Why Financial Services Can Kickstart Africa’s Digital Economy

Friday, August
09,  2019  01:48PM / By Herman Smit*, World Economic Forum
/ Header Image Credit: World Bank Group

 

Africa’s largely informal economy is
digitizing. Improved internet and smartphone penetration have given rise to
virtual marketplaces, also known as digital platforms, where millions of
workers and enterprises have the opportunity to sell their goods and services
digitally.

The digital rails created by these platforms provide a unique
opportunity for the financial sector to reach new consumers and shape the
nature of digital commerce on the continent.

Digital Platforms Rising In Africa

At the end of 2018, our research identified
277 digital platforms, operating across eight countries in southern, east and
west Africa. The larger platforms are well known, covering major sectors of the
economy and operating across emerging markets. For example, Jumia for online
shopping, Upworks for freelance work, Uber for e-hailing or Airbnb for rentals.

However, the majority of the platforms identified were started by local
technology entrepreneurs, more than half of which were launched in the last
three years. This includes the likes of SafeBoda for e-hailing services or
DeliveryBros for logistics and couriering.The biggest markets for these locally
owned platforms are Kenya, Nigeria and South Africa, but Uganda, Rwanda and
Ghana have their own emerging platform ecosystems and regional aspirations.

Available survey data from Research ICT Africa estimates that in
seven of the eight countries where our research was carried out, these
platforms attracted 4.8 million individuals with income-earning opportunities.
This equates to roughly 1.3% of the adult population and compares well with
more digitally advanced and developed countries such as the United States.

Measuring activity on digital platforms at any one point in time is
challenging, and our understanding of the size and nature of Africa’s digital
platforms and their participants is likely to mature with time.

Measurement challenges aside, there are positive early signs that
digital platforms in Africa are impacting lives for the better. More than half
of the individuals in the Research ICT Africa survey report using these
platforms to meet their basic needs. We believe that the financial sector can
build on these positive early signs to further optimize the lives of African
users and assist digital platforms in their attempts to reach scale.

The Financial Sector
Must Join The Party

If the platform economy is to optimally contribute to the livelihoods of
Africans, it will need a productive relationship with the financial sector.
Payment solutions, financing and risk-management solutions that speak to the
needs of platform participants will be key to unlocking its contribution.

Platforms do not, or rarely, require face-to-face interaction between
the consumer, the marketplace and the enterprise or worker providing the good
or service. While this should keep operating costs low, it creates large
dependencies on digital financial services to enable the viability of these
business models.

For example, while some platforms allow for cash payments from
consumers, most require consumers, workers and enterprises to be able to
receive and make payments remotely via electronic channels. While these payment
solutions do exist, many of these platform participants still experience
friction using them, often due to high transaction costs or slow settlement
times.

Further, these business models rely heavily on keeping the supply of
goods and services high and operating costs low. This incentivizes platforms to
look after their suppliers, either through reducing their exposure to risk or
increasing their production.

For example, e-hailing platforms such as Uber or Bolt require would-be
drivers to have insurance in the case of car accidents. This reduces Uber and
Bolt’s exposure to risk and helps get cars back on the road quickly.

Online shopping platforms like Alibaba offer financing to suppliers of
goods on their platform to increase the size and diversity of offerings to
attract the greatest number of customers. In some cases, they offer financing
to consumers to increase the size and basket of goods they buy, as well.

Early Signs Of A New
Generation Of Partnerships

Brokering partnerships between financial service providers and digital
platforms will thus be critical for maintaining and growing digital commerce in
Africa and its ultimate impact on Africans. A growing number of Africa’s
digital platforms are partnering with financial service providers to offer
financial services. Of the 277 platforms we identified, 15% offered one or more
insurance, digital wallet, savings or credit product to platform participants.

The graphic below highlights early demonstration cases of how
partnerships with the financial sector can improve the functioning of digital
platforms to the benefits of platforms and platform participants.

Image: insight2impact (2019)

• Online shopping platform Jumia launched a mobile wallet solution,
JumiaPay, in partnership with MasterCard. This payment service was launched to
improve the ability of providers and consumers to transact on the platform by
speeding up settlement times and reducing transaction costs.

• E-hailing platform Uber partnered with fintech Jumo World to offer
Uber drivers vehicle financing. This allows e-hailing drivers the ability to
purchase their own vehicles, rather than leasing from a third party, improving
drivers’ earning potential.

• Wesabi, a freelance platform operating in Nigeria, offers professional
indemnity insurance to protect consumers against damages related to services
obtained through their platforms. This reduces the risk to both the consumer
and freelance worker.

• Ghanaian e-hailing platform Dropping partnered with People’s Pension
Trust to provide pension products to their drivers. For the first three months
the driver is on the platform, Dropping pays the pension fund contribution on
behalf of drivers who achieve an average of 20 completed trips per week.
Assisting drivers to save and incentivizing greater platform participation.

While these partnerships provide clear benefits to financial services
providers, the digital platform and the platform participants, new products in
Africa are often slow to get off the ground. This is partly a translation issue
between these different actors. Partnerships between typically risk-taking
technology entrepreneurs and conservative banking and insurance executives do
not come naturally.

It also does not help that digital platforms are still in the early
stages of figuring out how to use the rich data they are collecting on their
participants to better understand their financial needs and give financial
services providers the information they need to optimally design and deliver
services.

These teething troubles will likely be resolved in time. But until the
financial sector comes to the digital platforms table, the contribution of
Africa’s digital economy will likely be stunted.

Credit: The post Why
Financial Services Can Kickstart Africa’s Digital Economy
first appeared in World Economic
Forum on Jun 26, 2019.

*Herman Smit is a director at Cenfri.

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