interoperability, Dare Okoudjou, the founder and CEO of MFS Africa, states that “with only two or more networks available in Sub-Saharan Africa, users aren’t able to send money to another person on a different network in their country, nor to a person in another country. Furthermore, service providers such as insurers, lenders and merchants have to deal with each and every mobile money operator to scale services across the market. As a result, creating a ‘network effect’ is essential. Mobile money needs to move from a fragmented landscape of closed, proprietary systems to an open, consolidated one to meet the needs of consumers, businesses and regulators”.
 
As a result, the issue of interoperability is the first problem that their hub, “MFS Hub” was created to solve. They connect these local schemes to each other to increase the utility for each participant through the ‘network effect.
 
ID verification
 
Speaking to Chris Low from Letshego, he says “there are many things that could be done to advance financial inclusion, however, the main one is having Anti-Money Laundering (AML) & Know Your Customer (KYC) systems in place. Although a number of telecommunication ministries and regulators have introduced these systems to enable users to open mobile accounts and wallets, it is important that there is collaboration between financial service regulators and telecom operators. They need to accept that the current KYC process is not robust enough, as well as ensure it is relevant to the economic sectors that companies operate in.
 
Given that most of the transactions or loans issued via mobile money are very small, it is unlikely that they would be for money laundering or illegal purposes. Therefore, through an open approach to disclosure, we believe there are plenty of opportunities that will arise in that space. Other areas will include capital adequacy, liquidity rules and reserve requirements that are enabling and that, in turn, will accelerate financial inclusion.”
 
“On the other side, there is national identity, where ID verification is used to verify the consumer’s identity. In India for example, national ID cards are being used to enable them to identify their citizens which support KYC issues. This is often the first hurdle to having access to financial services”.
 
As mobile money continues to play a strong role in financial inclusion in  Africa, ID verification starts to become the one thing that can open many doors for key organisations.
 
Parinda Kularatne, Head of Product at an ID verification software provider, Selified, says, “ID verification is a regulatory demand. Therefore, government & industry regulations (such as AML, KYC) have placed the responsibility on businesses to make sure that their customers aren't criminals or terrorists.
 
Identity verification is at the heart of this process and getting this wrong can lead to heavy losses and large fines. Yet, most financial institutions are still using outdated manual processes that are not only costly but also laborious for all parties involved.
 
By applying technologies like biometrics, machine learning and AI, this process can be automated. For example at Selfied, verifying an identity is as simple as taking a selfie. Our automated verification service verifies the person facially, verifies their picture ID and proof of address documents and other third party databases, providing an instant response.”
 
Looking at Africa's fight against financial inclusion, building consumers’ confidence to use mobile money and become accustomed to banking online is the main challenge that is persistent throughout the continent. Even though consumers no longer need to rely on the availability of bank branches and cash for their day to day lives, the use of cash has proven to be a major hurdle, especially in rural parts of Africa. However, this particular issue will be demolished as we see more and more success stories through the growth of mobile money. Therefore, the continent must break down the market fragmentation that is impacting user adaptation and opening up domestic networks. With the right KYC and identity verification put in place, Africa is on the way to fulfil its financial inclusion dreams in no time.