The COVID-19 pandemic, despite its debilitating effects, promoted financial inclusion, particularly in emerging markets like Africa, and helped boost digital payments. This article introduces CHINWE UZOHO, Regional Managing Director, West and Central Africa at Network International, a leading digital commerce enabler in the Middle East and Africa, providing a full range of technology-enabled payment solutions to merchants and financial institutions of all types and sizes, assesses, how digital payments are emerging as a key driver in Africa’s post-Covid recovery.
As Africa’s economies embark on the path to post-COVID recovery, the ever-growing adoption of digital payments is emerging as a key driver, expanding financial inclusion and potentially accelerating cross-border trade. African governments have introduced incentives and reforms that encourage cashless transactions and built supporting infrastructure.
Despite these positive advances, more needs to be done to mainstream mobile money as an engine for economic growth across the continent, as a much-vaunted Pan-African Free Trade Agreement, backed by an instant payments initiative, underscores the potential for digital transactions to play a key role in bolstering Africa’s financial wealth.
The transition from cash to digital money in Africa had been growing rapidly, albeit from low levels, before the pandemic hit, helping to address a number of the continent’s development challenges. These include millions of unbanked citizens and bureaucratic barriers to cross-border trade, particularly for informal traders, an important economic community. COVID-19 has accelerated mobile money adoption amid concerns that using cash could spread the virus and lockdown restrictions boosting e-commerce.
According to the GSMA, the industry association of mobile network operators, the value of digital transactions in sub-Saharan Africa in 2020, at the height of the pandemic, was $495 billion, up almost a quarter from the previous year. In 2021, the number grew to just over $700 billion, accounting for about 70 percent of global transaction value, which exceeded $1 trillion for the first time.
A recent World Bank report on how COVID-19 has fueled a surge in digital payments indicates that 33 percent of adults in the region now have a mobile money account — a proportion three times larger than the global average of 10 percent. The report also revealed the changing nature of cashless transactions: originally used as a means of sending remittances, in the past year 3 in 4 mobile account holders in Africa have made or received at least one non-person-to-person payment.
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In fact, a 2021 Statista survey showed that 84 percent of internet users in Kenya use mobile phones to pay, a much higher acceptance rate than in Europe. The corresponding figure in Nigeria was 60 percent. The two countries clearly lead the African field while others lag behind due to less developed digital payment infrastructure, low income and education levels, and deep-rooted preferences for using cash.
Notwithstanding these differences, the recent accelerated growth of digital payments across the continent has done much to promote financial inclusion. According to the World Bank report, “The proliferation of mobile money accounts has created new opportunities to better serve women, the poor and other groups traditionally excluded from the formal financial system.”
But as COVID-19 took hold on the continent, some African governments sought to encourage their citizens to turn to mobile money by waiving transaction fees. Such proactivity reflects a general willingness to create an environment conducive to digital transactions, not least because the continent’s young population is embracing it. Indeed, in its assessment of the global regulatory environment in 2021, the GSMA gave most sub-Saharan countries high overall index scores (above 70 out of 100) based on indicators such as consumer protection, know-your-customer (KYC) requirements, infrastructure and investment environment, according to Quartz Africa.
However, the business daily said the index also highlights concerns. Kenya, Côte d’Ivoire and Senegal, for example, underperformed on KYC, while West Africa’s four major mobile money markets, Côte d’Ivoire, Senegal, Mali and Burkina Faso, fell short on consumer protection. And while Nigeria excelled in KYC and consumer protection, it lagged behind Ghana, Liberia and South Africa in terms of infrastructure and investment supportive environment.
At the same time, some observers have warned of the risks of over-regulation. African payments consultancy AfricaNenda has argued that certain measures are holding back the spread of mobile money. It suggests that taxing digital transactions could reverse their adoption and restrictions on the flow of data across borders – in the form of data localization laws – could increase costs for providers and consumers, regardless of the legitimacy of national privacy concerns.
While there is clearly room for improvement on the regulatory front, a big incentive for governments to find the right balance of reforms is the prospect of boosting trade with neighboring countries through the ambitious African Continental Free Trade Area (AfCFTA). The goal is to create a powerful economic bloc, the largest free trade zone since the founding of the World Trade Organization. The initiative could serve as a framework for the region’s economic recovery, potentially increasing the volume of intra-African trade by more than 81 percent by 2035, according to the World Economic Forum, lifting millions of people out of extreme poverty.
Underpinning and facilitating AfCFTA is a new pan-African payment processing system, PAPSS, that will break down some of the legal and regulatory barriers hampering trade. In essence, PAPSS means that merchants no longer have to spend time and expensively converting local currencies into a third currency such as the dollar or euro. According to the International Institute for Sustainable Development (IISD), the system could cut transaction times to seconds, overcoming one of the key obstacles to the growth of intra-African e-commerce, trade in services and goods. “The system will transform the payments infrastructure,” the IISS said, noting that “consumers will be able to make payments in a local currency while sellers will be paid in their own currency.”
It’s all very promising, but to realize its potential for the digital economy, Africa needs to focus on more fundamental issues: internet penetration and usage. A report by the GSMA late last year found that just 28 percent of Sub-Saharan citizens were connected to the internet, while 1 in 5 live in areas without mobile broadband. And yet a significant number of those who have access to the latter do not use the Internet. Barriers to adoption include factors such as affordability of cell phones and data, and a lack of literacy and digital skills, according to the industry association. The World Bank’s report on the COVID-19-related surge in digital payments found that a third of mobile money account holders in sub-Saharan Africa said they “could not use their mobile money account without the help of a family member or an agent.” .
So African governments face major challenges if they want digital payments to really drive economic recovery. As they work to encourage low internet connectivity, they must improve the enabling environment for mobile money operators and incentivize usage by driving down costs for consumers and closing gaps in their ability to use the internet. It’s a tall order, but there are signs that many governments are up to the task – not least as they recognize that cashless transactions are key to expanding financial inclusion and thereby boosting economic activity.