Leyton, a working-class district in eastern London, has for years been a popular destination for Zimbabwean immigrants. Drawn to the district through its reputation as host to a large Zimbabwean community, newly arrived immigrants have typically settled in Leyton and forged close ties with other members of the diaspora. As a result, the district has also become a conduit for informal finance and remittance flows between the UK and Zimbabwe.
In a bid to circumvent the high costs of cash transfer fees imposed by banks on remittances, immigrants have instead used their community’s informal networks to transfer cash back to Zimbabwe.
“We have seen a growth of informal remittance systems, as more people in the UK with families in Zimbabwe have bypassed banking institutions in order to reduce transaction fees,” says Charles Laurie, head of Africa research at consultancy firm Maplecroft. “For example, as one of four individuals in a network, I might know someone who I can give money to in the UK, which I want to remit. They will then know someone in Zimbabwe who will then give either money, food products or gift vouchers to my family in Zimbabwe. This system is tied to a diaspora network and the community system which is in the host country.”
While remittances have played a significant role in supporting the development of a large middle class in Africa, which professional services firm Deloitte estimates to number some 335 million people, a key challenge is that Africa’s banking and financial services industry has not evolved to match the needs of local Africans or their relatives in the diaspora. Moreover, while a growing number of telecommunications and financial services companies, such as Kenya-based Safaricom, have worked to offer banking services to micro-traders and smallholder farmers who form a large percentage of Africa’s population, basic banking facilities such as deposit accounts and debit cards are still reserved for Africa’s wealthy elite.
Although local and international banks have invested heavily in establishing infrastructure such as bank branches and ATM machines in Africa’s capital cities, limited efforts have been made to provide similar services in the region’s rural hinterlands. As a result, sub-Saharan Africa has the lowest banking penetration in the world according to the African Development Bank, and the consultancy firm McKinsey estimates that 80% of Africans are still unbanked.
Yet Kristel Teyras, a communications director at the digital and banking solutions provider Gemalto, says that the success of mobile phone-based microfinancing facilities such as Safaricom’s M-Pesa, coupled with the widespread availability of cheap mobile phones, has created a vibrant cashless banking industry in Africa. Having emerged as a cheaper and convenient alternative for individual users, Ms Teyras believes that there will be a strong convergence of technologies as more financial services firms offer increasingly sophisticated cashless products.
Pointing to the move by Gemalto to develop a sim card which, in addition to enabling users to make calls, offers them contactless payment and cash transfer facilities, Ms Teyras says banking services will increasingly be dominated by mobile phone-based transactions.
“Mobile phone-based platforms have been very successful in Africa because telecommunication firms had a broad access to agents and distributors, whereas banks had a traditional approach to just being based in big cities and towns,” says Ms Teyras. “What we are now seeing is a convergence of technologies. Mobile operators want to bring more to their end-users. In addition to offering remote mobile payment services, they are also offering contactless payments. The cashless market is growing and you can pay, without using cash, through just using your phone. This industry will continue its expansion.”
Yet seeking to increase their market share in Africa, local and international banks have also worked to adapt pre-paid gift cards, which are widely used in Europe and North America, as free-standing micro bank accounts for lower income households. The move in 2012 by the South Africa-based Standard Bank to offer pre-paid bank cards to South Africans enabled the bank to reduce customer credit risk by de-linking the card from a bank account, while also offering banking facilities to a broader group of Africans.
“There is a strong trend towards pre-paid cards among banks,” says Benjamin Binet, vice-president for Africa at Gemalto. “This is another way to solve the challenge of giving more people in Africa access to a bank account. People can use pre-paid cards for transactions that they would normally reserve for banking cards. However these cards are not linked to any bank account – they top up these cards on a pre-paid basis. What we are seeing is that more banks are using the same type of technology that is available in a different part of the world – Europe in this case – but adapting it to the local markets in Africa, with completely different implications.”
While pre-paid bank cards offer individuals accessible financial services, they are also able to build a long-term relationship with their banks, which could eventually enable them to access more sophisticated financial products as their incomes increase.
“Achieving economies of scale is the a primary challenge for banks across Africa, and that was one of the reasons why they did not invest extensively in infrastructure – the cost was not justified,” says Paul Opie, banking field marketer in Gemalto. “However, the traditional bricks-and-mortar banks recognise that they need to increase financial services accessibility. What we will see is banks adapting their services and using more digital platforms to offer wider services to a broader group of people in Africa.”