Africa: the essential rise of open banking
Africa is at a turning point in its development: on one hand, increasing internet access via mobile telephones is opening up a new world of opportunities for services and tools that could support economic and social progress. On the other hand, financial inclusion is still a major issue for many emerging markets. Banks are thus faced with a tough challenge: improving accessibility and offering services suitable for rural populations that constitute two thirds of the continent. To do so, they must find their place in this constantly-evolving ecosystem.
THE POWER OF MOBILE
In West Africa, the percentage of adults with active bank accounts varies between 5% and 20% depending on the country, according to the Abidjan Regional Economic Service in its 2017 report on banking in the EUMOA zone. This growth reflects the continent’s economic development and the strategic importance of banking access for its inhabitants.
The European Investment Bank (EIB), in its study on financial inclusion in Africa, describes how digital banking still holds unfulfilled potential in Sub-Saharan Africa, provided that financial services are suitable for the local situation and the end users’ needs. In other words, fully capitalising on the potential of financial inclusion means being fully aligned with on-the-ground practices, rather than simply replicating successful strategies used in European and Western markets.
While mobile technology is one of the main catalysts identified, it is not the sole instrument for development. The figures put together by the EIB show that there is not necessarily a correlation between mobile phone penetration rates and the number of banking transactions. The situation varies from one country to another: mobile payments have skyrocketed in Kenya, but are yet almost non-existent in Botswana, despite there being more mobile phone subscriptions than inhabitants. If there is a bottleneck in financial inclusion, problems regarding internet access are not solely to blame.
EXPANDING ONE'S NETWORK
Given these circumstances, how can banks effectively unite the unbanked population? With several solutions available, they certainly shouldn’t go in alone. In particular, they can rely on local companies whose services have already been adopted and who will serve as middlemen between the financial institution and its customers, both current and future. The banking ecosystem, incidentally very active on the continent, is an essential catalyst to creating solutions that meet Africa’s specific needs.
These alliances can be forged on various levels. On the ground, they give rise to an operational model that already exists in Europe and Africa: agent banking. This is where processing of certain client transactions is contracted out to individual partners. For example, a local retailer can offer financial services such as money transfers, cash flow deposits or withdrawals on behalf of a bank. Agent banking seems like the obvious choice on a continent where two thirds of the population live far from major cities, making it the only economically viable way to develop full coverage. Its implementation requires the necessary infrastructure to manage the operation, offering an attractive service to the customer and guaranteeing security through innovative technology like biometrics.
However, the potential of financial inclusion is not limited to a physical presence or the provision of daily transactions as enabled by agent banking.
BUILDING A SERVICE ECOSYSTEM
Thinking big is the key to creating value: banks must devise a global range of services that satisfy a wide range of needs. If they offer personal car loans, why not also guarantee the monthly payments to the seller or insure the buyer’s new car? An array of services maximises the potential touchpoints and investments made.
Banks are not always required to create these services in-house. On the contrary, there is much benefit to be had from forging ties with others who are capable of meeting these highly specific needs. Whether they already have an established presence on the ground or come from the FinTech world, they bring their network, expertise and client base, enabling banks to enter markets where there is zero supply but certainly no lack of demand. This is the case, for example, with SME financing, seen as one of the primary obstacles to economic growth in Sub-Saharan Africa. To do so, banks must learn to open up their IT systems, as this will allow them to build or integrate digital native financial services in a customer-centric approach.
LAYING THE FOUNDATIONS OF AN OPEN SYSTEM
The landscape is rapidly evolving in every single country. To sustainably support economic development and boost financial inclusion, we must also lay the foundations for a scalable environment. In a region as ever-changing as the African continent, banks must be technically capable of adapting to any sudden changes. They must also be capable of quickly integrating a promising FinTech whose service is taking off, or negotiating with different partners depending on the region and market. This is of paramount importance given the enormous disparities between countries, both in terms of penetration rates and practices. Agility is not an option!
Consequently, IT systems must take a central role in the creation of new value-added services for the end customer. No longer is it simply a collection of closed business modules. Instead, it should be an agile and versatile system, able to adapt in an unsteady environment where technological, digital and security units communicate to support innovative services for clients.
This is where the open banking approach comes to the forefront. Technically speaking, it will provide the flexibility needed to rapidly develop innovative digital services and build a network of intermediaries and partners. Technology will be at the heart of the transformation, not only with the development of open architecture able to communicate with third parties through APIs, but also in the creation and marketing of financial products, both banking and otherwise. The key to financial inclusion lies in creating services that are both accessible and targeted.
David Lejolivet - Product Strategy Director at Sopra Banking Software
Find out more with the article "Africa needs digital-native banking services" by David Lejolivet - Product Strategy Director at Sopra Banking Software
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