The Banking Gap in Africa: The Rise of Mobile Money & Digital Banking

Africa's banking sector is experiencing remarkable growth, showcasing its potential to bridge the financial inclusion gap across the continent. While still smaller in scale compared to more established markets, African banks are rapidly expanding their reach and services. 

The industry's net interest income, a key measure of banking profitability, has surpassed $229 billion — a testament to its increasing significance.

Net Interest Income Explained

Net interest income is a crucial metric in banking, representing the difference between the interest earned on loans and investments and the interest paid on deposits and borrowings. It's a fundamental indicator of a bank's core profitability and operational efficiency.

Africa's Banking Sector: A Story of Growth and Potential

The African banking landscape is evolving at an impressive pace, driven by technological innovation and a growing middle class. While the continent's net interest income of over $0.229 trillion may seem modest compared to Europe's $1.19 trillion or North America's $0.75 trillion, it's important to consider the context of Africa's rapid development.

While Africa's banking sector has made significant steps, there's still immense potential for growth as a large portion of the population remains underserved by traditional banking services.

This gap in banking access is rooted in several interrelated factors, including high infrastructure costs, the prevalence of cash-heavy economies, and insufficient financial literacy.

Physical Banking Infrastructure & Cash Economies

Despite advances in digital technology and mobile connectivity, approximately 50% of the adult population in Sub-Saharan Africa remains unbanked. The disconnect between banking infrastructure and the population is primarily driven by the high costs of establishing and maintaining physical banking infrastructure, which makes it economically unfeasible to serve low-income individuals and small businesses, particularly in remote or underserved areas. 

This challenge is compounded by limited access to financial services, inadequate digital infrastructure, high transaction costs, and cultural barriers that discourage the use of formal banking systems, leaving significant portions of the population without effective financial support.

In regions with low population density, such as rural areas, the cost of setting up branches and ATMs often outweighs the potential returns. According to a report by McKinsey & Company, the cost-to-serve for low-income clients is higher compared to middle and high-income clients due to lower transaction volumes.

Many African economies remain heavily reliant on cash transactions. In countries like Nigeria and Kenya, cash transactions dominate, with over 90% of retail transactions conducted in cash. This reliance on cash not only limits the adoption of formal financial services but also poses challenges to cash management and financial stability.

In Africa, banking structure is limited. Even where banking infrastructure exists, it is often inaccessible to the majority of the population. A study by the World Bank found that in rural areas, individuals lack access to a bank branch or an ATM. This geographical and infrastructure gap creates barriers to financial inclusion, as many people cannot access banking services due to distance and lack of reliable transportation.

Traditional banking infrastructure in Africa is characterized by its reliance on physical branches and expensive operational models. Establishing and maintaining these branches, especially in rural and underserved areas, incurs significant costs. For many financial institutions, the expenses linked to maintaining physical locations in sparsely populated regions do not align with the potential returns from these markets. 

Consequently, banking services are often concentrated in urban areas, leaving rural communities with limited or no access to formal financial services.

Cash remains the predominant medium of exchange in many African economies, further entrenching financial exclusion. Several factors, including the lack of reliable banking infrastructure and low financial literacy, drive this reliance on cash. Many transactions occur informally, through savings clubs or personal networks, reinforcing a cycle of exclusion from the formal financial system. 

This complex interplay of factors has resulted in a significant segment of Africa's population being excluded from basic banking services, which are essential for economic stability and growth. The financial infrastructure gap highlights the growing need for innovative solutions that can bridge this divide and provide broader access to financial services.

The Emergence of Mobile Money and Digital Banking

Mobile Money

The financial exclusion experienced by many in Africa has led to the emergence of mobile money and digital banking as critical drivers for increasing financial inclusion. Mobile money platforms have been instrumental in providing financial services to underserved populations, leveraging the widespread use of mobile phones to bypass traditional banking infrastructure.

Mobile money has revolutionized financial services in Africa by allowing individuals to perform financial transactions through their mobile phones. One of the recent examples of this is Kenya’s M-PESA, which has shifted the financial landscape. M-PESA, launched by Safaricom in Kenya in 2007, is recognized across Africa. 

By 2021, it had attracted 66.2 million active users and was processing transactions worth more than $33 billion annually. Despite its popularity, M-PESA has several significant limitations. One of the primary issues is its high transaction fees, which are a considerable burden for many users, especially those in low-income regions. This makes financial services less accessible to the very communities that need them most. Furthermore, M-PESA’s range of services is relatively narrow. Compared to traditional banks, M-PESA offers limited options for investment and international transactions, which restricts users who need more than basic financial services.

Orange Money, introduced by the Orange Group in 2008, operates in several West and Central African countries. While it attempts to reach rural and remote areas, the existing infrastructure in these regions is often inadequate. Poor internet connectivity and unreliable mobile networks significantly hinder its effectiveness, making it difficult for users in these areas to access even the most basic financial services. 

Moreover, like M-PESA, Orange Money has high service costs, which is a struggle for low-income individuals, further limiting its reach and impact. Additionally, the costs associated with digital banking services can be prohibitive for low-income individuals, creating a barrier to access. 

Regulatory hurdles and the need for robust cybersecurity measures further complicate the landscape, requiring ongoing adaptation and innovation.

Shortcomings of Mobile Money

Despite its success, mobile money platforms face several challenges. First, while they provide essential services such as money transfers and bill payments, they often lack the comprehensive financial services available through traditional banks. 

For instance, mobile money services typically do not support investment options like stocks or bonds, limiting users' ability to grow their wealth. Additionally, the service also suffers from relatively high transaction fees which impacts users, particularly those with lower incomes, and a limited suite of financial products compared to more developed financial markets.

Security is another major concern. Mobile money services are vulnerable to fraud and cyberattacks, which can reduce user trust and limit adoption. This also causes the economy to be even more cash-reliant as people lose trust and do not want to risk their money. 

Regulatory issues also pose challenges, as mobile money operators must navigate complex and often inconsistent regulations across different countries.

Digital Banking: Expanding Financial Horizons

In parallel with the rise of mobile money, digital banking has emerged as a powerful force for financial inclusion in Africa. Digital banking platforms offer a range of services that go beyond the capabilities of mobile money, including online banking, digital loans, and investment opportunities. 

Digital banking services often cater to more tech-savvy users which can exclude those who are less familiar with technology or lack access to the necessary devices. Financial literacy remains a significant barrier, as many individuals in developing regions are not well-versed in managing digital financial tools or understanding their benefits, especially as half of Africa’s fintech companies started operating in the last six years. 

In a short time, this booming industry has reached the underbanked, giving them the opportunity to participate in the digital economy. 

Fintech companies such as Flutterwave, Chipper Cash, and OPay have been at the forefront of this transformation in Africa, bringing to millions services such as digital bill payments, loans, and even a digital sales platform during the pandemic, all while navigating a complex regulatory environment. These companies have made accessible reliable money transfers in USD between the United States and the United Kingdom and different African countries.

The potential for growth remains immense as millions are either still unbanked or underutilizing banking services in the region.

Indeed, despite the rapid evolution of the digital banking landscape, fintech has not yet gained the trust of the bulk of the African public, compared to more established financial institutions. 

While established banks possess the trust factor, according to the African Banker Digital Banking Transformation Report 2023, only about a quarter of African banks respondents have spent more than $3 million on the digital transition, despite recognizing the importance of technology in the sector. Furthermore, 40% of these respondents view fintech companies as a threat.

Putting their strengths together, traditional banks and fintech companies have the potential to accelerate financial inclusion.

EZO – A Holistic Solution for Financial Inclusion

EZO sets itself apart from existing financial services by bringing high Canadian banking standards to Africa. While many platforms focus on disrupting the local banking scene, EZO takes a collaborative approach, working alongside local banks to improve financial services without causing disruptions.

The EZO app will offer a comprehensive range of financial services all in one place — daily financial services, payments, transfers, savings accounts, investments, and business management. This integration will make it easier for users across Africa to handle all their financial needs through a single accessible platform.

The distinctive strategy is to work closely with local banks and regulators. This approach ensures that our services are tailored to meet regional needs while complying with local regulations. Our commitment to collaboration helps build trust and ensures that our solutions fit well within existing financial systems.

In a place where financial services have been unevenly distributed, EZO’s approach represents a huge leap toward achieving inclusive and accessible banking for all. By addressing key challenges such as high transaction fees, limited service offerings, and inadequate infrastructure, EZO is positioned to make a meaningful impact on financial inclusion in Africa.

EZO’s Suite of Products

• EZO SuperWallet: This all-in-one financial application integrates payments, basic financial services, and investments into a single, user-friendly platform. It allows users to manage their finances efficiently, whether they are making transactions, saving money, or investing in various financial products.
• EZO Swap: EZO Swap facilitates seamless conversion between fiat currencies and cryptocurrencies within the EZO platform. This feature provides a simple, user-friendly interface for quick and cost-effective currency exchanges, catering to the needs of individuals who engage in both traditional and digital financial activities.
• EZO Pay: EZO Pay enables users to send, receive, and pay using any fiat currency or cryptocurrency. This functionality eliminates the need to convert currencies when traveling or conducting international transactions, making it easier for individuals and businesses to operate globally.
• EZO Earn: EZO Earn provides access to savings and investment products tailored to users' risk appetites. With options to invest in fractional shares of public companies, EZO Earn offers opportunities for wealth growth and protection against inflation.
• EZO Business: EZO Business offers a basic Point-of-Sale (PoS) system that allows businesses to manage payments, inventory, accounting, and employee payments through a smartphone. This solution simplifies business operations and financial management, reducing the need for costly hardware and infrastructure.

EZO will address the need for efficient international money transfers with security at its core. The app supports secure and straightforward global transactions, making it easier for users to send and receive money across borders. 

This focus on remittances adds significant value, especially for individuals and businesses that need to manage international payments.

The gap in banking access in Africa shows the need for innovative solutions that can bridge the divide and provide comprehensive financial services to underserved populations, especially those in rural and remote areas. 

EZO’s all-in-one financial app will offer a complete solution, integrating a wide range of services and working in partnership with local banks and stakeholders to enhance financial inclusion and support economic development.

‍

Written by Krish Asher