www.ifc.org/ThoughtLeadership Note 34 | March 2017 How Fintech is Reaching the Poor in Africa and Asia: A Start-Up Perspective This note explores the way traditional banks and financial technology companies, or FinTechs, interact in Africa and Asia, and their ability to offer innovative digital financial services that grant unbanked individuals access to financial transactions. The FinTech sector is experiencing explosive growth in both continents, but while Asian banks have managed to efficiently integrate with FinTech solutions, African banks have been slower to adapt to this change. Still, the outlook for mobile banking remains positive, and its prevalence will boost the financial industry in both regions. The digital age has unleashed a disruptive movement across the Figure 1 illustrates the portions of 25 countries that lack access financial industry allowing financial institutions to attract to banking or financial services, as of 2014. Given that more previously “unbanked” individuals in emerging markets, while than half of the world’s unbanked live in Asia, and many more retaining already existing traditional bank clientele.1 live in populous African countries like Nigeria and Ethiopia, the Digitalization has ushered in digital financial services, which focus is on these regions in particular. provide innovative financial technologies that offer a greater number of individuals access to financial products and services. Although the banking sector is relatively developed in Asia, the large populations in China and India mean there are still This note will use the terms digital financial services, financial significant unbanked populations in that region, while access to technology companies, and FinTech interchangeably. banking in Africa is generally low. Figure 1: Some 73 Percent of the World’s Unbanked Reside in 25 Countries, Predominantly in Asia. Access is Low in Africa. Shaded Countries = IDA International Development Association (poorest countries). Sources: Global Findex 2014, IMF Financial Access Survey 2012. Digital financial services, a business opportunity for services, according to the Consultative Group for the Assistance emerging markets of the Poor (CGAP), have a “significant potential to provide a Since approximately two billion people in emerging markets range of affordable, convenient and secure banking services to are unbanked, the provision of digital financial services is as poor people in developing countries.”2 In emerging markets, much about creating markets for these future clients as it is these services are instrumental to private sector productivity. about altering current bank-customer relationships. Such Figure 2: Supply side: financial industry’s response to emerging trends Source: Holtmann, Martin, Digital Financial Services – Challenges and opportunities for Banks, Presentation provided at the Sixteenth Annual Conference on Policy Challenges for the Financial Sector - Finance in Flux: The Technological Transformation of the Financial Sector, June 1-3, 2016, Washington, DC. Abbreviations in figure: AUM = Assets under Management; mPOS = mobile point of sale; NFC = National Finance Center, a federal agency within the US government. Digitalization of the traditional banking sector transforms the First, drive efficient financial services, as more banks in way banks react to their customers, offering them digital emerging markets turn to FinTech innovations to improve their solutions such as: digital service delivery.  Virtual in-branch investment advisors  Online and mobile banking products and services Second, redefine the industry’s perception of what it takes to be called a bank. FinTechs not only offer bank-like services,  Increased use of social media and data analytics to including receiving financial transactions and making loans, communicate with customers, and lower operational costs.3 they also innovate faster and are able to rapidly grow their Figure 2 illustrates the massive disruption banks in emerging customer base. Unlike traditional banks, they have the markets face—despite proactive adoption of digital financial flexibility to provide cheap and accessible products and technology—from the emergence of FinTechs. services and are quicker to tailor their service offering based on The FinTech sector is experiencing explosive growth, attracting changes to behavioral consumer data. $12.2 billion from investors in 2014, three times more than the previous year,4 and a massive $19 billion in 2016. The Third, become an intricate part of the banking sector, while industry’s outlook remains positive. distinguishing itself from traditional banks under international regulatory guidelines. Strongly backed by venture capitalists, FinTech companies are set to influence the financial industry in three significant ways: This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. ASIA bKash, Bangladesh – Promoting financial inclusion through Asia’s traditional banking sector mobile payments Asian banks were resistant to the effects of the 2008-2009 Home to 160 million people, Bangladesh has an extremely global financial crisis due to relatively fewer financial linkages low banking penetration rate, with over 70 percent of its with Europe and the United States, as well as lower levels of population having no access to a bank account. Its banking debt. As a result, they outperformed the global banking sector. sector lacks adequate technology to reach the poor, which Emerging middle class income, and stable macroeconomic translates into a unique opportunity for bKash, a mobile fundamentals were further contributing factors. Headwinds money platform. created by the crisis also enabled a number of local banks to gain greater market share as they replaced deleveraging foreign BKash Limited, a subsidiary of BRAC Bank Limited banks that withdrew. (Bangladesh) was launched in 2011 to provide mobile financial services, including payments and money The region’s banking sector has become competitive, making transfers, to both the unbanked and banked populations of great strides in innovative technologies. However, shadow Bangladesh. Upon registration, each bKash user receives banking remains a major source of financing for corporates and a mobile wallet that serves as a bank account. individuals due to limited access to bank loans. For China, shadow banking made up 40% to 70% of GDP in 2017, from Through bKash’s vast agent network of over 90,000 retail 35% at the end of 2015, according to Bloomberg. points, users are able to deposit electronic money into their bKash accounts, receive disbursements, including The value of wealth management products more than tripled salaries, loans, and domestic remittances, cash-out the between the end of 2015 and three years earlier. 5 Part of this electronic money, and perform peer-to-peer transactions. expansion can be linked to FinTech innovations, especially its BKash’s main goal is to serve lower income households impact on payments. Traditional banks are eager to capitalize in the country by offering free registration and cashing-in on these innovations. services. It also provides users with the cheapest handset in the world (approximately $15) for accessing bKash’s In India there is a consolidated banking sector with well- simple user interface. developed digital offerings. Banks encourage customers to Currently, despite more than 20 mobile financial service manage their finances using mobile phones. licenses approved by the central bank of Bangladesh, bKash has a clear monopoly, commanding over 80 percent FinTech market penetration and its impact on traditional of mobile banking transactions made in Bangladesh. banks in Asia bKash is now used by over 17 million Bangladeshis and Digital payments used in advanced countries now reach Asia’s handles more than 70 million transactions a day, according middle-class through international and local debit and credit to the company. bKash CEO Kamal Quadir attributes the card networks such as India's Rupay and China's UnionPay, company’s fast growth to its focus on providing mobile among others. To gain a competitive edge and respond to the financial services through mobile platforms. growing middle-class demand to access the e-commerce space, Asian banks turned to digital technologies offered by FinTech In 2013, the IFC made a $10 million equity investment in companies.6 They proactively sought ways to reduce costs and bKash to help the company expand its distribution meet customer needs, choosing to partner rather than compete network. According to the Consultative Group to Assist with FinTechs. Asian governments and regulators have been the Poor, a global partnership of 34 leading organizations, similarly supportive, encouraging FinTechs to provide funding 22 percent of Bangladesh's adults use mobile money and to small businesses, and innovative solutions to banks.7 over 80 percent of transactions are made through bKash, partnering with MasterCard and Western Union. bKash These solutions have however not adequately served unbanked announced in April 2016 that its account holders now have or poorer households who use less formal retail outlets like access to international remittances on their mobile phones, street vendors and local markets and have less access to a breakthrough that will benefit 22 million people living bankcards or Point of Sale devices to make payments. in the eighth largest country for remittances in the world. In Asia, both banks and FinTechs benefit from a symbiotic relationship. While FinTechs view banks as a gateway into a panoply of markets, banks turn to FinTechs to stay current in This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. Understanding Big Data According to the International Data Corporation, global Internet traffic will rise to 44 Zettabytes (ZB) in 2020, ten times what it was in 2013 (a Zettabyte is one trillion Gigabytes.) FinTechs are using their ability to draw insights from vast amounts of consumer data, while applying innovative solutions to monetize this data. Two types of data analytics that help banks to minimize regulatory compliance costs and identify risky consumers are: (1) Know Your Customer analytics, which provide a history of how customers have interacted with financial products and services; and (2) Anti-money laundering and counter financing of terrorism AML-CFT applications, which use a combination of descriptive analytics and statistical techniques to prevent fraudulent activities. The second technique is termed diagnostic analytics for its ability to identify possible reasons for certain behavior or outcomes by highlighting customer habits and trends. The combination of block-chain and big data will soon create a financial ecosystem that can identify trends, track end-to-end data, make judicious decisions based on this data, and use the entire data set for financial forecasts. the rapid unfolding of financial innovations, while keep abreast perception that banking is for the rich, in a continent where of sudden shifts in regulatory mandates, and gaining access to financial services such as opening a bank account can be big data to help improve their customer relationships. painfully bureaucratic. Emerging paths for Asia’s traditional banks and FinTechs Poor infrastructure, including inadequate roads, electricity, Asian banks’ successful partnerships with FinTechs allow them intergovernmental data connectivity, and utilities also hampers to connect to new customers through the digital space, a less access to bank branches and ATMs.12 costly way to gain market share particularly in locations where they have a limited supply of physical distribution channels. 8 In contrast, although 389 million people live on less than $1.90 Banks can gain access to a market like China where foreign a day (based on 2013 data), the continent has one of the highest banks have a combined market share of less than two percent. mobile penetration rates in the world13. This is making the region a fertile backdrop for the emergence of FinTech. The India, one of the pioneers of digital banking in Asia has FinTech industry took off in the wake of the global financial successfully created an environment for FinTech innovative crisis in 200814, despite barriers such as poor infrastructure, and solutions to flourish and feed into the established traditional limited Internet penetration.15 banking sector. India’s banking sector does however refer closely to the central bank for regulation guidance with regards FinTech market penetration and its impact on traditional to FinTechs, slowing down service dissemination into the banks in Sub-Saharan Africa market. Africa’s FinTech revolution owes its success to the industry’s deep understanding of customers at grass-root levels and FinTechs must thus find ways to test their latest innovative adequately meeting their needs. The industry is attracting ample solutions through a Proof of Concept process required by attention from venture capitalists with funding of the tech sector financial institutions. Every successful Proof of Concept expected to rise from $414 million in 2014 to $608 million in provides a benchmark for the industry, allowing FinTechs to 2018, according to the Financial Times. It has giving rise to offer their products to overseas markets.9 small business solutions like Rainfin backed by Barclays bank, which is currently the largest peer-to-peer (P2P) lending AFRICA business in South Africa with transactions of more than one Role of traditional banking in Africa million rand per day. Other than South Africa’s developed financial sector, the footprints of banks in neighboring African countries have However, FinTech solutions are often country specific and historically been low, especially in the rural areas. Bank serve rather narrow niche markets. With a weak distribution penetration in Sub-Saharan Africa is below 35 percent.10 strategy, a FinTech solution may work successfully in one Approximately 80 percent of Africa ’s 1 billion population11 country but fail miserably in another. M-Pesa is a perfect lack access to formal banking services. example where its operations took off in Kenya but failed to launch in South Africa. Founded in 2007 by Safaricom, M-Pesa Africa’s banking sector is held back by currency fluctuations, allows subscribed users to perform traditional banking services and in particular a low supply of products for savings, using their mobile phones. insurance, credit, and payment transactions to large segments of populations in these countries. There is a prevalent The service boasts 19 million mobile subscribers in Kenya and 6 million in Tanzania, compared to a mere 76,000 active users This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. in South Africa out of only one million subscribers (based on Safaricom must either file a bank license, which can take 2015 data)16. M-Pesa’s timing and deployment strategies in months to obtain, or find an alternative route into the banking Kenya and Tanzania were impeccable. Safaricom seized the sector. Both options are expensive, and represent an obstacle opportunity to enter both markets based on its position as the for FinTechs to make a major impact on the continent. dominant mobile network operator. It further deployed a vast agent distribution network.17 The outlook for FinTechs in Africa remains unclear. Traditional banks remain internationally accepted entities for M-Pesa’s difficulty to replicate its success story in South Africa cross-border transactions.21 However, what is clear is that was based on three factors: (1) An inadequate distribution FinTech companies offering global financial solutions, such as network; (2) low mobile network subscription rates; and (3) big data will play a pivotal role in boosting the traditional South Africa’s stricter digital wallet regulations. banking sector. M-Pesa’s low adoption rate in India (operated by Vodafone, a network with 173 million customers) is another example of the Conclusion difficulties to replicate its success. Only 370,000 users FinTechs have had a positive impact in Asia’s banking sector, subscribed to the service in September 2014, after more than giving it access to a larger market at a lower cost. Countries two years of operation.18 such as China and India have successfully created an environment for assisting FinTech innovative solutions to In 2012, Safaricom and the Commercial Bank of Africa flourish and integrate with the traditional banking sector. launched M-Shwari, which provides mobile bank accounts offering savings and micro-credit products. M-Shwari, In contrast, domestic FinTech innovations in Africa, often succeeded in rapid market penetration in Kenya19 and expanded deployed by mobile network operators, operate separately from to other countries, including Tanzania. and are often in direct competition with banks. This is changing however, as illustrated by the success of M-Shwari, Scenarios for Africa’s traditional banks and FinTechs demonstrating the potential for integrated services. South Africa’s well-regulated banking sector and aggressive Alex J. Alexander, Chairman and CEO of CashDlite digital banking roadmap is already developing its own system (alex.alexander@CashDlite.com) of innovative FinTech solutions, which represents a major entry barrier for venture capital-backed FinTechs.20 Banks in the rest Lin Shi, Strategy Analyst, Thought Leadership, Economics and of Africa are in direct competition with FinTech solutions, Private Sector Development, IFC (lshi@ifc.org) unlike Asia where both work harmoniously. Bensam Solomon, Research Assistant, Thought Leadership, The pace of the FinTech industry in Sub-Saharan Africa is Economics and Private Sector Development, IFC somewhat dictated by existing mobile network operators and (bsolomon@ifc.org) their relationships with central banks. To enter a new market, depending on the country, mobile network operators like 1 Holtmann, Martin, Digital Financial Services – Challenges and opportunities 9 KPMG, FinTech in India – A Global Growth Story, KPMG, June 2016. for Banks, Presentation provided at the Sixteenth Annual Conference on Policy 10 Demirguc-Kunt, Asli – Klapper, Leora – Singer, Dorothe – Van Oudheusden, Challenges for the Financial Sector- Finance in Flux: The Technological Peter, The Global Findex Database 2014 – Measuring Financial Inclusion Transformation of the Financial Sector, June 1-3, 2016, Washington, DC. Around the World, World Bank Policy Research Working Paper No. 7255, 2 Consultative Group for the Assistance of the Poor (CGAG). World Bank, April 2015. 11 http://www.cgap.org/topics/digital-financial-services World Bank World Development Indicators, retrieved March 8, 2017. 3 TLT, Digital banking: from revolution to evolution, TLT 2016. http://data.worldbank.org/region/sub-saharan-africa. 4 Julian Skan, Julian – Dickerson, James – Masood, Samad, The Future of 12 Beck, Thorsten – Cull, Robert, Banking in Africa, CSAE Working Paper, FinTech and Banking: Digitally disrupted or reimagined? Accenture 2015. WPS/2013-16, First Draft August 2013, Centre for the Study of African 5 Kuen, Yap Leng, Jump in China’s Shadow Banking Products Potentially Economies. Destabilizing, Thestar.com, Feb 27, 2017; Tu, Lianting – Luo, Jun, China 13 The Economist stated at the end of Dec 2016 that there are almost 1 billion Default Chain Reaction Threatens Products Worth 35% of GDP , active phone subscriptions in Africa, where many people have multiple sim Bloomberg.com, May 29, 2016. cards, which leads to the conclusion that ca. half of Africans have phones: N.N., 6 EY, Banking in Asia-Pacific - Size Matters and Digital Drives Competition, Mobile phones are transforming Africa, economist.com, Dec 10, 2016; The GSMA EY 2015. estimates, similarly, for 2015 unique phone penetration rates for women to be 7 EY, Banking in Asia-Pacific - Size Matters and Digital Drives Competition, 49% and for men 41%: GSMA, The Mobile Economy in Africa 2015, GSMA EY 2015. 2015. 8 EY, Banking in Asia-Pacific - Size Matters and Digital Drives Competition, 14 See Galat, Bonnie – Ahn, Hyung, The World Bank Group’s Response to the EY 2015. Crisis: Expanded Capacity for Unfunded and Funded Support for Trade with This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. 17 Collett, Dominique, The unstoppable rise of FinTech in Africa, Disrupt Africa (web site), May 20, 2016. Emerging Markets. In: Chauffour, Jean-Pierre – Malouche, Mariem (eds.), 18 Leach, Anna, Mobile Money: Why isn't the M-Pesa Effect Hitting More Trade Finance during the Great Trade Collapse, 2011, pp 301-317; see also Countries? The Guardian, April 16, 2015. Ramachandran, Vijaya, Mitigating the Effects of De-Risking in Emerging 19 Cook, Tamara – McKay, Claudia, How M-Shwari Works: The Story So Far, Markets to Preserve Remittance Flows, IFC EM Compass Note No. 22, Consultative Group to Assist the Poor (CGAP) and Financial Sector Deepe- November 2016; Starnes, Susan – Kurdyla, Michael – Alexander, Alex J., De- Risking by Banks in Emerging Markets – Effects and Responses for Trade, IFC ning (FSD) Kenya, Access to Finance Forum, Reports by CGAP and Its EM Compass Note No. 24, November 2016. Partners No. 10, April 2015. 15 Collett, Dominique, The Unstoppable Rise of FinTech in Africa, Disrupt Cook, Tamara – McKay, Claudia, Top 10 Things to Know about M-Shwari. Africa (web site), May 20, 2016; GSMA estimates that by 2020, 60% of the World Bank Blog, April 10, 2015. population in Africa still lacks access to internet services: GSMA, The Mobile 20 Gould, Elizabeth, Africa’s Big Banks are Betting on FinTech Startups and Economy in Africa 2015, GSMA 2015. Bitcoin to Beat Disruption, Quartz Africa qz.com,February 19, 2016. 21 16 N.N., Vodafone M-Pesa Reaches 25 million Customers Milestone, N.N., FinTech vs. Traditional Trade - Surviving the Digital Transition, Trade vodafone.com, April 25, 2016; Mbele, Lerato, Why M-Pesa Failed in South Finance Magazin Special Issue, September 2016. Africa, bbc.com, May 11, 2016. This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group.