Financial Inclusion Design in sub-Saharan Africa

When the World Bank launched a focus on financial inclusion in 2011, about 2.5-3 billion people lacked access to even the most basic financial services. Since then, dramatic progress has been made.

Between 2011 and 2014 an astonishing 700 million people gained bank accounts (twice the population of the US). In the latest World Bank Findex report, it was stated that a further 8% of the world opened an account.

Unfortunately, the stats are hiding the truth; many newly opened accounts are not being used. Although 68% of the world sounds impressive, a full 740 million accounts lie dormant. I recommend the stellar work from Elisabeth Rhyne and Sonja Kelly to break down the World Bank’s latest Findex Report. Achieving meaningful financial inclusion requires the banking and development sectors to overcome a number of constraints. Without addressing these constraints, those 700 million accounts are a vanity statistic for the World Bank and not much else.

Cost of services in sub-Saharan Africa

In its simplest form, financial exclusion means not having somewhere safe to store cash. Money under the mattress isn’t enough when you throw in pests who eat it, inflation which devalues it, and humid temperatures that rot notes; the issue is always more complicated. But that doesn’t stop people sticking with cash, often out of necessity. Cash might be risky, but it doesn’t cost anything to store it or to use it as a form of payment. Unfortunately, the same cannot be said for most bank accounts. Standard practice across much of the continent is to have minimum opening balances, monthly fees, and charges on transactions and withdrawals. If the banking sector wants people living on under $1.25 a day to use their accounts, they must reduce minimum balances and transaction costs to close to zero. The aim should be to replicate the UK’s zero fee current account market over the US system, where monthly fees on basic accounts are common.

Digital products that aren’t data-heavy

Smartphone penetration growth across India and sub-Saharan Africa has been meteoric over the past decade. But the high cost of data and patchy connectivity in many rural areas means that digital financial products must operate on a limited amount of data. Otherwise the cost of interacting with the service is prohibitively expensive. The non-profit Project Isizwe conducted a study that found that data in Africa is three times cheaper if you are rich and able to purchase it in bulk. This problem is worst for land-locked countries which do not benefit directly from the undersea fibre optic cables which thread into the continent from Europe and the Middle East. Non-coastal users pay an average of $232 more per month for fixed line broadband. So, how do financial service providers get around this? The wildly successful M-PESA network uses decades-old technology called USSD to send text between a mobile phone and an application program. This allows low data interactions with financial services via a text-based menu. When designing standard mobile apps, companies need to bear in mind the cost of data, optimise the app size and performance to reduce the cost of accessing the service. Other considerations incude offline usage and syncing, to cater to people who move in and out of connectivity. This brings up issues with protection of data stored on the device.

Cost of getting to a branch

Smartphone only banks like Monzo and Starling have broken the millennium-old trend of associating bank accounts with a fixed location. In the developed world, this is a positive trend, but in the developing world the impact will be much greater. At the moment, traditional sub-Saharan African banks are largely located in urban areas. Travelling to branches or ATMs would eat up most of a daily wage in many countries. Mobile money and agent networks have gone a long way to addressing this issue, but there is a lot further to go. Branch networks are expensive to build and operate. Digital only products that are built by lean teams come out a fraction of the cost and can match all of the processes that are typically provided in branch. Anyone who’s interested in this topic should have a look at BBVA. They are digitalising all branch services and explore the digital-only products that are being built out by Standard Chartered in the Ivory Coast and Zambian challenger bank Zazu.

Why this is the time to focus on digital financial services

By most estimates, Africa will account for around 80% of the projected 4 billion increase in the global population by 2100. Even today, the continent has the youngest population in the world. The opportunity is huge! International and domestic technology and finance organisations should be concentrating on building useful, accessible digital financial products for this massive market. There are many other challenges that must be overcome for sub-Saharan Africa to close the gap with the developed world, but financial inclusion is a low hanging fruit that banks and fintechs are already in a position to overcome. The technology is there, the market is growing, it’s just a question of which organisations are capable of rising to the challenge. Financial inclusion is a topic that’s close to the heart of 11:FS. Subscribe to Fintech Insider for more content on financial inclusion or sign up for the 11:FS Newsletter so you never miss an update.