Prof. Njuguna Ndungu: Effects of Digitization of Payments within the African Continent

“Overall, the digitization of the payments sector in Africa offers a range of opportunities for foreign investors, but careful research, understanding of local regulations and market trends, and a long-term strategy are important for success,”says  Prof Njuguna Ndungu

1)    What sort of impact has the digitization of payments had on the African continent?

• Effective and efficient

Digitization of payments has had a significant impact on the African continent by increasing the coverage and reach for individuals and small businesses. This has been driven by the widespread adoption of retail electronic payments, which have made it easier for people to send and receive money, pay bills, and access credit as well as raise the level of financial inclusion. Additionally, the digitization of payments has increased transparency and reduced the cost of financial transactions, leading to greater efficiency and economic growth. Once the payments system is working effectively and efficiently, it is a game changer to the economy

2)    How would you describe the uptake of the digitization of payments in African states? And is there a geographical area which has shown more urgency in adopting this mode of payment and why is that? And what of the converse, which states (from which regions) are showing signs of being slow or laggards in the uptake of this technology?

Kenya leads the way in retail electronic payments and financial inclusion

The uptake of digitization of payments has varied across African states, with some countries showing a high degree of adoption and others lagging behind. One of the regions where the digitization of payments has taken off is in East Africa, particularly in Kenya and Tanzania, where mobile money platforms such as M-Pesa have been widely adopted. This is largely due to the high penetration of mobile phones and limited traditional banking infrastructure in these countries, which has made digital payments a more viable option for many people.  This essence was driven by the need to change the design of the financial service for low-income cohorts.

In West Africa, countries such as Ghana, Nigeria, and Senegal have also shown a high degree of uptake, driven by the largely young population, high mobile phone penetration, and increased awareness of digital financial services.

On the other hand, countries in the Southern Africa region, such as South Africa and Namibia, have been slower to adopt digitization of payments, due in part to a more developed traditional banking infrastructure and a lower mobile phone penetration rate.

Also, some countries in the Central Africa region, such as Cameroon and DRC, have been slow to adopt digitization of payments, due to a lack of regulations and infrastructure, as well as a lack of awareness of digital financial services among the population.

3)    What factors are emboldening African governments to embrace the form of payment and towards what ends?

There are several factors that are emboldening African governments to embrace the digitization of payments, including:

1. Financial inclusion: Digitization of payments can increase access to financial services for individuals and small businesses, particularly in rural and underbanked areas, which can lead to greater economic growth and development.  The banks formed the retail electronic payments platforms as a technological tool to manage micro savers and micro depositors.
2. Transparency and efficiency: Digital payments can reduce the cost of transactions and increase transparency, leading to greater efficiency in the financial system.
3. Economic growth: The digitization of payments can also boost economic growth by increasing the velocity of money and reducing the cost of doing business.
4. Tax collection: Governments can also benefit from the digitization of payments by increasing the ease of collecting taxes, as digital payments can be tracked and traced more easily than cash.
5. Anti-corruption: Digital payments can reduce opportunities for corruption by increasing transparency and reducing the use of cash, which is often used to facilitate illicit activities.
6. Security: Digital payments can also enhance security by reducing the risk of fraud and theft associated with cash transactions.

Overall, the goal of the African governments embracing digitization of payments is to increase financial inclusion, promote economic growth, and reduce corruption and fraud.

4)    What challenges are African governments facing in introducing this technology and why?

African governments are facing several challenges in introducing the digitization of payments, including:

1. a)Fibre optic physical infrastructure so that none is left behind.

Limited infrastructure: Many African countries lack the necessary infrastructure, such as internet connectivity and reliable power supply, to support the widespread adoption of digital payments.

1. b)Lack of regulations: Some African countries have yet to establish clear regulations and oversight for digital payments, which can create uncertainty for businesses and consumers and limit adoption.
2. c)Lack of awareness: Many people in Africa, particularly in rural and underbanked areas, may not be aware of digital payments or may not have access to the necessary technology, such as smartphones, to use them.
3. d)Data privacy and security: As digital payments require personal information, there are concerns about data privacy and security and the risk of identity theft and fraud.
4. e)Competition with traditional financial institutions: In some countries, digital payments may be seen as a threat to traditional financial institutions, which can lead to resistance to adoption.
5. f)Limited financial literacy: In certain areas, the population may lack the financial literacy to fully understand and use digital payment systems.
6. g)High cost of implementation: The cost of implementing digital payment systems can be high, particularly for governments and small businesses, which can limit adoption.

Overall, the challenges of introducing digitization of payments in Africa are multifaceted and complex, and they require a comprehensive approach to address them. African governments need to provide the necessary infrastructure, regulations, awareness & education, and ensure data privacy & security.

5)    For a probable foreign investor, what sort of opportunities are there if one is interested in investing in this sector?

For a foreign investor interested in investing in the digitization of the payments sector in Africa, there are several opportunities, including:

1. Mobile money: Investing in mobile money platforms such as M-Pesa, which have already been widely adopted in some African countries, can provide a strong return on investment.
2. Payment gateways and e-commerce: Investing in payment gateways and e-commerce platforms can tap into the growing trend of online shopping in Africa.
3. Digital banking: Investing in digital banking platforms and services, such as online and mobile banking, can provide access to the underbanked and unbanked population in Africa.
4. FinTech: FinTech companies that offer innovative financial services, such as microfinance, can provide opportunities for investment.
5. Infrastructure: Investing in infrastructure such as internet connectivity, power supply, and data centers can help to support the growth of digital payments in Africa.
6. Technical support: Investing in technical support such as cybersecurity and data privacy can help to ensure the security and integrity of digital payments in Africa.
7. Payment terminals and POS: Investing in payment terminals and POS systems can tap into the growing demand for digital payments in the retail and small business sectors.

Overall, the digitization of the payments sector in Africa offers a range of opportunities for foreign investors, but careful research, an understanding of local regulations and market trends, and a long-term strategy are important for success.

6)    Do you have a timeframe by when you see the entire African Continent embracing this technology?

It is difficult to predict an exact time frame for when the entire African continent will fully embrace the digitization of payments. The adoption of digital payments varies greatly across the continent and depends on a number of factors such as access to infrastructure, regulations, and education.  The necessity of payments will however push adoption of this as unit costs lower and transparency increases, as well as lower risks.

However, there are indications that the uptake of digital payments is growing rapidly in many African countries. For example, according to a report by the World Bank, mobile money transactions in Sub-Saharan Africa reached $1.6 billion in 2020 and the number of mobile money accounts had grown from 2.6 million in 2010 to 662 million in 2019.

It’s also worth noting that many African countries are actively working to promote and support the adoption of digital payments. Several governments are introducing policies and regulations to encourage the growth of the digital payments sector and investing in the necessary infrastructure.

That said, it is likely that it will take some time for the entire continent to fully embrace the digitization of payments, as adoption will vary by country, region, and demographic. Some countries may continue to be slow to adopt digital payments due to a lack of infrastructure, regulations, and awareness, while others may quickly adopt the technology.

7)    For a probable foreign investor, what sort of opportunities are there if one is interested in investing in this sector?

For a foreign investor interested in investing in the digitization of the payments sector in Africa, there are several opportunities, including:

1. Mobile money: Investing in mobile money platforms such as M-Pesa, which have already been widely adopted in some African countries, can provide a strong return on investment.
2. Payment gateways and e-commerce: Investing in payment gateways and e-commerce platforms can tap into the growing trend of online shopping in Africa.  The innovation in inter-operable payments platforms that will increase the volume of payments and lower unit costs will be desirable.
3. Digital banking: Investing in digital banking platforms and services, such as online and mobile banking, can provide access to the underbanked and unbanked population in Africa.
4. FinTech: FinTech companies that offer innovative financial services, such as microfinance, can provide opportunities for investment.
5. Infrastructure: Investing in infrastructure such as internet connectivity, power supply, and data centers can help to support the growth of digital payments in Africa.
6. Technical support: Investing in technical support such as cybersecurity and data privacy can help to ensure the security and integrity of digital payments in Africa.
7. Payment terminals and POS: Investing in payment terminals and POS systems can tap into the growing demand for digital payments in the retail and small business sectors.
8. Blockchain technology: Investing in blockchain technology companies that are developing solutions for digital payments, remittances, and other financial services can provide a good return on investment.

Overall, the digitization of the payments sector in Africa offers a range of opportunities for foreign investors, but careful research, an understanding of local regulations & market trends, and a long-term strategy are important for success.

Several papers on the subject matter: Two of them are good examples:

• An M-Pesa Case study
• Digitization and state capacity