(also published at Capgemini “Capping IT Off”)
The next wave of financial services innovation will come from Africa. This may be a surprising statement, but there are a lot of compelling reasons to look to Kenya, Tanzania and other countries for the “next big thing” in financial services. Why?
Disruptive innovation always comes from the bottom. In his groundbreaking book, The Innovator’s Dilemma, Clayton Christensen provides numerous examples in which new enabling technologies are dismissed by entrenched market leaders because these technologies, at least initially, underperform existing technologies and cater to a less profitable customer base. In fact, the next big thing always starts out being dismissed as a “toy” by incumbents because at first it “undershoots” customer needs. From that beginning, technologies tend to improve rapidly and have a greater impact than anticipated due to complementary network effects. There are many, many historical and very recent examples of this phenomenon: mobile phones vs. telephones vs. telegrams, digital photography vs. film, digital music vs. CDs vs. records, Wikipedia vs Encyclopedia Britannica.
Africa is a hotbed of financial services innovation –products are simpler, cheaper and offer more value. In Africa, a perfect storm of converged, ubiquitous mobile technology and financial services serving the “bottom of the pyramid” is acting as an accelerant for disruptive innovation in financial services. 52% of the world’s mobile money services are in Sub-Saharan Africa. According to GSMA Mobile Money for the Unbanked 2013 Global Mobile Money Adoption Survey, mobile-money accounts outnumber bank accounts in nine African countries—Cameroon, the Democratic Republic of Congo, Gabon, Kenya, Madagascar, Tanzania, Uganda, Zambia and Zimbabwe.
The compelling need to better serve the poor, particularly in sub-Saharan Africa, has driven a lot of mobile financial services innovation. Once established, these platforms give rise to a wide range of additional services. Person-to-person transfer, bill payment and airtime top-up are offered by over 85% of African mobile money services. But this is just the start.
- Merchants are increasingly accepting mobile money as payment. Kopo Kopo is a service popular with Kenyan and Tanzanian merchants because it enables mobile money acceptance and keeps track of mobile payments.
- Credit and savings products launched by M-Pesa with Commercial Bank of Africa lets customers move funds from their mobile wallet to an interest-bearing bank account and apply for loans.
- Micro-finance and person-to-person lending was pioneered by Kiva and Grameen Bank. Enabled by mobile technology, this concept is gaining ground. Musoni (‘M’ for Mobile and ‘Usoni’ for future) is a young but very promising microfinance institution in Kenya. Mobile Financial Services of South Africa is launching Mjara Loans.
- Bulk payments, used for salaries or government-to-person transfers are growing exponentially. In Tanzania and Uganda, small businesses are using mobile money to pay suppliers, receive customer payments and to pay employees. Tanzania Revenue Authority allows citizens to pay vehicle license fees. These services have the additional benefit of reducing corruption.
Insurance products span health, life and crop insurance. Kenya’s Changamka Microhealth customers purchase health insurance from their mobile account. In Senegal, Ghana and Tanzania, mobile operator Tigo offers a “freemium” Kiiray life insurance product providing a small base policy as long as they spend around $3 a month with Tigo, with an option to purchase additional coverage. Kilimo Salama (“Safe Agriculture”), crop insurance for Kenyan farmers, has automated pay out based on data collected by weather stations – no need to file a claim.
All of these innovations resulted in a doubling or tripling of basic financial activities – mobile money customers save more, borrow more and have more insurance.
What’s next? Few mobile operators can transfer money to other operators, inhibiting development of national and international systems. Again, Africa is leading the way. Three Tanzanian MNOs agreed to inter-network transfers. Tigo started cross-border remittances between Tanzania and Rwanda, Bharti Airtel and MTN Group offer cross-border mobile transfer between Ivory Coast and Burkina Fas. Finally, nine mobile operators across 48 countries and Africa and the Middle East committed to interoperate mobile money. And all of this happened in the first six months of 2014.
Once those innovations reach developed markets, they sow the seeds of disruption to incumbents. Have we witnessed any disruptive financial innovations from Africa yet? The answer is “Yes.” SMS messages enjoyed much faster take-up in Africa than in the US. Person-to-person and micro-lending services like Kiva, Prosper and Lending Club have operations in the US. It’s easy to imagine that simple targeted products will serve as alternatives to today’s complex, legacy-ridden bank and insurance accounts, especially for the less-profitable low end of the market.
It’s time for banks and startups in developed markets to monitor these innovations closely and consider how they will disrupt the status quo in the future.