Is technology the key disruptor of financial services across Africa?
In many markets on the African continent, significant growth in the number and breadth of financial services providers can be seen. This is in terms of the number of non-bank financial services providers who have reached critical mass in terms of size and scale, as well as the number of “non-traditional banks” (ie non-bank financial services providers) who have climbed the regulatory hierarchy and become deposit-taking banks (for example, Trustco in Namibia, and before them Capitec in South Africa). A number of critical factors have contributed to this trend including technology and innovation changing the shape of asset origination, as well as (especially outside South Africa) new channels of funding being available. Significant hype has been generated globally regarding “Fintech” and the new asset class has been grabbing attention from a variety of investor groups, from traditional tech investors on the West Coast of the US, to “bricks and mortar” banks, like Santander which has just announced a new financial inclusion fund, called InnoVentures, to development-types fund with “dual bottom lines”. Africa, as a continent with the lowest penetration of traditional banking services, and the lowest GDP per capital of any continent in the world (lower incomes imply smaller transactions sizes and the greatest scaling benefits) is perhaps ideally suited as a breeding ground for Fintech.
To date mobile money has been the most high profile innovation, with companies such as M-Pesa in Kenya having successfully created mobile money ecosystems. The markets where mobile money has been most successful have been those where the regulators have permitted mobile network operators (“MNOs”) the most flexibility to operate, for example Kenya and Tanzania have mobile money penetration of 58% and 34% respectively (source: CGAP), significantly higher than Nigeria where the regulatory environment has restricted the scope of involvement by MNOs. Companies such as Jumo World and Trustco Mobile have gone a step further and have used the mobile ecosystem to provide more complex products – micro loans and micro insurance respectively.
To date mobile money has been the most high profile innovation, with companies such as M-Pesa in Kenya having successfully created mobile money ecosystems.
However, it is not just technology which is disrupting financial services, but also innovative ways of conducting business and new routes to market. Twelve months ago, First Allied Savings & Loans, one of the largest savings and loans institutions in Ghana, initiated an agency business model branded “AlliedAgent”. Each “AlliedAgent” is a kiosk in a corner shop or fuel station. So far, First Allied has 150 agents; in comparison First Allied has 25 branches, so the agency model has multiplied the total number of “outlets” their customers can utilise by a factor of seven. All agents are carefully screened prior to appointment. When compared with an ATM, each agent provides a much broader range of services, and has a significantly lower fixed cost. The range of services provided by each AlliedAgent, include: deposits and withdrawals, instant money transfers, airtime top-ups, bill payment, Ezwich transactions, mini statement and account opening. Similarly, RenMoney, a leading Nigerian inclusive lender, is launching a new education loan product, specifically tailored to fund school fees payments by their customers. RenMoney, like many unsecured lenders in Africa, is aware that a significant part of its customer base use their loans for purposes of school fees, such is the importance placed on education by parents across the continent. The tailored school fees product will go one step further: the loans will be repayable by parents but will be disbursed directly to the schools who have signed up to the scheme. The overall initiative has a number of benefits including: (i) schools will direct parents who need credit to RenMoney, (ii) it will provide an additional channel for collections, and (iii) the designated use of the proceeds is expected to help RenMoney raise the additional funding for this purpose. Replication of successful business models from outside Africa is also an increasing theme. For example merchant credit advances – the lending of money to small businesses secured against credit card receivables – has become a major asset class in the US.
Innovation on the asset side of the balance sheet has been supported by developments relevant to the funding side of the balance sheet. Outside South Africa, the domestic institutional markets are significantly shallower. The last five years have witnessed the parallel growth of (1) hedging markets providing multi-year currency swaps across a range of African currencies; and (2) the growth of financial inclusion funds as an asset class. Together these developments have permitted local currency funding from the institutional market, whereas in the past borrowers have funded themselves with deposits (where regulations permit), local banks (appetite permitting) and retained earnings. The financial inclusion funds as an asset class is tiny by global standards, perhaps $10bn managed by 50-60 funds targeting non-bank financial institutions and non-traditional banks in emerging and frontier markets. Of this amount, around $2bn is earmarked for Africa: not insignificant given most of the investee institutions have balance sheets smaller than $100m. Such funds have traditionally been referred to as “Micro Finance” funds, but their mandates are much broader than investments which are typically associated which this label. A final disrupting force is M&A, both horizontally across different segments and cross-border. Horizontal consolidation provides for a number of critical benefits, diversification of asset exposure and funding sources, and shared channels to be leveraged across different products. Successful examples of such consolidation include Trustco Group’s acquisition of Fides Bank in Namibia in 2014 and Pan Africa Building Society’s acquisition of the Industrial Credit Company in Zambia in 2011. Letshego, one of the largest pan-African consumer finance operations, has been particularly active on the cross-border M&A trail, having acquired Micro Africa in Kenya in 2011 and FBN Microfinance Bank in Nigeria in 2016.