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Fintech and Development in Africa

Africa’s fintech revolution is one of the major success stories of a continent rarely associated with positive news. The impressive growth and innovation of fintech in Africa has changed the landscape of the financial industry in the continent and Sub-Saharan Africa has become the global leader, for instance, in global transfer payments. It is currently also the leader in mobile money transactions. In fact, fintech currently has a higher penetration than traditional banking and there are since 2015 more mobile banking accounts than traditional banking accounts (IMF 2019). The number of mobile money accounts (per number of adults) is about twice as many for Sub-Saharan Africa than for Latam or Europe, and about 50% more than Asia. The number of transactions is more than three times as much for Sub-Saharan Africa, as compared to other regions, according to the 2017 IMF Financial Access Survey.

FinTech has dramatically improved financial inclusion in Africa and enabled financial practices uncommon elsewhere. For example, the Cambridge Centre for Alternative Finance (2017) has documented the growth in peer to peer micro-lending, crowdfunding for real estate purchases, business equity, or of peer-to-peer donations in Africa. These have enabled access to capital to many and provided opportunities for investments for others, as well as efficiency gains across the financial services value chain. To some extent, it has also become an enabler in the continent and is fostering innovation in other sectors, such as agriculture or energy.
Despite the promise of spillovers to other industries, the fintech industry continues to dominate the innovation narrative in the continent, potentially crowding out other valuable investments. Most of the VC funding continues to be allocated to fintech startups. While the industry has been exalted as a catalyst for innovation in other sectors, the evidence on these effects is unclear. Our goal in this study is to contribute to our understanding of what has driven the success in certain places of African Fintech and how it can be built upon to solve broader challenges the region faces so that it is more than a (profitable) drop in an ocean. For example, adjacent services that are yet largely unrealized may serve to provide insurance in agriculture, improve citizen relations with governments such as through the tax system, or lower transaction costs in formal and informal markets. More broadly, it can lead to a wider and more egalitarian spread of economic development and the formation of a citizenship with a financial stake in the stability of region. We also hope to draw lessons for other regions in developing and developed countries, where Fintech development has often lagged.

The Project

Understanding the drivers and motivation of technology adoption in the field of FinTech in Africa.

Why have some African companies and countries, with many development challenges, been able to lead the world in this particular space? Understanding this should serve to answer and lay out a strategy for development whereby companies can implement new business models and governments can better take advantage of these technologies to deliver better services and collect revenue more efficiently, notable challenges for development in several African countries. Additionally, the development of Fintech raises practical questions about the opportunities that may lie in the development of other industries, particularly in the field of consumer technologies in Africa, from agritech, to transport, retail, or delivery.

The study will have three broad themes:

FIRST, the reasons for the fast rise of fintech in Sub-Saharan Africa are not wholly clear. For one thing, there are substantial differences in the rate of adoption and usage of fintech across the region, with East African countries leading the pack. While the oft-mentioned idea of “leapfrogging” likely provides part of the explanation in the sense that new technology is used to cover a need when older technology (in this case banking) is not available. The need for financial services coupled with the reliability of basic electrical and communications infrastructure has been cited. Yet countries like Kenya lead in fintech while not differing dramatically in technological development or infrastructure. Other questions such as regulation, or issues of business culture in a VC-driven industry, as well as the availability of human capital remain underexplored. We aim to provide a distinct contribution that can explain the puzzling inter-country variation in adoption.

SECOND, fintech has benefited many Africans in life-changing ways by providing previously unbanked citizens with access to financial services. This enables faster, and secure transactions, as well as stimulating price competition across providers. Beyond payments, it enables other services, such as micro-deposit accounts and insurance. However, the broader impact on the continent’s economic and social development is yet to be fully realized and it is unclear that its benefits accrue particularly to those in greatest need and those particularly vulnerable- like women, for instance. Likewise, there is little evidence of potential graduation pathways for fintech users; for example, the ability to access more mainstream products with better terms, like more affordable loans with longer repayment periods. Our goal would be to measure the improvement in outcomes, potential and realized that can be due to these new tools, as well as the broader technological infrastructure and talent it produces as externalities. We can think of economic outcomes but also others such as improvements to the government of the region, social cohesion or stability. The impact and potential of adjacent products, such as weather insurance, or market information provided by mobile technology, or business and agricultural advice has proven to be high too, and yet, it does not seem to have fully realized its value at scale. Identifying the potential of these adjacent sectors will be one of the critical objectives of this project.

THIRD, we will aim to map the barriers that exist for broader penetration of fintech within the region and for the leverage of this infrastructure in other sectors, as well as the lessons it poses for other countries and for providers in industries such as banking or mobile technology. Moreover, we will aim to work with governmental, multilateral, private, and civic leaders in tackling those barriers, and setting the foundations to ensuring wide and sustainable benefits from those opportunities.

LASTLY, we will improve our understanding of the limits and cautions necessary in the use of fintech, a currently lightly regulated sector. While this lack of regulation has surely contributed to its success, it is unclear what the potential perils of widespread usage, much like any other financial product may be. The example of the expansion of microcredit products and its dangers should provide cautionary lessons about the expansion of access to financial products that likely have not been learnt. Data ownership and vulnerability will increasingly be a concern.

Research Team

Carlos Lastra Anadon

IE University