Fintech: An Instrument for Promoting Financial Inclusion in Africa

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Financial technology “Fintech” is the technology and innovation that aims to compete with traditional financial systems in the delivery of financial services. It is an industry that uses technology to improve activities in matters of finance.

Financial technology has revolutionized the global financial sector and has, in many ways, fundamentally changed how we store, save, invest, transfer, and borrow money. With a foot in all these areas of opportunity for convenient financial services, fintech has developed products, both for financial service providers and consumers, aimed at improving the experience of all participants in this financial system.

FinTech 101: Introduction

FinTech is a catch-all term referring to the use of smartphones for mobile banking, investing, borrowing services, and cryptocurrency as a tool for making financial services more accessible to the general public.

FinTech simplifies financial transactions for consumers or businesses, making them more accessible and generally more affordable. From opening a savings account to receiving payments for a product or service or even investing in the world’s stock exchanges; these are some of the financial services that Fintech have tailored to make them available at the click of a button for everyone with an internet connection.

The term financial technology company “Fintech Company” describe entities dedicated to providing the full range of financial services usually offered by traditional banking but with the use of technology to modify, enhance, or automate financial services for businesses or consumers. It consists of both startups and established financial institutions and technology companies trying to replace or enhance the usage of financial services provided by existing financial companies.

While Fintech seems like a recent technological breakthrough, the basic concept has existed for some time. Early credit cards in the 1950s generally represent the first Fintech products available to the public, in that they eliminated the need for consumers to carry physical currency in their day-to-day lives. From there, it evolved to include bank mainframes and online stock trading services. In 1998, PayPal was founded, representing one of the first Fintech companies to operate primarily on the internet — a breakthrough that has been further revolutionized by mobile technology, social media, and data encryption.

Fintech in Africa

Over the years, Fintech has grown and changed in response to revolutions within the wider technology sector. This revolution has led to the mobile payment apps, blockchain networks, and social media-housed payment options we regularly use today.

Since the start of the tech boom in Africa, the financial sector has enjoyed plenty of hype. By the end of 2021, the interest in African Fintech start-ups exploded, with Fintech start-ups accounting for $3.3 billion which translates into two-thirds of all the investment raised by startups across the continent.

Fueled by investments, the African continent has embraced the Fintech revolution and continues to enjoy an extraordinarily high rate of growth across the African region.

Google recently announced that its Africa Investment Fund would invest up to $50 million in African growth-stage companies; thus making Fintech a significant driving force in the African economy, with $180 billion projected to contribute to the continent’s GDP by 2025.

According to 2021 data by Disrupt Africa, not only is the continent home to some 300 million users, there are 573 fintech startups in Africa across the different verticals of the industry- Paytech, Lendtech, Banktech, Insurtech, Blockchain, and Cryptocurrency.

But more than enabling millions of customers to connect and make digital payments, Fintech drives the African digital revolution in surprising ways. It offers a transformational solution for Africa’s banking sector in that it makes financial services more affordable, accessible, and profitable.

Financial Technology Partners, an investment banking firm focused exclusively on Fintech, said that the continent with its rapidly growing population, some of the fastest-growing economies, and an underdeveloped financial services ecosystem, presents an attractive opportunity for Fintechs.

Fintech Trends in Africa

Currently, approximately 57 per cent of Africa’s population does not have traditional bank accounts. In part as a result of this, credit- and debit-card penetration on the continent consistently hovers around 3 per cent, which is extremely low compared to 90 per cent in Europe, for instance.

But the emergence of fintech has changed the game and collaboration between banks and Fintech companies aim to mend this uneven circumstance to the benefit of all.

In place of cards, a vast array of different solutions is in circulation; with mobile money being the most popular method and widely used financial technology in Africa, and is now used across almost 40 African countries.

The widespread use of mobile phones and the internet have given rise to a new generation of financial services in Africa.

The younger element of the population has rapidly adopted the use of mobile financial wallets, with partnerships between telecommunications companies and banks set to encourage and increase the use of mobile payments. Relatively simple, text-based mobile phones have powered the spread of mobile money accounts, and smartphone technology is increasingly being used to make transactions through financial institutions.

Fintech companies encompass a broad landscape of businesses, generally around financial-oriented services, and products. Examples of Fintech-related businesses in Africa are Jumo, Opay, Yoco, Kuda Bank, PalmPay Limited, Flutterwave, MFS Africa, Interswitch, and PiggyVest among others.

Benefits for Africa

The importance of FinTech is largely based on the opportunities it offers both financial services users and providers.

Greater accessibility and time optimization: The move from cash payments to digital payments translates into an increase in the banking population since anyone with internet access can open an account and also improve efficiency by increasing the speed of payments and reducing the cost of disbursing and receiving them.

By providing access to a diverse range of financial products and services such as credit facilities for individuals and businesses, Fintech can boost aggregate expenditure, thereby improving gross domestic product levels.

Variety of services: Fintech cuts across different verticals of the industry, such that a whole range of services is offered, according to the needs of both financial service users and providers.

The provision of financial services through the use of technology also benefits the government by providing a platform to facilitate an increase in aggregate expenditure, which subsequently generates higher tax revenue from an increase in the volume of financial transactions.

Fintech can be used to enhance the security of payments and increase transparency, and thus reduce associated crime and corruption. For example, the Bank Verification Number was implemented by the Central Bank of Nigeria to increase security and protect bank customers from illegal transactions.

Disadvantages of Fintech

The provision of Fintech solutions comes with challenges.
A major one is the lack of technological infrastructure in Africa; e.g. unreliable mobile networks.

Lack of physical branches: This can be a disadvantage when there is a problem in the provision of the service since everything must be dealt with via email or social networks.

For many it is as easy as a swipe or a touch of a button on their smartphones, it, however, excludes a very large part of the population that does not have access to the Internet, and therefore, has difficulties becoming banked even with the existence of Fintech.

Lack of regulations: The Fintech innovations enabling African countries to transition from physical retail banking to online payments, remittances, and other services pose new challenges for regulators. On one hand, while innovators are moving at the speed of light to develop new customer propositions; regulators on the other hand are moving at a slow pace to issue guidelines to govern the space. It is a phenomenon that authorities around the world continue to study. Thus, there is the possibility of potential fraud in the absence of regulation.

While Africa’s financial technology payment space begins to see Fintech start-ups playing alongside global, established providers such as Visa, Mastercard, and Stripe, the next few years are likely to see increased movements across all Fintech verticals.

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