At present, some 1.7 billion people live without access to banks or similar financial institutions, according to the World Bank’s Global Findex Database 2017 (Findex).
Traditionally, these unbanked individuals have earned their wages in cash, paid their bills in cash, and generally functioned in isolation of the 21st century economy, lacking access to the banking and financial services that so many people living in first world countries have come to take for granted.
But the proliferation of mobile connectivity stands to shatter the status quo.
Globally, 1.1 billion unbanked adults have mobile phones, and about 480 million unbanked adults have access to the internet, according to the Findex.
This connectivity has ushered in the rise of fintech in the developing world. Read on to learn more about the plight of the unbanked, and how digital financial services are ushering in a new era of financial inclusion, particularly in Africa – a continent that accounts for more than its fair share of the global unbanked population.
The true costs of being unbanked
The consequences of being unbanked reach far beyond simply not being able to hold a savings account or deposit a paycheck.
The unbanked are cut off from a host of the luxuries granted to those who hold bank accounts. The unbanked can’t formally take out loans from financial institutions, creating significant obstacles when it comes to making major purchases. According to the Findex, unbanked individuals are less likely than their account-holding counterparts to own homes or land.
Unbanked individuals also face enormous transaction fees for basic services like check cashing or money transfers. According to the University of Pennsylvania’s Wharton School of Business, an unbanked individual with a full time job has to pay up to USD 40,000 on check cashing services over the course of his or her lifetime.
Furthermore, unbanked individuals have often faced a flurry of issues related to the lack of documentation that tends to accompany cash payments. If an unbanked family who keeps their savings in a shoebox under the bed is robbed, they will face an uphill battle proving the extent of their losses to law enforcement officers.
The problem is particularly poignant in Africa. According to a study published by the International Finance Corporation, about 80 percent of Africa’s population of 1 billion people lacks access to formal banking services.
According to the report, the problem is exacerbated by an array of issues specific to the continent, including currency volatility and a low supply of products related to savings, insurance, credit and payment transactions. “There is a prevalent perception that banking is for the rich, in a continent where financial services such as opening a bank account can be painfully bureaucratic,” the report reads.
Africa: fertile grounds for the rise of fintech
But hope is not lost.
News site Quartz recently revealed that fintech startups accounted for about one-third of African venture funding in 2017.
According to the report, startup funding in the continent surged by 51% during the year, reaching USD 195 million. The report noted that fintech plays a unique role in Africa. “While fintech is seen as disrupting the traditional financial sector in more advanced economies, in Africa it is bridging gaps that have not been addressed by the banking industry to begin with,” the report said.
A closer look at the fintech situation in Africa reveals that the prospects of the continent’s unbanked have risen dramatically in correlation with the advent of a host of fintech apps and services.
In Sub-Saharan Africa, some 21 percent of adults currently hold mobile money accounts, a figure that has nearly doubled since 2014, according to the Findex.
Two leaders in Africa’s fintech revolution are Nigeria and South Africa. In a recent survey, PwC reported that fintech investments across Africa could reach USD 3 billion by 2020, with Nigeria and South Africa each accounting for significant portions of these investments.
According to the survey, in Nigeria alone, more than 62 percent of customers will use mobile applications to access financial services in the next few years, and up to 40 percent of the country’s financial service businesses face risks related to the capacity of fintech to disrupt the market.
Meanwhile, South Africa also appears to be bracing for disruption. In January of this year, rapidly growing demand for fintech products pushed the South African Reserve Bank (SARB) to establish its own fintech unit, tasked with monitoring the impact of new technological developments on the traditional banking sector, according to news site Fintech Switzerland. “Given the rapid developments in financial technology it is evident that we are potentially facing one of the most severe innovation and technology-driven disruptions to products and services, particularly in the financial sector space,” the news site cited SARB Deputy Governor Francois Groepe as having said.
A host of promising new fintech startups are rapidly spreading their influence in the region.
Founded only two years ago, African digital payment provider Flutterwave has already processes some 10 million transactions, amounting to upwards of USD 1.2 billion. According to Quartz, Flutterwave and its competitor Paystack jointly raised more than $100 million between 2015 and 2017.
Another firm that has been at the forefront of the fintech revolution in Africa is Humaniq, which represents a growing trend of companies reaching beyond business, and endeavoring to give something back to the continent. Guided by the goal of expanding the banking sphere to the masses in historically underserved economies, Humaniq developed an app that can be used on low-cost mobile devices. The app uses peer-to-peer transactions to connect people who have thus far lived without access to traditional banking services. As of June 2018, the Humaniq app had been downloaded upwards of 350,000 times in Africa.
Beyond simply facilitating payments, Humaniq makes a variety of efforts to raise awareness and introduce innovation to the region. It runs a global challenge which entices social entrepreneurs to submit proposals for blockchain startups that aim to empower Africa’s unbanked. Its social awareness campaigns have thus far included a broadly viewed documentary highlighting the plight of Africa’s unbanked. It also directly engages local entrepreneurs through its network of African ambassadors.
With Humaniq, Flutterwave, Paystack and a host of other innovative solutions sweep the continent, the financial future of Africa’s unbanked appears to be brighter than ever.