The Unbanked In Africa
The percentage of unbanked individuals in Africa varies by country and region, but overall, a significant portion of the population in Africa remains unbanked. According to a 2017 report by the World Bank, around 66% of adults in sub-Saharan Africa do not have a bank account. The number of unbanked individuals is particularly high in rural areas and among low-income populations. Many people in these areas do not have access to traditional banking services due to factors such as limited infrastructure, high transaction costs, and lack of documentation. However, the rise of mobile money and e-wallet platforms has enabled many people in Africa to access financial services for the first time.
According to a report by the GSMA, a trade association for mobile network operators, there were over 500 million active mobile money accounts in Africa as of December 2020. This represents a significant increase from previous years, driven in part by the COVID-19 pandemic, which has led to a shift towards digital payments and a greater demand for financial services that can be accessed remotely. The use of e-money platforms is particularly high in East Africa, where mobile money services such as M-Pesa have become ubiquitous. According to the GSMA report, over 80% of adults in Kenya and Tanzania use mobile money, and mobile money accounts for over 50% of all non-cash transactions in these countries.
What is E-Money
E-money, also known as electronic money, digital money, or virtual currency, refers to a form of currency that is stored electronically and can be used for online transactions or as a substitute for physical cash. E-money can be used to purchase goods and services online or through mobile devices, and can also be used to transfer money between individuals or businesses. E-money is typically issued and backed by a financial institution, such as a bank or e-wallet provider, and is stored in a digital account. E-money can be used for a variety of transactions, including online shopping, bill payments, and person-to-person transfers. E-money can also be converted into physical cash through various channels, such as automated teller machines (ATMs) or money transfer agents. E-money is typically designed to be secure, with built-in encryption and other security measures to protect against fraud and theft. E-money transactions are also subject to various regulatory frameworks, including anti-money laundering and know-your-customer regulations.
Popular E-money platforms in Africa include:
- M-Pesa: M-Pesa is a mobile money service that was launched in Kenya in 2007. It has since expanded to other countries in Africa and allows users to deposit, withdraw, transfer money, pay bills, and purchase goods and services using their mobile phones.
- Flutterwave: Flutterwave is a Nigerian fintech company that provides payment solutions for businesses and individuals. It allows businesses to accept payments from customers using various payment methods, including debit and credit cards, mobile money, and bank transfers.
- Paystack: Paystack is another Nigerian fintech company that provides payment solutions for businesses. It allows businesses to accept payments from customers using various payment methods, including debit and credit cards, bank transfers, and mobile money.
- Paga: Paga is a Nigerian mobile money platform that allows users to deposit, withdraw, transfer money, and pay bills using their mobile phones. It also offers services such as airtime top-up and cashless payments at select merchants.
- Ecocash: Ecocash is a mobile money platform that is widely used in Zimbabwe. It allows users to deposit, withdraw, transfer money, pay bills, and purchase goods and services using their mobile phones.
The largest benefit of E-money platforms in Africa is financial inclusion. E-money platforms have the potential to promote financial inclusion by providing a way for individuals and businesses to access financial services that they may not have been able to access otherwise. E-money platforms can reach remote and underserved areas that traditional banks may not have been able to serve, making it easier for people to save, borrow, and transact.
E-Money Challenges in Africa
The interoperability of the varied and regional E-money platforms in Africa pose a significant adoption problem throughout the continent.
Interoperability of e-money systems refers to the ability of different e-money platforms to seamlessly communicate and exchange transactions with each other, regardless of the platform used by the sender or the recipient. This is important for promoting financial inclusion and enabling individuals and businesses to transact across different platforms. Currently, interoperability of e-money systems in Africa is still in its early stages, and there are limited examples of successful implementations. However, there are efforts underway to promote interoperability and create a more integrated digital payments ecosystem across the continent.
For example, the African Digital Payments Initiative (ADPI) was launched in 2019 by the United Nations Economic Commission for Africa (UNECA) to promote the interoperability of digital payments systems across the continent. The ADPI aims to establish a regional framework for digital payments that will allow for seamless transactions across different platforms, providers, and borders. In addition, some individual countries have taken steps to promote interoperability within their own digital payments systems. For example, Ghana launched its Universal QR code system in 2020, which allows users to make payments across different e-money platforms using a single QR code.
Suitable Banking Partners
Many startup and even established E-money platforms have encountered difficulty finding suitable (and necessary) banking partners in Africa. The primary reason for this is that most banks view E-money platforms as competition, not valuable on-ramps for retail banking. Nevertheless, there are a select number of banks that have embraced partnerships with E-money platforms, including:
- Ecobank: Ecobank is a pan-African bank that has partnered with several e-money platforms in Africa, including M-Pesa in Kenya and Tigo Cash in Ghana. Ecobank provides a range of services to these platforms, including cash management, liquidity management, and foreign exchange services.
- Standard Bank: Standard Bank is a leading African bank that has partnered with several e-money platforms in Africa, including M-Pesa in Tanzania and Mozambique and EcoCash in Zimbabwe. Standard Bank provides a range of services to these platforms, including payment processing, cash management, and foreign exchange services.
- GTBank: GTBank is a Nigerian bank that has partnered with several e-money platforms in Nigeria, including Paga and Flutterwave. GTBank provides a range of services to these platforms, including payment processing, cash management, and foreign exchange services.
- Zenith Bank: Zenith Bank is a Nigerian bank that has partnered with several e-money platforms in Nigeria, including Quickteller and eTranzact. Zenith Bank provides a range of services to these platforms, including payment processing, cash management, and foreign exchange services.
Due to fiat currency instability, inflation, and in some cases hyperinflation have plagued many African nations at one time or another.
Inflation can have an impact on e-money platforms in several ways. E-money platforms are often used for digital transactions, and as such, they are subject to the same inflationary pressures as traditional currencies. Inflation can reduce the purchasing power of e-money, making it less valuable for consumers and businesses. However, e-money platforms can also be used as a tool to mitigate the impact of inflation. For example, in countries with high inflation rates, e-money platforms can provide an alternative to traditional currencies that may be subject to rapid devaluation. E-money platforms can allow users to store and transfer value in a more stable and secure way, which can help to protect against the effects of inflation. In addition, e-money platforms can provide benefits such as increased access to financial services and reduced transaction costs, which can be particularly important in countries with high inflation rates. E-money platforms can enable individuals and businesses to transact more efficiently and securely, which can help to support economic activity even in the face of inflationary pressures.
E-Money & Cryptocurrency
While cryptocurrency adoption rates in Africa rank among the lowest in the world, digital currencies are growing in popularity and stand to become a viable alternative to E-money platforms. According to a report by Chainalysis, a blockchain data analytics firm, Africa accounted for just 2% of global cryptocurrency activity in 2020. However, the report also noted that cryptocurrency adoption is growing rapidly in some African countries, particularly in Nigeria and South Africa.
In Nigeria, for example, cryptocurrency adoption has been driven in part by the country’s large and active youth population, who are attracted to the potential of cryptocurrencies to provide a way to transact outside of traditional banking channels. According to a survey by the blockchain research firm Arcane Research, Nigeria has the highest cryptocurrency adoption rate in the world, with 32% of Nigerians saying that they have used or owned cryptocurrencies in the past.
In South Africa, cryptocurrency adoption has also been growing rapidly, with a number of cryptocurrency exchanges and wallet providers operating in the country. According to a survey by the South African financial services provider Old Mutual, 38% of South Africans who invest in cryptocurrencies view them as a long-term investment.
Finally, the interoperability of E-money and cryptocurrency is in its infancy and there are limited examples of successful implementations. However, there is growing recognition of the potential benefits of interoperability for promoting financial inclusion and enabling individuals and businesses to transact more efficiently across different platforms. Some initiatives are underway to promote interoperability between cryptocurrency and e-money platforms in Africa. For example, the Stellar Development Foundation, a non-profit organization that supports the development of the Stellar blockchain network, has partnered with several organizations in Africa to facilitate cross-border payments using a combination of cryptocurrency and e-money. In addition, some cryptocurrency exchanges in Africa are working on integrating with e-money platforms to enable users to buy and sell cryptocurrencies using their e-money accounts. For example, in Nigeria, the cryptocurrency exchange Quidax has partnered with several e-money platforms, including Flutterwave and Paystack, to allow users to buy and sell cryptocurrencies using their mobile money accounts.
E-money platforms typically require a license to operate in Africa, as in most countries around the world. The specific requirements for obtaining a license may vary by country, but generally, e-money platforms must comply with financial regulations and obtain approval from relevant regulatory bodies. In many African countries, the central bank is the primary regulator of e-money platforms. Central banks typically require e-money platforms to meet certain requirements, such as having sufficient capital, implementing strong risk management systems, and complying with anti-money laundering and know-your-customer regulations. Moreover, given the lack of de-regulation in the mobile telephony industry, E-money platforms may also be subject to licensing and oversight by other government agencies, such as telecommunications regulators.
Notable national licensing standards include South Africa and Zimbabwe.
In South Africa, the licensing and regulation of e-money platforms are governed by the Financial Intelligence Centre Act (FICA) and the National Payment System Act (NPSA). To operate an e-money platform in South Africa, a company must obtain a license from the South African Reserve Bank (SARB), which is the country’s central bank and the regulator for e-money platforms. The specific license required for an e-money platform in South Africa is a Category 3 Authorized Dealer in Foreign Exchange with Limited Authority (ADLA) license. This license allows the e-money platform to conduct certain foreign exchange transactions and issue e-money, subject to certain limits and conditions. To obtain a Category 3 ADLA license, an e-money platform must submit an application to the SARB and meet certain requirements, such as having sufficient capital, implementing strong risk management systems, and complying with anti-money laundering and know-your-customer regulations. The SARB may also conduct on-site inspections and audits of e-money platforms to ensure compliance with regulations.
In Zimbabwe, where rampant hyperinflation and a general lack of confidence in the Zimbabwean dollar, E-money platforms have become a necessary element of daily life while at the same time facing increased regulatory scrutiny. In Zimbabwe, the licensing and regulation of e-money services are governed by the Reserve Bank of Zimbabwe (RBZ). To operate an e-money service in Zimbabwe, a company must obtain a license from the RBZ, which is the country’s central bank and the regulator for e-money services.
The specific license required for an e-money service in Zimbabwe is a Mobile Banking License. This license allows the e-money service to conduct electronic transactions and provide mobile banking services, subject to certain limits and conditions. To obtain a Mobile Banking License, an e-money service provider must submit an application to the RBZ and meet certain requirements, such as having sufficient capital, implementing strong risk management systems, and complying with anti-money laundering and know-your-customer regulations. The RBZ may also conduct on-site inspections and audits of e-money service providers to ensure compliance with regulations.
Launching an Interoperable E-Money Platform from the United States
The volume of remittance from the United States to Africa varies by country and region, but overall, remittances are an important source of income for many African countries. According to data from the World Bank, remittances to Sub-Saharan Africa totaled $48.2 billion in 2020, a 12.5% increase from the previous year. The United States is one of the largest sources of remittances to Africa, accounting for a significant share of total remittances to the region. Notably, the COVID-19 pandemic had a significant impact on remittance flows to Africa, with many African countries experiencing a decline in remittances in 2020 due to the economic impact of the pandemic.
However, the high cost of traditional remittance services such as Western Union and Moneygram and the lack of access to formal financial services in many African countries continue to be significant barriers to the efficient and cost-effective transfer of funds.
As a general rule, money remittance platforms in the United States are generally required to obtain state money transmitter licenses in the states where they operate. Money transmission is regulated at the state level in the United States, which means that money transmitters must comply with state-specific regulations and licensing requirements. Given the nature of African diasporas in the United States, it is normally not necessary or cost effective to obtain a money transmitter license in each state. For example, the Nigerian diaspora is one of the largest African diasporas in the United States, with an estimated population of over 375,000. Nigerian immigrants have settled in many cities across the United States, including Houston, Dallas, Atlanta, and New York. Thus, obtaining licenses outside Texas, Georgia and New York may not be financially worthwhile.
On the receiving end, the U.S. E-money platform will need to obtain a license in the African nations in which it seeks to operate. As explained above, each nation has its own set of regulations and navigating those regulations without experienced legal professionals – particular in Africa, can be difficult. Moreover, the most difficult element of establishing the E-money platform will be identifying the partner bank in Africa to receive remittances.
In my experience, you can anticipate making multiple visits to Africa to meet with regulators, banking partners and even money transfer agents.
Without question, the E-money opportunity in Africa is unprecedented as various macro and micro economic factors only service to increased the number of unbanked individuals as well as a decreasing confidence in fiat currencies.
About Adam Tracy
Adam Tracy is a payments expert and entrepreneur who specializes in payment systems, blockchain technology, digital currencies, and other emerging technologies. He is the founder of Blockrunner, LLC that provides consulting services to clients in the blockchain, payments and cryptocurrency arenas.
Tracy has been involved in the payments industry as an attorney, consultant and entrepreneur since 2005, while he was become an expert in blockchain and cryptocurrency since its advent in 2013. Tracy has worked with a wide range of clients, including startups, established businesses, and investor – both in the United States and worldwide. He has advised clients on a wide range of compliance, legal and operational issues related to payment transfer systems, crypto token generation and architecture, cryptocurrency exchanges, regulatory licensing, smart contracts, and other blockchain applications.
In addition to his consulting work, Tracy has founded several companies in the payments, blockchain and cryptocurrency space, including a digital asset hedge fund, licensed electronic money institution and a blockchain-based tokenization platform. He is also a proponent of decentralized finance (DeFi) and has been involved in various DeFi projects.
Tracy is also a frequent speaker and writer on blockchain and cryptocurrency topics. He has been featured in a wide range of publications, including Forbes, CoinDesk, and Bitcoin Magazine.
Find Adam: https://linktr.ee/adamtracy