An American
influencer on holiday in South Africa recently posted a viral video
highlighting traveler misconceptions about Africa. In the video, she expressed
astonishment at the number of cashless transactions taking place.
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“South Africa takes more Apple Pay than even in the
United States,” the TikToker said.
As one of the most industrialized countries on the
continent, cashless payment systems have been commonplace in South Africa for
several years. The rest of the continent, however, is still operating with
mostly cash and this is the central challenge to the wider expansion of
financial technology across Africa.
In a new report, McKinsey forecasts the African
Fintech sector to grow dramatically in the short term. Fintech revenue could
reach $30.3 billion by 2025, which is eight times higher than revenue in 2020,
as more Africans gain access to the internet.
Roughly two-thirds of Africa’s 1.3 billion people do
not have a bank account or full access to financial services, according to
McKinsey. More than 90 per cent of all financial transactions are cash-based,
which creates a major opportunity for Fintech companies and governments.
Breaking the continent’s addiction to fiat cash
appears to be the last barrier to a full-blown digital revolution considering
Africa’s fast-growing population and smartphone penetration. But signing up
people for bank accounts is much easier said than done. Moving to a cashless
society requires advanced identification standards, such as biometrics.
The introduction of these systems has been slow and
fragmented in Africa. In many cases, the cost of setting up and maintaining a
biometric database is prohibitive. This problem was recently solved in India,
which has ambitiously embraced a cashless future through the privatization of
its national biometric identity system known as Aadhaar. The system can be used
for many different services across the economy, such as opening bank accounts,
withdrawing money from ATMs, applying for a driver’s license, and receiving
government subsidies.
But Aadhaar has not been without its critics who
have highlighted several serious privacy and cybersecurity flaws with the
database.
India has taken other major steps to pull its
cashless future forward. In November 2016, the government abolished high-value
currency notes (roughly 86 per cent of the notes in circulation) virtually
overnight. The move created unprecedented headaches for Indians that held
savings and retirement funds in large notes under their mattresses. At the same
time, cashless platforms like PayTm saw surges in traffic as Indians rushed to
new technologies to store value. The circulation of fiat currency in India
continues to decline year over year as more people keep their money in digital
form.
Once you have a new customer in the formal financial sector, it is much easier to offer access to healthcare and forms of insurance, which opens up other new sectors for impressive growth.
The relative success of Aadhaar and the abolishment
of currency notes underscore the vital role that governments play in any cashless
transition.
Innovation in Fintech will always be shaped by
technological advancements but a public-private partnership is needed to
transform the sector. The primary function of government should be the
establishment and maintenance of a viable biometric identification system as
well as the provision of infrastructure.
In Africa, smartphone infrastructure is critical to
any cashless transition. According to the Wall Street Journal, the ubiquitous
use of cellphones in Africa has enabled the creation of mobile money services
that allow customers to carry out financial transactions without ever setting
foot in a bank.
These platforms have helped Kenya nearly double the
share of adults with a mobile money account to 82 percent since 2011. Once you
have a new customer in the formal financial sector, it is much easier to offer
access to healthcare and forms of insurance, which opens up other new sectors
for impressive growth.
The entire premise of a shared cashless future is
not without its critics. Fiat cash affords a certain amount of anonymity that
digital payments do not, by design. Deeper integration between the financial
sector and biometric identification systems means that governments will have an
extra amount of control over citizens, which can be a good or bad thing,
depending on the government.
That being said, a shared cashless future is
inevitable to a degree. The success of payment platforms such as Apple Pay and
the rise of central bank digital currencies demonstrate the (unavoidable)
direction the world is heading.
The enormous value in Africa’s transition to
cashless systems is waiting to be unlocked by Fintech companies that have
experience in the African market, such as those based in the Middle East and
China.
Given their own experience with biometric databases
and experience with cashless platforms, companies in the UAE and Israel are
particularly suited to aid this transition. For this transition to take shape
in the forgotten corners of the continent, African countries will need to lean
on other countries that have ample experience in setting up their own
platforms. Middle Eastern countries are best suited for this task, given their
growing knowledge economies and experience in biometrics.
While Africa might be the last continent to fully
embrace the cashless future, it will be one of the largest drivers of growth in
Fintech anywhere in the world. Investors and companies on the periphery should
pay close attention.
Joseph Dana is the former senior editor of Exponential
View, a weekly newsletter about technology and its impact on society. He was
also the editor-in-chief of emerge85, a lab exploring change in emerging
markets and its global impact. Twitter: @ibnezra. Syndication Bureau.
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