By Corey Runkel
Sub-Saharan Africa boasts the highest digital payment usage in the world. What does that mean as payment providers grow around the world?
Homegrown Payment Platforms
Hold Great Promise
In 2017, the World Bank asked adults in 77 countries if they had a mobile money account. The first 12 countries were in Sub-Saharan Africa (SSA). In a better measure of use, the portion of residents who receive wages through their mobile phones, SSA boasted 25 of the top 30. The region as a whole boasted more than 40% of worldwide mobile money accounts in 2018. Now, with COVID-19 urging employers and customers to shift business online, the 2022 figures should rise still higher.
Payment providers promise SSA economies years (if not decades) of innovation. And they have challenged a persistent narrative that technology and innovation trickle down from the tech-drenched Global North to the Global South. Sub-Saharan Africa leads the world because of its homegrown payment platforms.
Payment platforms thrive in Africa because they can leap over the last-mile problems that plague home delivery of services. But, as The Generalist noted, platforms are also insulated from international competition. The tight regulations around banks, payment systems, and currencies make it difficult to expand payment platforms internationally. More regulations mean more differences and a higher value for local knowledge.
It can be easy to look at payments as a repeat of mobile phone expansion. Mobile phones offered similar advantages over wired connectivity. In other words, building cell towers is much easier than erecting landlines and piping broadband into everyone’s homes. The story of mobile phone penetration, and its explosive growth in the mid-2000s and early-2010s is well-told at this point. But this story neglects the fact that mobile phones initially arrived in Africa several years after they arrived in the Global North. Then, international telecom companies set the pace of adoption according to their pace of expansion into the so-called developing/emerging markets.
International telecom companies could set the pace because they had established operations and could easily scale production to Namibia the same way they had scaled to Vietnam, or Barbados, or Iceland. In the 1990s and 2000s, telecom manufacturers and providers, like Qualcomm and Vodafone, set international standards for the way phones and towers would exchange information. This is why Google Fi can offer service in Namibia, Vietnam, Barbados, and Iceland using the same SIM card. To do so, they met in standard-setting organizations largely free of government interference. This governance structure connected billions to products and services better than what may be built or designed by firms in their own country—at the expense of heavy corporatization and a brain drain of mobile-phone engineers from countries that lacked designers of their own.
Mobile payments have not been susceptible to the same route to standardization, and, therefore, to domination by payment providers from the Global North. Governments are far more protective of their currencies than their radio waves. This fact neutralizes the viral network effects usually attributed to technology.
Adoption of cashless payments has admitted novel solutions. In one powerful case, Sierra Leone averted nurses striking during the country’s Ebola outbreak when it switched to mobile payments and paid nurses on time – and safely. Elsewhere, mPesa continues to dominate payments across the continent. And Econet accounts for probably 90% of payments in Zimbabwe.
African Payment Platforms are Precarious
The history of mobile phone adoption did not predict the success of digital payments. It need not foretell the future of digital payments either. However, those familiar with the expansion of the companies mentioned above will note some recent facts don’t quite align with the narrative I’ve told so far. mPesa is now in 7 countries, but seems to only maintain a significant research and employment presence in Kenya. Zimbabwe’s president has banned Econet and jailed its CEO.
But, as payments, payment providers, and digital currencies become ever closer linked, they display more threats. Financial integration threatens to disassemble what African payment providers have already made possible.
Though governments regulate payment systems, they may still cooperate internationally in much the same way corporate SSOs have done. Or, ever-larger payment platforms may invest directly abroad, a time-consuming but potentially lucrative investment for their home offices. Just as standardization and integration allow products and services into a country, they can also push resources out. There are two ways this can happen.
The first way is on the level of the company. Say, for instance, that Facebook’s payment services overtake Econet in Zimbabwe. Because payment systems display huge network effects within countries, foreign domination of payments can lock out domestic challengers for long periods of time. It’s easy to worry about this already with mPesa. Then comes the dreaded brain drain in which a country’s best and brightest leave for a fancy office abroad because home doesn’t support their interests to the same degree. I feel I needn’t go deeper in this direction. The literature on foreign competition is widely available.
The second way that fintech integration threatens African payment providers is by reproducing the current international financial order. If that sounds shadowy and academic, it simply means that the US, UK, EU, China, Australia, Canada, Switzerland, and Japan will find new ways to exert the power they currently hold. The currencies of these countries control some 97% of international reserves; they (more or less) control and issue debt in their own currencies.
In May, Chair of the US Federal Reserve Jerome Powell issued an impromptu announcement that the US would start developing its own digital currency. Some movement on the digital payments front had been long in the works. What was not assured, however, was Powell’s attention – and praise – of stablecoins. These are digital tokens that tie their value to a basket of highly rated currencies and other liquid, low-volatility, assets. A successful stablecoin hasn’t been demonstrated yet. But should one arise, it could lure investors from less-stable sovereign currencies. This would be doubly bad since stablecoins have attracted concerns as runnable assets from scholars and policymakers such as Mark Carney.
Note that the success of mobile payment providers does not ensure this course. Mobile payment providers are often banks or – more often – work with banks. Nothing intrinsic to payment platforms allows for quicker runs. It’s more that software platforms make it easy to push new features to their customers. Someone who uses mPesa to receive wages or buy used furniture can easily learn how to receive or buy bitcoin. PayPal already does this. Users can purchase cryptocurrencies straight from the platform, no added account necessary.
Up to this point, the story has differed little from the history of dollarization around the world, notably in the Latin American 1980s. Then, the US dollar supplanted high-inflation domestic currencies in everyday transactions. This only further damaged the domestic currencies. Though these countries sometimes already lacked the capacity to manage domestic crises, dollarization nonetheless removed an important tool to manage economic disruption. And as the currencies jockeyed for supremacy, they disrupted daily life.
Unlike with mobile phones, I see little reason to doubt the parallels between currencies made more accessible by mobile payment providers and the US dollar in Latin America. Further, the history of Internet-driven innovation has shown that changes come much more quickly in cyberspace than they did in physical space. The emergence of widespread connections between people able to trade currencies and cryptocurrencies and stablecoins and digital money could make it easier, cheaper, and quicker for investors to flee to safe assets.
The results for SSA could be a more runnable currency as the barriers to flee it for more stable alternatives are knocked down. Perhaps it will not happen, but Zimbabwe’s experience with Econet shows it is possible. The reason it jailed the CEO of its largest payments provider is that it alleged Econet facilitated foreign exchange trading – Zimbabwean dollars for US dollars – and exacerbated the currencies devaluation. Now, the Zimbabwean dollar certainly had enough problems without this wrinkle, and evidence on Econet’s impact is hard to come by, but it is plausible.
Public and private actors around the world are encouraging digital financial integration down to the lowest levels of payments. Powell’s other announcement was that the US would be at the forefront of international standard-setting, which we can remember from the history of mobile phones as a tilted enterprise in global governance. Swift, the company which routes payments between banks around the world, published in May that CBDCs must be interoperable with current financial plumbing. In a very literal sense, then, Swift wants to reproduce the current international financial architecture. Swift’s membership may be international, but the US and Europe dominate it.
Going forward, African payment providers and governments have several choices. They could embrace some sort of Pan-Africanism, which has already been fostered by the central banks of West Africa and of Central Africa. In this scenario, providers would combine and power the strongest of each other. A different tack may involve forcing payment platforms into the current banking infrastructure by tying mobile wallets to bank accounts. Feeding regulation in through existing banking supervision infrastructure could make it easy to prevent the build-up of systemic risks to a country’s financial sector. Either route may also involve shutting out foreign competition. Many countries have effectively banned Facebook’s Diem (formerly Libra) payment system through one regulatory measure or another. There is nothing to rule out African payment platforms, now some of the most established, from succeeding on the world stage.
About the Author
Corey Runkel is a Research Associate at the Yale Program on Financial Stability, where he studies past financial crises to inform present and future policymaking.