Digital banking in Africa, including South African Development Community (SADC) countries, continues to see a combination of opportunities and hurdles. However, there are many digital solutions African banks can use to increase online adoption among their customers.
In this article, we’ll explore the top challenges facing African and SADC banks, the opportunities available, and the most common digital engagement channels banks can use to increase adoption.
Digital banking in Africa and SADC: Top challenges
So, what’s hindering Africa’s banks from seeing strong internet adoption levels? A few factors
Millions of unbanked people
One of the biggest challenges facing digital banking in Africa is the large number of unbanked people, many of whom lack identities.
There are over 350 million unbanked adults in Africa. Sub-Saharan Africa alone has nearly 500 million people who lack “proof of legal identity,” World Bank data shows.
Accordingly, nearly 90% of transactions in Africa continue to be cash-based.
Unconnected Populations
Two closely related digital banking challenges in Africa and SADC countries are the strength, or rather weakness, of mobile network coverage and the high cost of internet services. These two factors alone have resulted in millions of people being unable to benefit from online banking services. While major cities enjoy high-speed internet, rural areas lack connectivity and accordingly access digital financial services.
Ethiopia, Nigeria, the Democratic Republic of Congo, and Kenya are among the top 10 countries with unconnected populations.
Weak internet adoption levels
Being disconnected from the internet, naturally, means there will be low internet adoption levels in general.
Data shows that offline populations in South Sudan and Somalia stand at 93% and 90.2%, respectively.
Burundi, the Central African Republic, Ethiopia, and Chad rank fourth through seventh among the countries with the lowest internet adoption levels. The offline populations in Burundi and the Central African Republic are 89.8% and 89.4%, respectively.
Madagascar and Mozambique rank ninth and tenth with 80.3% and 79.3% offline populations, respectively.
Lack of financial literacy
Financial literacy, or the lack of it, remains an important barrier to digital banking services and solutions on the African continent.
High Customer Acquisition Cost
Global customer acquisition cost (CAC) for digital banks is significantly high. In Africa, research by McKinsey has found that some fintechs and digital banks may spend $20 to acquire a customer who’ll only generate $7 in revenue.
Legacy banking systems
Another hurdle to digital banking in Africa is the outdated legacy systems present in many banks. Industry experts estimate banks spend 75% of their IT budget on maintaining these existing legacy systems.
Top digital engagement channels for banks
How can African banks communicate with and provide services to customers? It’s through the use of digital engagement channels. Here are several channels to consider:
Mobile and online banking
One of the top ways digital banking in Africa becomes more accessible is through the internet and mobile banking. Having an internet connection means customers can access financial services via a bank’s website, its mobile app, or both.
Mobile banking involves using a bank’s mobile app to conduct financial transactions or accessing the bank’s mobile-friendly portal via a mobile web browser.
The number of smartphone subscriptions in Sub-Saharan Africa is forecast to reach 689 million by 2028, up from 415 million in 2022.
Banks offering internet and mobile banking take precautions to ensure high levels of security for their customers.
Digital wallets
A digital wallet or mobile wallet is a virtual wallet that lets customers conduct financial transactions. Many digital wallets are tied to bank accounts. The user stores money in the wallet and uses it to pay for products and services online.
Remittance Services
Remittance services are among the most common types of digital banking channels. They involve transferring money from one bank in one country to another bank or non-banking financial institution in another country.
Sub-Saharan countries received remittances worth $53 billion in 2022. This figure is expected to rise to $54 billion in 2023.
POS systems
Common among physical and online retails, point-of-sale (POS) systems prompt customers to use physical and virtual cards to pay for products and services.
POS systems can be considered a type of digital engagement and an opportunity for many merchants who seek to digitize their stores and experiences.
eKYC
Electronic Know Your Customer (eKYC) is an automated process banks and financial institutions use to verify their customers’ identities online. eKYC, an alternative to traditional documentation and paperwork, reduces financial crime, specifically identity theft.
Using eKYC, banks and financial institutions can scale easily while maintaining their customers’ data.
Digital banking opportunities in Africa & SADC
We’ve tackled the challenges to digital banking in Africa; let’s look at the opportunities.
Financial inclusion is on the rise
Although financial inclusion is limited in many parts of Africa, it’s making headway. Recent data shows that 24% of adults in Sub-Saharan Africa have an account at a formal financial institution. Meanwhile, 16% “use a mobile phone to pay bills or send or receive money,” data from the Global Financial Inclusion index shows.
In addition, women in Sub-Saharan Africa are finding more opportunities in financial inclusion. “Both as a driver of account ownership and of account usage through mobile payments, saving, and borrowing.” (The World Bank)
Improving identification systems
Several African nations, including South Africa, “have achieved noteworthy identification systems.” Meanwhile, countries like Ghana, Nigeria, Tanzania, Ivory Coast, and Guinea are taking advantage of technology to “make identification more feasible and affordable,” according to the World Bank.
Modernizing banks
African populations continue to trust traditional banks and their services. This means modernizing banks and offering more digital opportunities can bridge the gap between the banking sector and the unbanked.
Modernizing banks’ legacy systems can also reduce costs, allowing banks to add new customers and serve them better.
Emergence of non-banking fintechs
Africa is home to many financial technology (fintech) startups and businesses.
Between 2020 and 2021, there were over 2,000 fintech companies across the African continent, giving banked and unbanked alike more opportunity to conduct financial transactions.
Strong traditional banking foundations
Several African countries, including those in the South African Development Community, have good banking foundations. This means they have an opportunity to develop and benefit from digital banking.
Zimbabwe is one such example. Digital banking penetration in Zimbabwe is expected to reach 5.83% in 2023, whereas credit card penetration won’t exceed 0.5% in 2023.
Despite these feeble statistics, Zimbabwe has good traditional banking penetration. It’s expected to reach 70% in 2023, while debit card penetration will likely reach 17% this year.
Final words
Though there are many hurdles to Africa’s digital banking scene, there are also many opportunities. Specifically, from private businesses, startups, and non-banking institutions.
In today’s modern, mostly digital world, banks can work on replacing their legacy systems, collaborating with companies like CARITech. They can also benefit from the different financial and technological advancements.
CARITech helps banks stand out in the banking industry. We help banks improve their operating efficiency, benefit from fintech innovation, and deliver personalized customer experiences.
Ready to transform and revolutionize your core banking? Get in touch with CARITech to learn more about how to transform your banking operations to meet your customers’ needs.