Why financial services can kickstart Africa's digital economy

Africa’s largely informal economy is digitizing. Improved internet and smartphone penetration have given rise to virtual marketplaces, also known as digital platforms, where millions of workers and enterprises have the opportunity to sell their goods and services digitally.

The digital rails created by these platforms provide a unique opportunity for the financial sector to reach new consumers and shape the nature of digital commerce on the continent.

At the end of 2018, our research identified 277 digital platforms, operating across eight countries in southern, east and west Africa. The larger platforms are well known, covering major sectors of the economy and operating across emerging markets. For example, Jumia for online shopping, Upworks for freelance work, Uber for e-hailing or Airbnb for rentals.

However, the majority of the platforms identified were started by local technology entrepreneurs, more than half of which were launched in the last three years. This includes the likes of SafeBoda for e-hailing services or DeliveryBros for logistics and couriering.The biggest markets for these locally owned platforms are Kenya, Nigeria and South Africa, but Uganda, Rwanda and Ghana have their own emerging platform ecosystems and regional aspirations.

Available survey data from Research ICT Africa estimates that in seven of the eight countries where our research was carried out, these platforms attracted 4.8 million individuals with income-earning opportunities. This equates to roughly 1.3% of the adult population and compares well with more digitally advanced and developed countries such as the United States.

Measuring activity on digital platforms at any one point in time is challenging, and our understanding of the size and nature of Africa’s digital platforms and their participants is likely to mature with time.

Measurement challenges aside, there are positive early signs that digital platforms in Africa are impacting lives for the better. More than half of the individuals in the Research ICT Africa survey report using these platforms to meet their basic needs. We believe that the financial sector can build on these positive early signs to further optimize the lives of African users and assist digital platforms in their attempts to reach scale.

If the platform economy is to optimally contribute to the livelihoods of Africans, it will need a productive relationship with the financial sector. Payment solutions, financing and risk-management solutions that speak to the needs of platform participants will be key to unlocking its contribution.

Platforms do not, or rarely, require face-to-face interaction between the consumer, the marketplace and the enterprise or worker providing the good or service. While this should keep operating costs low, it creates large dependencies on digital financial services to enable the viability of these business models.

For example, while some platforms allow for cash payments from consumers, most require consumers, workers and enterprises to be able to receive and make payments remotely via electronic channels. While these payment solutions do exist, many of these platform participants still experience friction using them, often due to high transaction costs or slow settlement times.

Further, these business models rely heavily on keeping the supply of goods and services high and operating costs low. This incentivizes platforms to look after their suppliers, either through reducing their exposure to risk or increasing their production.

For example, e-hailing platforms such as Uber or Bolt require would-be drivers to have insurance in the case of car accidents. This reduces Uber and Bolt’s exposure to risk and helps get cars back on the road quickly.

Online shopping platforms like Alibaba offer financing to suppliers of goods on their platform to increase the size and diversity of offerings to attract the greatest number of customers. In some cases, they offer financing to consumers to increase the size and basket of goods they buy, as well.

Brokering partnerships between financial service providers and digital platforms will thus be critical for maintaining and growing digital commerce in Africa and its ultimate impact on Africans. A growing number of Africa’s digital platforms are partnering with financial service providers to offer financial services. Of the 277 platforms we identified, 15% offered one or more insurance, digital wallet, savings or credit product to platform participants.

The graphic below highlights early demonstration cases of how partnerships with the financial sector can improve the functioning of digital platforms to the benefits of platforms and platform participants.

• Online shopping platform Jumia launched a mobile wallet solution, JumiaPay, in partnership with MasterCard. This payment service was launched to improve the ability of providers and consumers to transact on the platform by speeding up settlement times and reducing transaction costs.

• E-hailing platform Uber partnered with fintech Jumo World to offer Uber drivers vehicle financing. This allows e-hailing drivers the ability to purchase their own vehicles, rather than leasing from a third party, improving drivers’ earning potential.

• Wesabi, a freelance platform operating in Nigeria, offers professional indemnity insurance to protect consumers against damages related to services obtained through their platforms. This reduces the risk to both the consumer and freelance worker.

• Ghanaian e-hailing platform Dropping partnered with People’s Pension Trust to provide pension products to their drivers. For the first three months the driver is on the platform, Dropping pays the pension fund contribution on behalf of drivers who achieve an average of 20 completed trips per week. Assisting drivers to save and incentivizing greater platform participation.

While these partnerships provide clear benefits to financial services providers, the digital platform and the platform participants, new products in Africa are often slow to get off the ground. This is partly a translation issue between these different actors. Partnerships between typically risk-taking technology entrepreneurs and conservative banking and insurance executives do not come naturally.

It also does not help that digital platforms are still in the early stages of figuring out how to use the rich data they are collecting on their participants to better understand their financial needs and give financial services providers the information they need to optimally design and deliver services.

These teething troubles will likely be resolved in time. But until the financial sector comes to the digital platforms table, the contribution of Africa’s digital economy will likely be stunted.

• Please engage with us on this research via email (herman@cenfri.org or chernay@cenfri.org) and follow the conversation #Africandigitalplatforms