Human trade has always looked for more effective ways to do business, and this innovation is currently picking up speed. The way individuals pay for products and services has drastically changed in the twenty-first century. Electronic payments are gradually replacing cash, and more recently, digital currencies and cryptocurrencies have begun to challenge conventional ideas of money.
Africa has not only kept up with but in some cases gone ahead of this innovation, and the continent’s e-payments ecosystem is still being shaped by new investments and legal changes. While cash remains the preferred method of payment in Africa, a McKinsey survey indicates that e-payments will certainly challenge cash’s dominance shortly. Africa’s domestic e-payments market is expected to see revenues grow by approximately 20 percent per year, reaching around $40 billion by 2025,3, compared with about $200 billion in Latin America. This is due to banks and nonbank players alike innovating to reduce friction in domestic and cross-border payments and deliver much-needed new solutions to consumers and businesses.4 In contrast, over the same time frame, worldwide payments revenue is expected to expand at a rate of 7% each year.
In addition to our examination of the factors propelling the expansion of e-payments across the continent, this article includes perspectives from specialists in Africa (refer to the “Our perspective” sidebar). It draws attention to the opportunities and difficulties facing businesses trying to carve out a position in this quickly changing and fiercely competitive market.
Africa’s rapid transition to digital payments
With more investment than any other financial services sector and the strongest returns and growth in the industry over the last ten years, electronic payments are a growing business globally.5. Africa is no different. Including both domestic and international payments, Africa’s e-payments market brought in around $24 billion in revenue in 2020, of which $15 billion came from domestic electronic payments. 47 billion individual transactions totaling a little over $800 billion in transaction values produced $15 billion in domestic electronic payments revenue. Six However, compared to 50% or more in Turkey, for example, just 5 to 7% of all payment transactions in Africa were conducted through digital or electronic channels on average.
From 2000 onwards, e-payments have gained popularity in Africa and, like the rest of the world, experienced significant growth during the COVID-19 pandemic. Over the past two years, e-payments have increased at a record rate in many African countries. For example, the Central Bank of Nigeria reports that mobile-money transaction volumes in Nigeria doubled to approximately 800 million in 2020, and data from South Africa indicates that during lockdowns in 2020 and 2021, online commerce increased by about 40%.
Approximately 80% of participants in a McKinsey poll of payment specialists throughout Africa think that the transition to electronic payments will not only continue but will pick up speed. Specifically, 84% of respondents anticipate that e-payments would expand at a rate of at least 30% annually until 2025.
One-third of those surveyed anticipate an annual increase of 50%. McKinsey predicts that the e-payments market will expand by approximately 150 percent between 2020 and 2025, with around 188 billion in transaction volumes, and nearly $40 billion in revenues from domestic payments alone (Exhibit 1).
But this expansion will probably be unequal throughout the continent and will rely on a number of factors, including each market’s preparedness for infrastructure, level of e-commerce, adoption of mobile money, and regulation.10. Certain nations—most notably Egypt, Ghana, Kenya, Nigeria, and South Africa—have handled the shift to digital payments more quickly than others, and they either already have or are quickly building the necessary infrastructure and pertinent legislative frameworks to provide an advanced electronic payments system.
These five nations will probably account for half of the money generated by electronic payments in the future, with Nigeria growing at the quickest rate, at 35 percent annually. Other nations that are expected to experience robust growth of over 20 percent annually are Senegal, Uganda, Ghana, Kenya, and the Ivory Coast. With $5 billion in yearly sales, South Africa will still be the largest e-payments market in Africa in 2025, even if its overall share will probably decrease as other markets grow.
Four factors are influencing how e-payments will develop.
The future of payments in Africa is being shaped by a combination of factors including favorable demographics and economic growth, technological innovation, and advancements in payments infrastructure. Another element that is more difficult to forecast is the effect of more recent disruptions like open banking and digital currencies.
The future of payments in Africa is being shaped by a combination of factors including favorable demographics and economic growth, technological innovation, and advancements in payments infrastructure.
Young people living in cities and solid economic principles
Robust economic fundamentals and a youthful, urban consumer base are creating an opportune environment for expansion. Africa has the youngest median age of 20 years old and the quickest population growth rate in the world, averaging 2.7 percent annually, compared with a global average of 1%.11 By 2045, the majority of these youths will probably be city dwellers.12 A youthful, urban population offers an eager market for electronic payments, and changes in how people purchase, travel, and consume entertainment are already driving growth in e-hailing, e-commerce, and e-hailing services.
Electronic payments are also likely to benefit from fundamental economic growth factors and falling data costs. African economies are showing signs of recovering from the economic setbacks of the COVID-19 pandemic. Across the continent, governments are looking to prioritize internet and mobile phone penetration amid falling internet and mobile costs. Sub-Saharan Africa had more than 300 million mobile connections in 2017, 40 percent of which were smartphones, and this figure is expected to double to more than 600 million in 2022, with mobile data traffic expected to grow sevenfold.
Proliferation of alternative payment methods
As technology has advanced, so too has innovation. Consumers in Africa continue to benefit from an increase in the proliferation of alternative payment methods across the continent, offered by local and international fintech players and telecom companies. According to GSMA, globally registered mobile money accounts stood at 1.2 billion in 2020, roughly equal to the population of the continent, with more than $2 billion in daily processed transactions, equivalent to more than 40 percent of the GDP of sub-Saharan Africa.14 International remittances terminating in mobile-money wallets grew by 65 percent year over year in 2020 to around $1 billion, with no signs of slowing.15 Digital wallets that are linked to a variety of payment methods, including cards, accounts, and mobile money, also are growing in availability and adoption. Card-linked digital wallets, for instance, are a significant driver of growth in the issuance and usage of cards, including virtual cards.
New and innovative technologies are also enabling easier consumer and merchant transactions and new business models and offerings. For instance, integrated universal QR codes, including those sponsored or built by central banks or similar institutions, are helping to reduce complexity as the number of payment methods grows. For example, Ghana’s Quick Response service (GHQR) enables payments from bank accounts, mobile money, and cards, and Nigeria has launched the NQR, a similar solution. Meanwhile, interoperability between competing mobile wallets has been achieved in most countries.
Payments infrastructure is reducing friction and boosting integration
Infrastructure investments are helping to accelerate electronic payments domestically and across borders, while offline channels are proving to be a critical bridge between Africa’s large stock of cash and fast-growing electronic payments.
On the domestic payments front, Africa is experiencing an increase in real-time payment infrastructure enabling instant account-to-account transactions. A few countries are investing in new rails or upgrading existing ones with modern technology, but only six countries were live with real-time payments at the end of 2021. A recent ACI report showed that Nigeria is already in the top ten of global real-time transaction rankings in absolute terms, ahead of the US, Japan, and Brazil, while Kenya is among the ten countries expected to experience the fastest growth in real-time payments.16 Egypt has approved regulations to enable instant payments, and Ghana has recently introduced instant payments. Tanzania and other countries are following suit.
While investments in real-time payments infrastructure have been led mostly by central banks, regulators, or associations of banks and focused on domestic payments systems, a new breed of fintech and other players are also rapidly integrating endpoints across countries, developing modern rails that enable faster and cheaper intra-Africa cross-border payments. We expect that these solutions will continue to be scaled up across more geographies and payment methods.
The Pan-African Payment and Settlement System (PAPSS)—which is being developed by the African Continental Free Trade Area to ease payment constraints across Africa’s complex network of more than 50 countries and about 40 different currencies—is a potentially transformative development for cross-border payments.17 At the same time, regional initiatives such as the SADC RTGS18 are already helping to improve transaction settlements within regions that would previously have required more complex and expensive correspondent banking arrangements and counterparties outside of Africa.
Because of the continuing dominance of cash in Africa, offline channels, especially agent networks, are another critical component of African e-payment infrastructure. With the rise of mobile money in the late 2000s, these networks have extended beyond cash-in, cash-out (CICO) services, expanding in size and complexity to facilitate electronic payments and provide a platform for the distribution of financial services. SANEF in Nigeria, Mukuru in Southern Africa, and Fawry in Egypt are just a few examples of non-telecom agent networks, all with more than 100,000 access points. For banks, these networks with their lower operating costs have become a critical channel for customer acquisition and servicing, enabling access to a new segment of customers.
