About 1.4 billion people worldwide are “underbanked”. They do not have bank accounts as they often work in the informal economy and lack stable incomes or assets such as land titles to borrow against. About 60 percent of the underbanked live in Africa. The underbanked in Africa are, however, a goldmine for so-called FinTechs, companies that gather and analyse data to gain financial intelligence on customers.
As internet and cellphone infrastructure expanded across the continent, so did financial inclusion of Africans with little or no prior access to banking. Nowhere is the proportion of the adult population with mobile money wallets from a phone provider higher than in Africa.
Banks hesitated to service potential customers from the informal economy as establishing their creditworthiness was costly. However, data technology provided FinTechs with the opportunity to gather Big Data sets of behavioural data through cellphone usage, such as the frequency of purchasing airtime (cellphone credit), to estimate the income and creditworthiness of customers at a lower cost than traditional banks.
Many African banks are used to concentrating on the wealthier middle classes and neglect riskier customers from the informal economy. A few major banks command huge market shares and their fees are traditionally high. Thus, the way the African banking sector is set up creates many incentives for FinTechs to challenge banks and get a piece of the lucrative business. Banks are big ships with many areas of business, which often prevents them from focusing as much on the digitalisation of their services as FinTechs.
FinTechs are sometimes portrayed as disruptors of established banks, challenging the power of Big Finance. However, most of our everyday money is created by banks by typing digits into computers and FinTechs without a banking licence merely shift those numbers from A to B. Hence, FinTechs are better understood as a kind of Apple iPhone plugged into the monetary circuit of banks or the “electricity grid” of finance. In the future, Big Data and Big Finance may even merge into ever-more powerful entities.
In addition, Big Tech companies that cut across different markets with their data technologies, such as Alphabet (Google) or Meta (Facebook) are increasingly eyeing Africa. They are, for example, partnering with Africa’s largest telecommunications companies to invest in the Equiano and 2Africa submarine cables to improve data capacity for their services and to reduce costs. Google’s Equiano submarine cable, named after the abolitionist Olaudah Equiano, is expected to stretch from Portugal to South Africa.
Meta even intended to issue its own digital payment token (Libra and later Diem) that would be tied to a basket of major currencies, potentially becoming one of the biggest shadow banks in the world, with a third of humanity as customers and a lot of valuable behavioural data. While Meta abandoned its plan due to the fierce resistance of major central banks, for data capitalists, finance remains the goose which lays the golden eggs.
The financial industry, alongside public-private sector initiatives such as the Better Than Cash Alliance, has praised FinTech for its “financial inclusion” of underbanked people. A study by the US economists Tavneet Suri and William Jack, funded by organisations including Financial Sector Deepening Kenya, and later by the Gates Foundation, claimed that around 2% of Kenya’s population had been lifted out of poverty via the mobile money technology M-Pesa. However, the study was later criticised for significant methodological flaws.
Better access to loans could, in theory, trigger a credit-investment nexus, allowing small businesses to increase productivity and thus income generation. However, as with microloans, most FinTech supports consumption rather than investment, and the highly unregulated sector might accelerate rampant consumer debt.
The M-Pesa money transfer service (M stands for mobile, pesa is Swahili for money) is used by over 50 million customers, primarily in East Africa. M-Pesa was initiated by the UK Department for International Development, the Kenyan telecommunications company Safaricom, and the British company Vodafone. M-Pesa works on simple-feature phones and capitalises on an informal credit system used by many Africans, by which they shift airtime to family and friends. Thus, M-Pesa is a socially-adapted technology which contributes to the financial inclusion of underbanked people.
However, M-Pesa also made Safaricom one of the most profitable companies in Africa. Some economists accuse M-Pesa of draining local purchasing power by pushing consumer loans at high fees or interest rates on the poor, aggravating consumer indebtedness, and distributing profits to international shareholders. M-Pesa is also financializing public goods such as access to clean energy and water.
South Africa is one of the African “big four” in FinTech, along with Egypt, Kenya and Nigeria. South Africa has turned into a laboratory of financial data capitalism for a variety of reasons. First, the colonial and apartheid legacy of South Africa’s economy being built around minerals and energy has contributed to a banking sector dominated by a few banks (Standard Bank, FirstRand/FNB, Absa Bank, Nedbank, Investec and, more recently, Capitec) that did not serve huge parts of the population well.
People without a stable income or collateral to pledge are not attractive customers to banks. Capitec, which initially targeted unbanked customers, made huge profits in the unsecured loan market and pulled out when the party was over as household debt was not sustainable.
Second, South Africa has a comparatively high proportion of an already banked and insured population when compared to other sub-Saharan economies, as well as a high smartphone penetration rate, which provides opportunities for services built around a tech-savvy middle class.
However, the microloan disaster in South Africa send a chilling warning. As poor neighbourhoods had only limited purchasing power to support entrepreneurs, a lot of microfinance was used for consumer debt and contributed to the country having some of the highest household debt ratios in the world.
The so-called garnishee orders entitled microcredit institutions in South Africa to automatically deduct money from the poverty wages of debtors via their employers. The Marikana massacre against striking mineworkers was to some extent related to that system. A lot of the striking miners were so deeply indebted to the main microfinance institutions, several of which were actually on the mine’s premises, that they would require a salary increase for them to be able to break free from debt.
TymeBank, for example, is a digital bank focused on low-income black, female and rural customers. It is owned by South African billionaire Patrice Motsepe and was originally developed as a Deloitte consulting project funded by the telecommunications provider MTN.
With no branches and no paperwork required to sign up, TymeBank benefited more from lower transaction costs in the unsecured lending market than rival banks operating networks of physical branches. TymeBank partners with important supermarket chains Pick n Pay and Boxer and aims for the mass market with its yellow card machines. It features products, such as health insurance, and gains valuable data on people’s lifestyles — one example is learning about a customer’s diet through their shopping behaviour.
Jumo is a London-headquartered and Cape Town-based FinTech company. It has entered partnerships with telecommunications companies and banks to enable unsecured credit products across different African countries. It is therefore not only focused on the South African market.
Jumo uses software to run algorithms based on data from cellphone customers (such as contract histories, airtime purchasing patterns and voice, SMS and geo-location data). Jumo was involved in developing credit scores for companies offering car loans to Uber drivers based on their earnings, tips and behaviour, eg their driving style.
They also attempt to calculate the fraud risk of borrowers in Ghana with algorithms that analyse data points such as income size and deposit frequency, as well as use of cellphone batteries (how long the phone was off or how often users let their battery die).
FinTechs have long been syphoning off the local purchasing power of the population through exorbitant fees and interest rates. In some countries, such as Nigeria, consumer protection authorities have stepped in after some FinTechs aggressively debt-shamed customers who did not repay loans on time by sending out negative messages about debtors to personal contacts from their phone address books.
Furthermore, because many FinTechs are less regulated than banks, and often require only a phone number or an email to conduct financial transactions, FinTechs might encourage capital flight from countries which have a weak currency. Capital flight could thus contribute to the central bank hiking interest rates, curtailing public and private investment, and aggravating unemployment. The M-Pesa platform has already announced it wants to facilitate cross-border payment flows in East Africa.
To ensure that the FinTech boom in Africa does not end with a hangover, stronger regulation of the sector by antitrust law and consumer protection authorities is necessary. Digital profits could be taxed locally. In addition, central banks should develop public mobile payment technologies that enable higher levels of data protection and allow them to offer central bank digital currency (CBDC) that is as safe as cash.
As opposed to commercial banks, a central bank, as the issuer of legal tender, can never go bankrupt in its own currency. Hence, if businesses (wholesale CBDC) or citizens (retail CBDC) could hold bank accounts with central banks like commercial banks do, their deposits would be 100 percent safe from insolvency. Central banks could use CBDC to impact conditions in financial markets even without fully taking over loan intermediation.
For example, the South African Reserve Bank could offer limited preferential loans to small and medium enterprises at low interest rates to counterbalance private digital money. Otherwise, FinTechs with growing market and data power could in the future extract high economic rents (income derived from market power) by charging consumers and small businesses high interest rates, damaging the purchasing power and productive capacity of the local economy.
However, many people in rural areas lack access to digital infrastructure. Therefore, the cash supply of the poorer population must remain guaranteed in order not to further increase the population’s dependence on financial companies and access to digital infrastructure. Otherwise, the risk of turmoil is high as recently witnessed by Nigeria when the outgoing president and the central bank tried to drive out cash in a hasty shock therapy without providing suitable alternatives to the poorest.
However, the small municipality of Maricá in Brazil, ruled by President Lula’s Workers’ Party, uses FinTech for the public good. The municipality introduced a community-based digital currency to pay out a basic social grant to inhabitants who fulfil certain conditions. The recipients receive a monthly payment of the digital community currency Mumbuca, which is issued by a local development bank, eg via a cellphone app.
The salaries of municipal employees are also paid in the digital community currency, which is tied to the national currency, the Brazilian real (exchange into which involves a 1% transaction fee) and many payments to the municipality (such as utility bills) can be settled in that currency to encourage its use.
As opposed to universal basic income schemes in Kenya with M-Pesa, Mumbuca beneficiaries are not charged fees to access their funds. Further, the community bank does not sell the purchasing data it collects to third-party clients.
Any surplus generated by Mumbuca Bank is returned to the municipality. In contrast to investor-driven FinTech, there is no “pressure selling” of its services, such as pushing digital microloans on the poorest. The bank uses the Mumbuca to fund local economic development programmes such as zero-interest loan schemes for cooperatives and social enterprises.
As Africans face many pressing social needs, such as safety, housing, education and access to energy and clean water, there is little political debate around data protection and the digital infrastructure. Hence, the sovereignty of Africa — which over the centuries has been forced to supply labour and raw materials to the Northern Hemisphere — could once again be hollowed out by data colonialism in the 21st century.
However, financial data technology also has the potential to strengthen the regional economy and contribute to providing social welfare to the poorest via public banks. It is time to develop policies that safeguard Africa’s technological sovereignty in finance. However, this requires politicians and public institutions that work for the many and not the few.
Fabio de Masi was a member of the European Parliament (2014 to 2017) and the German Parliament (2017 to 2021) . The economist is a Research Fellow at the Financial Innovation Hub of the University of Cape Town . This article is based on the studies “When Finance Meets Big Data: The Scramble for Africa” and “Banking on the poor: The Rise of Financial Technology in South Africa”, commissioned by the Rosa Luxemburg Foundation. https://www.rosalux.de/en/topics/international-and-transnational/africa/the-future-of-money-in-africa He writes in his personal capacity.
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