The majority of digital banking transactions in Nigeria and Africa will continue to go through the Unstructured Supplementary Service Data (USSD) channel on the back of the slow adoption of smartphones.
Digital banking is being tipped to outgrow the use of cash in the near future as more online payment channels become user friendly, and smartphones become even more affordable. But as it stands, feature phones continue to dominate the mobile phone market leaving millions of people with fewer payment channel options.
According to the IDC, feature phones accounted for 56.0 percent share of all devices shipped in the first quarter of 2020 in Nigeria. The feature phones are preferred as secondary phones because of long-lasting batteries, and network access in rural areas where 4G is unavailable.
Feature phones are a midway point between smartphones and basic phones. Unlike smartphones, they usually do not accommodate third-party apps, which means banking applications are near impossible on feature phones since they mostly do not come pre-installed.
The latest GSMA report showed that while the number of unique mobile connections in sub-Saharan Africa reached 477 million in 2019, representing 45 percent of the population, internet subscribers were at 272 million (26%). Smartphone penetration at 44 percent of mobile connections means only 209.9 million people own a smartphone in the region. That is way below the global average at 64 percent at the end of 2019. It also means that the number of smartphone owners in all of sub-Saharan Africa is a little above the population of Nigeria alone at about 200 million people. What that means for financial institutions and fintech companies, is that the total addressable market for digital payment channels that rely heavily on the use of smartphones is less than 210 million people in sub-Saharan Africa.
It gets even lower when it comes down to Nigeria, Africa’s most populous country. Less than 30 million Nigerians own a smartphone and the majority of those who do live in urban centres and can afford to buy one.
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Reports have also shown that not everyone who owns a smartphone gets to use it for digital transactions. For example, insight from DataProt found that in the period between October 2019 to February 2020, only 79 percent of smartphone owners in the US have used their device for online purchases. In Nigeria, the volume of mobile and POS transactions dropped in the month of August 2020, according to the Nigerian Interbank Settlement System (NIBSS) because of the drop in disposable income and difficulties in carrying out transactions caused by poor infrastructure.
Niyi Toluwalope, CEO of eTranzact told BusinessDay that the mobile banking trends in Nigeria have been evolving and changes over time with new development. Prior to the creation of USSD in 2010, cards issued by foreign card companies like Mastercard and Visa were the most payment channels. Then came the local cards schemes like Verve by Interswitch. After that, mobile phones and smartphones became relatively affordable, hence mobile applications became a predominant channel. Practically, all the banks in Nigeria own at least one mobile application that speaks to one form or the other.
“We have also seen the USSD. That has taken up a lot of focus because of its ease of use and it is phone agnostic, you don’t have to have a sophisticated phone to be able to use a USSD service. You just need to have a phone that has connectivity with the telco and has airtime balance on it. Every bank has a *# something for a specific service. Even merchants are now having dedicated streams for their service. A DStv could be *389*9*smartcardnumber# that calls up my account balance and I can do a debit into my bank account and make a payment,” Toluwalope said.
The GSMA projects that the number of smartphone users in Nigeria would surge to 154 million by 2025 on the back of continuous falling prices.
“The average selling price of smartphones has reduced significantly in recent years, with the influx of sub-$100 devices from Chinese brands such as Tecno and Infinix, and the growing momentum behind the KaiOS-powered smart feature phones. However, many consumers are still unable to afford the one-off upfront cost of purchasing a device,” the report noted.
The GSMA hopes that with smartphone financing gaining traction in some African countries, this model would soon translate to more people owning their smartphone in the very near future. Should be the case, mobile banking applications are likely to also gain traction. But Toluwalope still thinks the race would be won by USSD.
“I think the USSD is winning the battle because of its ease of use, adaptability, and anybody with any kind of phone can access it. We are seeing a lot of growth; many bill payments are now going the USSD route, fund transfers, and airtime purchases. In fact, more airtime purchases are going via the *389# than opening a mobile phone and doing a transaction,” he said.
The challenges facing smartphone penetration in Nigeria and sub-Saharan would likely not be solved by just improving financing models. Addressing affordability would require the removal or reduction of mobile-specific taxes and fees that can stimulate the economy through greater mobile penetration, investment, and tax revenues.
Toluwalope adds that mobile applications that are well built would give USSD good competition any day.
“If it is well built, user friendly, and has good graphics, people want to use it all the time. That is a winning strategy for mobile-application focused service. You can easily compete with a USSD once you can achieve that because that is the attraction of a USSD. in three-four clicks on a USSD you are done. There is going to be some form of competition between the mobile application and the USSD overtime. However, I think the USSD might just trump that because it is quite popular among the younger demographic of Nigeria,” he said.
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