Why has traditional banking failed Africa?
How Traditional Banking Lost its Mojo in Africa and Fintech Became the New Rockstar.
🌟Good morning, entrepreneurs & tech enthusiasts!
Today, we delve into the banking landscape in Africa, where a staggering 80% of the workforce is employed in the informal sector. In a continent with 1.2 billion people, only 484 million Africans were formally employed in 2022.
Traditionally, banks perform two primary functions: accepting deposits from those with funds and lending these pooled resources to those who need them provided they are deemed safe to be able to pay back. However, the existing banking framework largely caters to stable economic environments and formally employed, salaried individuals. This model has led to a significant problem, with over 350 million adults in Africa remaining financially excluded. These individuals operate on a cash-only basis, lacking access to bank accounts, credit and debit cards, or loan facilities.
Opening a bank account in a typical African country is still a lengthy and bureaucratic process. Requirements include a national ID or valid passport, proof of residence, and proof of employment or income source. While these measures align with global banking standards to prevent illicit financial flows (IFFs), they create significant barriers for the average African.
For example, at Standard Bank in South Africa and many other banks across Africa, if your proof of residence is not in your name, you need to involve a landlord, local chief, or councillor. In a world where things can be done with a click of a button, this is just too much hassle.
Let me share a personal anecdote that's juicier than your morning coffee. So, I score this grant for my healthcare brainchild, and the bank starts throwing paperwork at me like it's a ticker-tape parade. Unemployed and document-challenged, they demanded proof from the grant board, a letter from the local councillor confirming my residence, and probably a DNA sample for good measure. But alas, the bank rejected the councillor's letter, claiming the stamp wasn't up to their stamp standards. Seriously, are we in a banking drama or a Shakespearean tragedy? This, my friends, is what I mean when I say it is a hustle to bank in Africa.
Enter Fintech
In the epic saga of African finance, fintech has emerged as the superhero, swooping in when traditional banks were stuck in the mud like a car without GPS. This dynamic duo of innovation and accessibility is filling the void that banks left behind, turning financial frowns into digital high-fives.
In a continent where mobile phones are practically an extra limb, fintech startups are having a field day. It's like trying to find a needle in a haystack, but the haystack is made of smartphones, and the needle is financial empowerment. With more startups joining the party than there are emojis on your keyboard, the market pie is starting to resemble a pie-throwing contest at a carnival. And who doesn't love a good financial carnival?
Opening an account with these fintech whizzes is simpler than trying to explain cryptocurrency to your grandma. Platforms such as M-Pesa and EcoCash are the cool kids who let you into the clubhouse with just a secret handshake – in this case, a mobile phone. So, forget about paperwork taller than your pet giraffe; all you need is a device that fits in your pocket. With that, you're not just opening an account; you're unlocking a world of transactions, savings, and financial adventures. It's finance, but fun – the kind of fun that doesn't involve complicated spreadsheets or boring pie charts.
Currently, only 44 percent of the adult population in Kenya has access to a bank account, compared to a 76% penetration rate of mobile money subscriptions. Over 50 percent of Kenya’s GDP flows through M-Pesa, with over 237 million person-to-person transactions.
This pattern is replicated in Zimbabwe, where we see 6.7 million registered users on the EcoCash platform, three times more compared to 2 million conventional bank account holders in the country.
What makes them different?
In the financial battle royale, fintech startups are the cool rebels challenging the established order of traditional banks. It's not just a David vs. Goliath story; it's David with a jetpack and Goliath stuck in paperwork. Banks are like that friend who never changes their favourite pizza topping, insisting the world revolves around them. Fintech, on the other hand, is the savvy buddy who gets you avocado toast before you even knew you needed it.
Fintech understands the struggles of the everyday African trying to make a transaction; it's like they've been reading our minds or at least our WhatsApp conversations. While banks are stuck in Stone Age, fintech is the cool kid on the block, shaking things up, and caring about your financial dilemmas. They're not just businesses; they're problem-solving wizards, turning headaches into high-fives. No wonder they're growing faster than a rumor at a family reunion. So, here's to Fintech, the disruptors of dullness and the champions of change in a world where financial innovation meets user-friendly charm.
Fintech startups understand that they have to rapidly disrupt traditional banking by innovating consumer financial services and creating digital systems and infrastructure. They are leveraging technology to provide efficient and accessible financial services to the unbanked population in Africa.
In addition, the bigger advantage that fintech startups enjoy is their agility and flexibility in their approach to innovation. They can quickly adapt to changing market conditions and customer needs, allowing them to stay ahead of the curve. Their adaptability allows them to ship features faster than traditional banks can say, “Next customer, please.”
Perhaps the biggest differentiator with fintech startups is that they have a lower cost structure compared to traditional banks, enabling them to offer more affordable financial services to their customers.
Will banks ever improve?
Lately, we are seeing the rise of digital banking as a department in traditional banks. Banks are feeling the heat from fintech startups and are using their financial muscle to compete by modernizing their core business activities and services. Many banks are collaborating with fintech startups to offer technology-driven services. Banks are also investing in proper technologies and improving the general user experience to keep up with changing customer needs and retain a competitive edge against fintech disruptors.
In addition, banks are focusing on providing personalized and convenient financial services to their customers, which has helped them build a loyal customer base. Like startups, they are adopting agile and flexible approaches to innovation, allowing them to quickly adapt to changing market conditions and customer expectations.
Will they win?
I’m no oracle to tell the future; however, what I can say is if banks can manage to do away with their bureaucratic practices and channel their financial muscle towards financial innovations, they can make a significant impact in the market. I guess we will see.
Cheers, stay caffeinated and productive my friends,
Google Jr