African countries south of the Sahara desert represent prime markets for digital payment development because residents have few other financial services options, according to a report from McKinsey & Company.
Mobile money services, especially those that operate similar to person-to-person payments, have great potential in that region because so many consumers still use cash, the investment consulting firm states in its February
Mobile money represents a lower-cost, more scalable alternative to traditional banking in Africa, but few companies have established such services, McKinsey says.
In most of sub-Saharan Africa, only a small percentage of upper-income households use card-based, online, or mobile banking and payments, the report states.
Because of that, consumers, banks and governments in that region bear the high cost of cash payments through manual acceptance, record keeping, counting, storage, security and transportation.
However, two-thirds of adults in the region currently use mobile phones.
In Kenya, which uses Safaricom's M-Pesa system, mobile-payment penetration is at 86% of households, the report says.
M-Pesa is a branchless mobile-banking service that enables consumers to deposit and withdraw funds from a network that includes airtime resellers and retail outlets that serve as banking agents. The service enables users to transfer funds to others, pay bills and purchase airtime.
But neighboring nations vary widely in their mobile payment habits.
Payments technology investors have been reluctant to invest in the region because of limited information about the nature and size of the markets, as well as the risks factors and uncertainty about what consumers there want and need, the report says.
Gallup researchers indicate person-to-person payments are popular in the region, with 70% of the population making use of long-distance digital payments, the report says.
But those numbers ignore the potential of "incremental revenue from other types of payment flows, such as retail and other revenue-based business models" that a digital-payment system would enable, McKinsey says.
The region has the potential to expand beyond P2P payments into other types of digital payments, such as wages and business and government payments.
Broad acceptance of digital-payment platforms also benefits other industries, the report states. In Kenya, many startups are attempting to incorporate M-Pesa as part of their business models.
Consumers ultimately benefit from the savings associated with digital payments, the study suggests.
The cost of making payments through M-Pesa is about half that of other formal domestic-remittance services, the report says.
Customers can instantly send payments from their mobile phones instead of traveling an hour or more to distant bank branches. Many customers in sub-Saharan Africa need bank services but simply live and work too far from a branch office.
"Sub-Saharan Africa presents a number of opportunities for bank and nonbank financial-service providers, mobile operators, and others seeking new markets," the report says.
