Fintechs are aiding financial inclusion across sub-Saharan Africa

By Nikki Kettles, Executive of Licences and Payments Regulation at Mukuru

As the Southern African Development Community sees growth in fintech operators, it will become easier and safer for people to send money back home, writes Nikki Kettles, Executive of Licences and Payments Regulation at Mukuru.

With half of Africans migrating to other countries on the continent to work, and then having to send money home, fintech is playing a leading role in driving financial inclusion, while offering a safe solution at a reasonable cost; and dominating the provision of cross-border remittances.

Many migrants living in South Africa trying to send money home have historically experienced several challenges, including unreasonable costs. Other aspects that impacted the historical experience were the need to wait several days for the money to clear, and a lack of transparency in pricing and knowing where the money was going. Moreover, one must consider the security risks if a cyber criminal intercepts the cash during the lengthy process it takes to send money across borders.

To make this process easier across Africa, instead of trying to avoid these challenges and informally send cash home via friends or family, one can ensure that it arrives at its intended destination instantly by using a formal fintech provider. Fintechs, regulated under the Central Bank as a Non-Bank Financial Services Provider, have played a big role in enabling people to join the formal economy where money is protected and secure. They also take trends into account and develop software to match current and future needs.

Fintechs have driven a shift to secure transfers, helping break the pattern of people withdrawing money from bank accounts the moment it lands so they can send it home. Fintechs in South Africa have also supported the reduction in prices and informality of cross-border remittances. The cost has been reduced by 50% over the past 10 years.

Interestingly, 43% of South Africans who contributed to a FinScope study conducted in 2022 said they still withdraw money from a bank account as soon as it landed because they needed all of it immediately. Of these, 37% preferred cash.

In this context bank accounts are not generally seen as helpful as they don’t do anything productive apart from being a short-term repository for money. In fact, 19% of South African residents are unbanked, according to FinScope, and 10% see a bank account as being too expensive.

According to the same report, 60% pull cash out of a bank account once a month. There is still a strong reliance on cash in our economy: 25 million adults withdraw cash at least once a month, and almost half of those who receive money or income are getting it in cash.

Fintech as a solution

However, when people are given a digital solution, and they use it productively to buy goods or to send money home, it becomes true financial inclusion in its simplest form. Having a bank account doesn’t constitute financial inclusion if it is used as a post box and a means to get funds. A bank account is the ‘old’ way of measuring financial inclusion. Usage of financial services is the new, more relevant, index. The most successful fintechs walk a trust-based journey with their users, enabling them to grow into more sophisticated financial services.

According to McKinsey, fintech and other players are very quickly integrating endpoints across Africa, which makes it faster and cheaper to send money across borders. It expects that solutions will continue to scale up across more countries with additional payment methods being added across service providers.

Thanks to fintech players such as ourselves, the cost of sending money digitally is coming down. An International Monetary Fund paper from last year found that the median remittance price of the value transferred dropped from 7.7% in 2011 to 5.7% in 2020. At the same time, “there has been a broad reduction across the distribution of remittance service fees,” the study noted.

As fintech continues to grow in the remittance and financial services space, and regulations become uniform, even more people will be drawn into the formal economy. By putting customers front and center, innovative fintechs make a meaningful contribution to lasting financial inclusion because they enable access for their customers to a suite of financial services.