Although the prediction is undoubtedly on the optimistic side, it illustrates the potential of digital payments in emerging markets.
The study assessed formal and informal payment channels in 44 nations in SSA, making projections based on three possible scenarios.
The first assumed P2P payments in Africa would digitize at Kenya’s current penetration rate for long-distance digital payments of 70%, increasing region-wide P2P payment revenue by 60% to 70%. This would see such revenue increase from $1.6 billion to $2.7 billion, with corresponding digital-payment revenue rising from $6.6 billion to $7.7 billion.
A more optimistic scenario assumed other types of long-distance payments, such as wages and government-to-public payments, digitized to Kenya’s current level of 70%. This would stimulate total revenue growth for electronic payments by 50% to 60%, to between $10 billion and $11 billion annually, according to McKinsey.
The most optimistic scenario envisaged P2P payments maintaining the 70% rate of digitization, with the total transaction volume growing at the same rate as seen in Kenya between 2006 and 2009, during the early expansion of M-Pesa – Kenya’s mobile payment system.
“In Kenya, survey data show the number of P2P remittance senders grew by 215% between 2006 and 2009, probably the result of M-Pesa’s rapid deployment,” says McKinsey. “If the region’s P2P electronic payments were to grow similarly, its electronic-payment revenue would exceed its baseline by about 50%, reaching $15 billion to $16 billion.”
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McKinsey believes its scenarios are relatively conservative relative to Africa’s potential. The first two scenarios assume no growth in P2P payments, despite better options probably becoming available, while all scenarios ignore incremental revenue from other types of payment flows or the enhanced business opportunities improved mobile payments channels would offer. However, it also acknowledged replicating Kenya’s success would not be easy. While mobile payments were growing at their fastest rate, M-Pesa enjoyed a dominant market share that is usually shared by the top two to three providers in a market, says Sachin Shah, head of cash management at Standard Bank.
Across Africa, banks are typically responsible for driving innovation and there is little sign of evolving interoperability between banks.
Mobile payments can only take off if people trust the providers, understand the offering and the cost relative to cash makes it affordable. These criteria were satisfied in Kenya where regulatory clarity left telecoms companies such as M-Pesa responsible for the process, with customers having clear recourse in the event of a dispute.
Few other markets have the regulatory clarity of Kenya. Most African countries are working on reforming their regulations to encourage growth, but they have much to do. In Nigeria, for example, the absence of a national ID system makes verification challenging and it is hard to see mobile payments gaining traction until this has been resolved.
Africa needs established processes to give customers comfort that problems can be quickly resolved. In Kenya, M-Pesa has the mandate to resolve such problems, but in most other countries nothing can be done without involving the police, introducing delay and complexity to the process.
Kenya has other advantages, including a relatively small population – under 50 million – and an absence of physical geographical challenges that other African countries have to contend with, such as mountains or deserts.
However, Kenya’s success has set an example for other African countries to emulate and many should have closed the gap within the next three to five years, predicts Standard Bank’s Shah.
Robert Schiff, a principal at McKinsey in San Francisco says: “This is not a walk-before-you-can-run situation – this is a leapfrogging opportunity. We already have a situation where Kenya is well ahead of the US in mobile payments, showing what’s possible.
“With banks, telcos and governments across Africa, as well as international bodies, such as the G20, all prioritizing financial inclusion, there is no reason why other African countries can’t make similar progress.”
South Africa, with the most-developed financial infrastructure, is probably the closest to emulating Kenya’s success in mobile payments. However, smaller economies are also making progress.
Tanzania and Uganda are making substantial progress towards Kenyan levels of digital payments, says Jake Kendall, head of the research and innovation initiative within the Financial Services for the Poor team at the Bill & Melinda Gates Foundation. In Tanzania, 45% of adults have used mobile money, with Uganda only just behind on 43%.
“The big question is whether other countries will develop on the Kenyan, single-mobile-operator model, or something that incorporates banks and other providers and offers interoperability,” says Kendall. “The former is much easier to set up, but the latter has more potential for the economy, and even Kenya is looking at how to bring new providers into the system.”
Most African countries are developing their own mobile payments systems, though the East African Community is developing a more regionally integrated approach that should give it an advantage relative to the rest of the continent as the technology grows.
Mobile payments are therefore likely to look different between African countries. Nigerian banks are working closely with telecoms companies, while most other African countries are leaving it to the banks on their own. In South Africa, a more developed existing payments infrastructure is likely to be leveraged, with established players, such as Visa and MasterCard, likely to compete for a share of the mobile payments market, says Shah.
What Africa does have is almost ubiquitous mobile-phone ownership and a high level of enthusiasm for technology. One tiny economy with great potential is Rwanda, “the Silicon Valley of emerging Africa”, according to Charles Weller, head of global transaction banking for west Africa at Deutsche Bank.
“Across Africa you see a massive demand for technology, so the issue is not about fear of new technology – the problems revolve around issues of security, identity and verification,” he says.
Such concerns don’t only discourage customer uptake of digital payments channels. Shah warns: “There is considerable revenue potential for banks but also risks.” Societies have evolved to guard the security of physical assets, such as cash, using safes and burglar bars, but the infrastructure to protect virtual assets has not yet developed, he says.
The lower income thresholds and lack of safety nets in Africa makes many Africans more vulnerable to virtual currency theft than customers in the west, adds Shah.
Deutsche’s Weller says: “The formal economy is already covered by existing banking regulations, so the challenge is regulating the grey economy in which many mobile payments are made. You see very few pronouncements on this issue. I’m sure regulators are looking at it, but trying to regulate mobile payments must be a real challenge.”
Yet observers agree dramatic increases in digital payments in Africa will come, and it is a question of when and not if.
“People overestimate change in the short term but underestimate it in the long term,” says Gates Foundation’s Kendall. “In two years things probably won’t look much different, but in 10 years I expect the whole landscape will have been transformed, probably even beyond our predictions.”