The African wave of digital transformation of non-banking financial institutions
A wave of innovation in financial services is currently sweeping Sub-Saharan Africa. This innovation is fueled by a new generation of fintech firms, investments in digitalisation by existing banks, and new rules in the wake of the COVID-19 pandemic. In fact, with some of the fastest-growing economies and most vibrant digital hubs in the world, Africa is positioned to become a global financial powerhouse thanks to a perfect storm of demographics, technology, and opportunity. Fintech companies in Africa have received an influx of capital, with names like TradeDepot, Chipper Cash, OPay, and Wave all receiving funding rounds totalling more than $100 million in the past year.
At Sibos 2021, Sim Tshabalala, CEO of Standard Bank, stated that the demographics of the African continent are the finest in the world since it is getting younger, healthier, wealthier, and more productive. To this, we must add the essential component of faster digitisation, which has happened not just as a by-product of the Covid-19 pandemic but also as a result of Africans becoming more connected via mobile phones.
Increasing financial inclusion quickly
Early in 2021, a rush of digital innovation in the African financial sector fueled services and applications with the potential to disrupt the banking industry seriously. This innovation reacted to the pandemic’s firm grasp on the continent. That digital tsunami has increased over the past year, unleashing a deluge of innovation and transformation.
Millions of digitally connected Africans who are still officially unbanked but are still engaged in the economy have opportunities thanks to the digital solutions designed for touchless and remote banking that banks, non-banking financial institutions like credit unions, Saccos, and other Fintech providers have been announcing across the continent.
Additionally, investments in fintech startups imply that the continent will continue to generate new technologies, resulting in a rise in the number of creative services. According to research from Briter Bridges, 62% of the US$4.9 billion in the estimated funding for 2021 went to fintech companies.
The report says, “Financial technology companies continue to capture the largest share of funding on the continent, almost two-thirds of total funding into technology companies across Africa.” The Partech Africa Report also states that the primary investment industry in the subcontinent aims to increase access to financial services for a large population, including the unbanked. Organisations prioritising mobile and digital technologies move more quickly, are more responsive, and put customers first than conventional banks.
Digital lending in Africa
Africa has passed the litmus test in proving that they are more open and adept at embracing technology and finance together through the widespread acceptance of digital payments and remittance methods like M-Pesa, Paystack, Rave, Pesapal, etc.
But to prove that digitalisation truly impacts the economy, we need to consider the lending sector. Loans increase an economy’s overall money supply and competition. More loan demand benefits the economy since it encourages consumer spending on durable products, which boosts money flow within the country’s economy.
The digital lending market has risen significantly with simple options like Buy Now, Pay Later (BNPL). Artificial intelligence-powered new lenders have enabled new models of small-ticket loans to retail and SME/MSME segments. Another alternative lending sector is P2P lending. Kenya and South Africa have the largest peer-to-peer (P2P) lending markets. Fintechs can quickly onboard users in the lending industry by providing streamlined customer experiences and unsecured algorithm-backed loans that do not require collateral or face-to-face talks.
This has driven away business from traditional lenders, whose services are significantly cumbersome and challenging to obtain. But one challenge that the digital lending space in Africa faces is fragmentation in the loan market. Lenders frequently handle geographic variation linearly rather than as a marketplace. Despite increased lending to the small and microfinance industries in Sub-Saharan Africa, they faced a US$ 331 billion funding shortfall in 2018.
Microfinance institutions (MFIs) also lend to small businesses, although the system is fragmented despite its size.
In Nigeria, fintech lending is rapidly growing. The country’s fintech can use payment data to more readily identify lending risk and use cell phones as distribution platforms. Fintech startups like Carbon and Renmoney have used alternative credit scoring to give individuals quick, unsecured, short-term loans. Other fintech, such as Migo, provide unsecured working capital loans to small and medium-sized businesses with minimum documentation. Paystack, an online payment service, has developed a plug-and-play solution that allows retailers to receive payments within minutes of registering, and over 25,000 merchants have signed up.
Financial inclusion and better access to loans would not have been possible without technological innovation. Skaleet, originally TagPay, began in 2008 by developing Near Sound Data Transfer (NSDT) software, which enables financial institutions to authenticate individuals to process payments remotely. This enabled banks and FIs to make critical digitisation movements to compete with telecommunications companies. Since then, they have diversified in 22 African countries.
Credit unions and Saccos are helping nurture an inclusive lending ecosystem
NBFCs like credit unions and Saccos (Savings And Credit Cooperative Organisations) are increasingly providing better access to loans to marginalised community members and small businesses. Statista reports that 90% of the world’s credit unions are located in Africa and Asia. The Saccos and Credit unions are using the latest digital innovations to serve their members better, leading to better financial inclusion for the unbanked and underbanked population and MSMEs.
Kenyan company Kwara, which aims to help credit unions in east African countries transition to digital platforms, raised $4 million in a seed round from Breega and the SoftBank vision fund in December 2021, illustrating the level of interest and possibilities in the industry. David Mategwa, the Kenya Police Sacco (KPS) National Chairman, is optimistic that technological innovation will give underserved people access to a full suite of financial services that would have otherwise been impossible.
He also expects technological advancements to encourage more Africans staying overseas to join Saccos back home and participate in the property investment sector. He further stated that technology has made Saccos more appealing to individuals who previously utilised commercial banks to mobilise assets for investment because the former gives better rates. Xend Finance, a Nigerian fintech startup, is also introducing decentralized finance (DeFi) to credit unions to improve operations and deliver greater yields.
What it all comes Down To
With all the disruption that has been witnessed over the past 2-3 years in in the whole concept of how different financial services are consumed, it has been extremely tough and challenging for all the novice small sized lenders, insurers, and other institutions offering different savings and investments products across the African region with all its different forms. Mammoth sized banks are tasting the heat from all the new innovative Fintechs that have been popping up and gaining momentum like crazy, let alone the much smaller sized FIs that additionally lack the necessary know how, technical teams, and strategic savinness to even start putting a roadmap as to what digital really could mean to them. If it were as simple as hiring an IT guy or going to the first cheapest SW provider that would install in a mobile app of some sort that looks cool enough, then I guess we would not be writing this article in the first place. The issue is that although, with all the above being said, and will all the obvious consent from a majority of African FIs realize and acknowledge that it is not longer an option, and that they will have to adopt a digital first strategy and how that in itself directly impacts their operational costs’ efficiency, they have little in the first place to decide on what criteria do they actually do select their optimal technology provider.
Today, with the abundance of technology providers from the big international players to some of the very subtle and local providers, to many FIs, they simplify it down to a price selection. However, who has the ‘real’ referenceability, the expertise, the local market know how, the regulatory aspects of the technology, and most importantly, the business culture and mindset that would plicate a true strategic partnership that most of the FIs should be seeking, is yet to be utlized in their evaluation process. A long way goes into educating and creating the necessary awareness for a lot of these FIs to have a clear selection criteria to what indeed would suit their business requirements in that particular market.
With VERICASH, multiple initiatives have went into creating various hubs across multiple markets to empower and enable FIs, especially lenders of all kinds, from microfinance banks and institutions, to credit unions, and other SACCOs, utilizing its Fintech Enbalement Platform with other regional technology partners, to actually enable a quick to market digital transformation that would help a lot of these struggling FIs to adopt something light, quick to implement, yet very disruptive in the nature of its digital financial services it delivers to their various customer segments. Furthermore, it provides the flexibility of evolving their core business products to stack up on other financial added value services through simple configuration steps and allowing to help these FIs grow significantly in short time frames. A critical point of engagement is based on a long term continuous relationship where exchange of global expertise and best practices are delivered with their customers to ensure constant growth and an active customer base in their new adopted platforms.
Conclusion
It can be concluded that the African wave of digital transformation of non-banking financial institutions is radicalising the country by making financial services accessible to the unbanked. Thus, the financial future is a welcoming and inclusive ecosystem that benefits all residents equally. Thanks to fintech companies like Vericash, financial institutions can offer digitally enabled services using their platform. Its goal is to provide people with a wide range of solutions, including services like mobile wallets, online banking, international money transfers, and others. The current imperative is for banks to undergo a full digital transformation, enabling customers to access financial services via any channel instantly. Vericash paves the way for that.
About CIT Vericash
CIT VERICASH is a division of CIT GLOBAL, an international leading provider of innovative eCommerce and mCommerce software solutions and services with solid expertise spanning 25 years, since its establishment in Toronto, Canada in 1993. By applying CIT Global’s dedicated centers of excellence and its specialized leading products, in cooperation with its strategic partners, the company has delivered innovative and award-winning solutions to its clients in more than 48 countries, serving leading brands from North America, Europe, Asia Pacific, the Middle East, and Africa.