The COVID-19 pandemic, in spite of its debilitating effects, encouraged financial inclusion especially in emerging markets such as Africa, assisting to increase digital payments. In this article, CHINWE UZOHO, Regional Managing Director, West and Central Africa at Network International, a leading enabler of digital commerce across the Middle East and Africa that provides a full suite of technology-enabled payments solutions to merchants and financial institutions of all types and sizes, assesses how digital payments is emerging as a key driving force in Africa’s post Covid recovery.
As Africa’s economies set out on the road to post-COVID recovery, the ever-growing adoption of digital payments is emerging as a key driving force, expanding financial inclusion and potentially expediting cross-border trade. African governments have introduced incentives and reforms promoting cashless transactions and built facilitating infrastructure.
Despite this positive progress, more remains to be done to establish mobile money as an engine for economic growth across the continent, with a much-heralded pan-African free trade agreement backed by an instant payment initiative underlining the potential for digital transactions to play a key role in bolstering Africa’s financial fortunes.
The cash-to-digital transition in Africa had been growing at pace, albeit from a low base, before the pandemic struck, helping to address a number of the continent’s development challenges. These include millions of unbanked citizens and bureaucratic obstacles to cross-border trade, particularly for informal traders, a key economic community. COVID-19 has expedited the adoption of mobile money, amid concerns that the use of cash might spread the virus and lockdown restrictions boosting e-commerce.
According to the mobile network operators’ industry body the GSMA, the value of digital transactions in sub-Saharan Africa in 2020, the height of the pandemic, was $495 billion, up nearly a quarter on the previous year. In 2021, the figure grew to just over $700 billion, accounting for about 70 per cent of global transaction values, which amounted to more than $1 trillion for the first time.
A recent report by the World Bank on how COVID-19 has driven a surge in digital payments points out that 33 per cent of adults in the region now have a mobile money account—a share three times larger than the 10 per cent global average. The report also revealed the changing nature of cashless transactions: originally used as a means to send remittances, last year 3 out of 4 mobile account owners in Africa made or received at least one payment that was not person-to-person.
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Indeed, a survey by Statista in 2021 showed 84 per cent of internet users in Kenya were using cell phones to make payments, a much higher adoption rate than in Europe. The corresponding figure in Nigeria was 60 per cent. The two countries are very much leading the African field, with others significantly behind because of less developed digital payments infrastructure, low income and education levels and entrenched preferences for the use of cash.
Notwithstanding these differences, the recent accelerated growth in digital payments across the continent has done much to boost financial inclusion. The World Bank report said “the spread of mobile money accounts has created new opportunities to better serve women, poor people, and other groups who traditionally have been excluded from the formal financial system”.
Yet as COVID-19 imposed itself on the continent, a number of African governments sought to encourage their citizens to turn to mobile money by waiving transaction fees. Such proactiveness reflects a general willingness to create an enabling environment for digital transactions, not least because the continent’s youthful population is keen to embrace them. Indeed, in its 2021 assessment of the regulatory environments worldwide, the GSMA gave most sub-Saharan countries high overall index scores (over 70 out of 100), based on indicators such as consumer protection, Know Your Customer (KYC) requirements , infrastructure and investment environment, according to Quartz Africa.
But the business publication said the index also highlighted concerns. For example, Kenya, Côte d’Ivoire, and Senegal did not do so well on KYC, while west Africa’s big four mobile money markets, Côte d’Ivoire, Senegal, Mali, and Burkina Faso, fell short on consumer protection. And while Nigeria excelled on KYC and consumer protection, it was behind Ghana, Liberia, and South Africa on the enabling environment for infrastructure and investment.
At the same time, some observers have warned of the risks of over-regulation. The Africa payments consultancy, AfricaNenda, has argued that certain measures inhibit the expansion of mobile money. It suggests that taxation on digital transactions could reverse their adoption and restrictions on the flow of data across borders – in the form of data localisation laws – might increase costs for providers and consumers, notwithstanding the legitimacy of national data privacy concerns.
While there is clearly room for improvement on the regulatory front, a big incentive for governments to get the balance right on reforms is the prospect of being able to boost trade with neighbouring countries through the ambitious African Continental Free Trade Area (AfCFTA). It will aim to create to a powerful economic bloc, the largest free trade area since the creation of the World Trade Organisation. The World Economic Forum says the initiative could serve as a framework for the region’s economic recovery, possibly increasing the volume of intra-Africa trade by more than 81 per cent by 2035. Moreover, the World Bank believes it has the potential to lift tens of millions of people out of extreme poverty.
Underpinning and facilitating AfCFTA is a new pan-African payment settlement system PAPSS which overcomes some of the legal and regulatory obstacles that hamper trade. In essence, PAPSS means traders no longer have to convert local currencies into a third currency, such as the dollar or the euro, which is time-consuming and expensive. According to the International Institute for Sustainable Development (IISD), the system could slash transaction times to a matter of seconds, overcoming one of the main obstacles to intra-African e-commerce, services and goods trade growth. “The system will revamp the payments infrastructure,” said the IISS, pointing out that “consumers will be able to make payments in one local currency while sellers are paid in their own currency”.
It is all very promising but to achieve its digital economy potential, Africa must focus on addressing more fundamental problems: internet penetration and usage. A report by the GSMA late last year noted that just 28 per cent of Sub-Saharan citizens were connected to the internet while 1 in 5 live in areas without mobile broadband. And yet sizeable numbers of those with access to the latter are not using the internet. Adoption barriers, says the industry body, include such factors as affordability of handsets and data and a lack of literacy and digital skills. The World Bank report on the COVID-19 – driven surge in digital payments noted that one-third of mobile money account holders in Sub- Saharan Africa said they “could not use their mobile money account without help from a family member or an agent”.
African governments, then, face significant challenges if they want digital payments to really fuel economic recovery. As they work to boost low internet connectivity, they must enhance the enabling environment for mobile money operators and incentivise usage by lowering costs for consumers as well as deal with gaps in their ability to use the internet. It’s a big task, but the signs are that many governments are up to the task – not least because they recognise that cashless transactions are key to widening financial inclusion and, in so doing, bolstering economic activity.
