Digital-payment revenue in sub-Saharan Africa expected to soar

Solomon Teague
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Electronic-payments revenue in sub-Saharan Africa (SSA) could reach up to $16 billion annually in the next few years if the growth of mobile payments in Kenya is repeated across the continent, according to a recent study by McKinsey and the Gates Foundation.

Although the prediction is undoubtedly on the optimistic side, it illustrates the potential of digital payments in emerging markets.

The study assessed formal and informal payment channels in 44 nations in SSA, making projections based on three possible scenarios.

The first assumed P2P payments in Africa would digitize at Kenya’s current penetration rate for long-distance digital payments of 70%, increasing region-wide P2P payment revenue by 60% to 70%. This would see such revenue increase from $1.6 billion to $2.7 billion, with corresponding digital-payment revenue rising from $6.6 billion to $7.7 billion.

A more optimistic scenario assumed other types of long-distance payments, such as wages and government-to-public payments, digitized to Kenya’s current level of 70%. This would stimulate total revenue growth for electronic payments by 50% to 60%, to between $10 billion and $11 billion annually, according to McKinsey.

The most optimistic scenario envisaged P2P payments maintaining the 70% rate of digitization, with the total transaction volume growing at the same rate as seen in Kenya between 2006 and 2009, during the early expansion of M-Pesa – Kenya’s mobile payment system.

“In Kenya, survey data show the number of P2P remittance senders grew by 215% between 2006 and 2009, probably the result of M-Pesa’s rapid deployment,” says McKinsey. “If the region’s P2P electronic payments were to grow similarly, its electronic-payment revenue would exceed its baseline by about 50%, reaching $15 billion to $16 billion.”

McKinsey believes its scenarios are relatively conservative relative to Africa’s potential. The first two scenarios assume no growth in P2P payments, despite better options probably becoming available, while all scenarios ignore incremental revenue from other types of payment flows or the enhanced business opportunities improved mobile payments channels would offer.

However, it also acknowledged replicating Kenya’s success would not be easy. While mobile payments were growing at their fastest rate, M-Pesa enjoyed a dominant market share that is usually shared by the top two to three providers in a market, says Sachin Shah, head of cash management at Standard Bank.

Across Africa, banks are typically responsible for driving innovation and there is little sign of evolving interoperability between banks.

Mobile payments can only take off if people trust the providers, understand the offering and the cost relative to cash makes it affordable. These criteria were satisfied in Kenya where regulatory clarity left telecoms companies such as M-Pesa responsible for the process, with customers having clear recourse in the event of a dispute.

Few other markets have the regulatory clarity of Kenya. Most African countries are working on reforming their regulations to encourage growth, but they have much to do. In Nigeria, for example, the absence of a national ID system makes verification challenging and it is hard to see mobile payments gaining traction until this has been resolved.

Africa needs established processes to give customers comfort that problems can be quickly resolved. In Kenya, M-Pesa has the mandate to resolve such problems, but in most other countries nothing can be done without involving the police, introducing delay and complexity to the process.

Kenya has other advantages, including a relatively small population – under 50 million – and an absence of physical geographical challenges that other African countries have to contend with, such as mountains or deserts.

However, Kenya’s success has set an example for other African countries to emulate and many should have closed the gap within the next three to five years, predicts Standard Bank’s Shah.

Robert Schiff, a principal at McKinsey in San Francisco says: “This is not a walk-before-you-can-run situation – this is a leapfrogging opportunity. We already have a situation where Kenya is well ahead of the US in mobile payments, showing what’s possible.

“With banks, telcos and governments across Africa, as well as international bodies, such as the G20, all prioritizing financial inclusion, there is no reason why other African countries can’t make similar progress.”

South Africa, with the most-developed financial infrastructure, is probably the closest to emulating Kenya’s success in mobile payments. However, smaller economies are also making progress.

Tanzania and Uganda are making substantial progress towards Kenyan levels of digital payments, says Jake Kendall, head of the research and innovation initiative within the Financial Services for the Poor team at the Bill & Melinda Gates Foundation. In Tanzania, 45% of adults have used mobile money, with Uganda only just behind on 43%.

“The big question is whether other countries will develop on the Kenyan, single-mobile-operator model, or something that incorporates banks and other providers and offers interoperability,” says Kendall. “The former is much easier to set up, but the latter has more potential for the economy, and even Kenya is looking at how to bring new providers into the system.”