The future of FinTechs and open banking in Africa
Businesses of every kind have been affected by the COVID-19 pandemic. The banking sector has not been immune: for some banks, the economic impact has been notably acute. In response, the move to online financial services has accelerated at a dramatic rate as a plethora of fintechs, so-called “neobanks” and non-traditional financial service companies, continue to expand their activities. As the payments phenomenon became truly global during the pandemic, Africa has emerged as a new FinTech hub.
by Manoj Mistry, Managing Director, IBOS Association
An increase in investment has led to African FinTech companies expanding their services across the continent. The potential is enormous, particularly in sub-Saharan Africa – a region that has traditionally suffered from limited access to financial services. As Africa’s largest economy with a population of nearly 210 million, Nigeria received more than 60% of Africa’s inbound FinTech investment in 2021. But over 50% of Nigerians do not yet have a bank account.
Last year, four African FinTech companies achieved unicorn status with $1bn+ valuations: OPay, a mobile-payments company, which raised funds from investors including SoftBank; Wave, a Senegal-based mobile money network; Chipper Cash, a peer-to-peer payments operator backed by Jeff Bezos; and Flutterwave, which offers payments services to businesses.
If the future of the banking sector in Africa seems promising, then open banking looks set to play a pivotal role, providing third-party financial service providers open access to consumer banking, transaction, and other financial data through application programming interfaces (APIs). As an open-source technology, it allows third-party developers, such as fintechs, to access data held by banks and to develop applications or services based on such data. Through this seamless connection of data, open banking enables customers to access products best suited to their needs, lowering costs, as well as facilitating innovation and inclusion.
Africa’s latent demand for open banking requires the banking sector to adopt fintech solutions. Some of that is already underway. In December 2020, Kenya’s Central Bank released its four-year strategy which highlighted Open Infrastructure as one of its main strategic objectives. In 2019, two large South African banks embraced open banking at the height of the pandemic. The number of South African banks offering open banking services has since grown to six. Meanwhile, South African and Nigerian start-ups TrueID and Okra, respectively, announced they had received significant funding to develop open banking infrastructure.
The UK and EU have already addressed the legislative challenge. At the heart of the Competition & Markets Authority (CMA) Order and the Second Payment Services Directive (PSD2) is customer consent. In Sub-Saharan Africa, the regulatory frameworks that are integral for the operation of open banking in the future, such as data protection laws, have largely yet to materialize.
Meanwhile, a significant part of the population remains unbanked or underbanked across much of the region. Taking South Africa as an example, a great opportunity exists for banks across the continent to become involved in open banking solutions, meeting the needs of the consumers and revolutionising the concept of African banking. African legislators, therefore, need to recognise the enormous potential that open banking creates to facilitate financial inclusion, especially its beneficial impact on access and affordability.
January 27, 2023
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