There is no mistaking the buzz surrounding cashless transactions facilitated by smartphones. In the West and other developed economies, they mean convenience. In emerging markets, however, marrying the phone to financial services is about more than not having to deal with cash. It speaks of a narrative of financial inclusion and the eradication of poverty.
In that respect, consider Africa. Many Africans don’t have access to the formal financial sector. They don’t have bank accounts and conventional credit histories.
By 2050, Africa will have the largest number of people under the age of 24. It is also forecast that the majority of these young people will be connected to the internet by a smartphone. Now, connect the dots. If these young people can be brought into the formal financial services sector, a host of economic and developmental goals can be achieved. And the key to that is the ubiquity of the smartphone.
To be sure, we’ve been here before with the “next big thing” when it comes to the empowerment of the poor. In particular, there was microcredit, which, to be honest, hasn’t been an unvarnished success. The model, based on giving loans to people outside the formal financial system and who have no collateralizable assets means the cost of credit must be correspondingly high. Very high, in fact.
Most borrowers don’t realize or notice this because they could never borrow before, except from unlicensed money lenders who charge even higher rates. And then, repayment rates for microloans of $20 or $30 often are not translated into terms that reveal their punishingly high average percentage rates. And even if they were, borrowers often don’t understand the high cost of loans – if you don’t know what an APR is, how do you know what’s high? In its later and more recent permutations, microcredit programs have done more to accelerate debt loads than establish a platform for poor communities to move out of penury.
Next, the financial sector has been undergoing “disruptive” innovation over the past three decades. Some of it hasn’t been so prudent – think about collateralized mortgage obligations and the financial wizardry that caused the 2008 world financial crisis. But some of it has been beneficial. People who have been on the margins of a half millennium-old system of money and banking aren’t suddenly going to become an intrinsic part of the system – unless they beat the odds and win the lottery. For them, a new form of money – cryptocurrency – might be a way to circumvent the traditional financial system.
Though still volatile, cryptocurrency offers the promise of leaving behind the traditional impediments put against the poor by fiat money. In Zimbabwe, for example, people have turned to cryptocurrency to buy and sell goods because the local fiat currency is worthless outside the country.
In fact, cryptocurrency is only one of the financial innovations being propelled by the field of fintech, or financial technology. Together with smartphones, fintech offers new ways of measuring risk, new forms of currencies free from the corrosive effects of corruption and a safe way of storing value through blockchain technology.
Africa is particularly receptive to innovation because many people have little to lose from shunning a financial infrastructure that shuts them out anyway. They are in turn seen as an attractive source of growth for cutting-edge financial firms out to disrupt the status quo. Together, they might yet show the rest of the world the way forward in the new world.
Admittedly, lofty narratives about empowerment through consumer power are commonplace. But the reality in many African countries tells a different story. Indeed, the continent is attractive to the latest crop of impact investors who see poor communities as untapped customer pools. And given access to capital, poorer people can upscale their informal activities into viable businesses. Coupled with the digitalization of financial services, more economic activity would emerge from the shadowy depths of informal markets.
But there are cautions to heed in the private sector’s role.
Kenya’s M-Pesa is widely recognized as Africa’s leading microcredit and digital payment transfer service. It is often held up as a model of financial inclusion for its many successes in getting Africans connected to the digital financial services sector. Yet, from a development perspective, M-Pesa demonstrates the double-edged sword of financial inclusion.
The platform’s parent company, Safaricom, derives the majority of its profits (more than $680 million in 2018) from its payment services. Instead of investing those profits into, for example, Kenya’s telecommunications infrastructure or other local projects, most of the money went to Safaricom’s overseas investors. Such is the nature of private enterprise.
Africa is a continent full of natural riches and entrepreneurship. But the former has been concentrated in few hands and the latter mostly has been starved of financing. Fintech and young people with smartphones can break the old system and bring fresh funds to the continent’s millions of micro-businesses. But they are going to need assistance from smart government policies.
To achieve economic empowerment, consumer-driven products must take their place among a host of other initiatives backed by governments. And while credit is hugely important, it must be targeted at small businesses that eventually grow the tax base. In this respect, while innovation is important, it needs to be sustainable and not simply financial engineering for profit by credit suppliers. Thus, better government policies and closer partnership between the public and private sector, moderated by the broad aims of the UN Sustainable Development Goals, might be the formula for genuine African empowerment.
Joseph Dana, based between South Africa and the Middle East, is editor-in-chief of emerge85, a lab that explores change in emerging markets and its global impact.