With the rapid evolution of payment structures, Africa’s digital payment environment will become more dynamic with the rise of new payment methods such as blockchain and crypto.
- Although cash reigns supreme in Africa, research indicates that decentralized finance will challenge this position in the coming years.
- Africans have limited access to commercial banking, especially for people in rural and remote areas.
- Blockchain and crypto can offer a lifeline for the survival of Africa’s digital financial landscape.
Modern commerce has always pursued more efficient exchange platforms, and this trend has now gained momentum. In the 21st century, how people pay for products and services has dramatically changed. Electronic transactions are displacing cash. Recently, blockchain and crypto have emerged as alternatives to conventional monetary concepts.
Africa has kept up with and occasionally led this innovation. The influx of new investments and regulatory adjustments continue to impact the continent’s digital financial landscape. Although cash reigns supreme in Africa, research indicates that decentralized finance will challenge this position in the coming years. Banks and nonbank actors continue to innovate to reduce domestic and cross-border payment friction and deliver essential new business and consumer solutions.
By 2025, Africa’s domestic digital financial market will generate revenues of approximately $40 billion, compared to roughly $200 billion in Latin America. In contrast, global payments revenue is expected to increase by 7 per cent annually over the same period.
Africa’s fragmented digital financial landscape
Moving money in Africa is a complicated process and expensive process. Africans have limited access to commercial banking, especially for people in rural and remote areas. Digital banking options have also proven scarce. Add massive hyperinflation, pervasive government corruption, and capital regulations that lock domestic currency in banks, and money ceases to make sense.
Part of the issue stems from the continent’s quasi-colonial payment architecture. Under this framework, about 80 per cent of cross-border payments initiated by African banks are handled overseas, mainly in the United States or Europe. This results in increased costs and longer processing times, measured in weeks.
As a result, the idea of Africa going cashless has sparked a rush to transform the continent’s digital finance landscape. Despite massive investments in the sector over the years and major actors striving to develop its infrastructure, the long-held perception is that the field remains highly fragmented.
Many payment methods across various countries—banks, mobile money wallets, cards—and the complexity of managing online transactions in different local currencies impede digital payment processing throughout the continent. With the rapid evolution of payment structures, Africa’s digital payment environment will become more dynamic with the rise of new payment methods such as blockchain and crypto.
Mobile money challenges
Mobile money is an electronic wallet linked to a phone number and does not need a smartphone or data to function. Rather than relying on conventional banking options, users may pay bills and make purchases with their phones through messages sent via SMS. Mobile money has been present in Africa since the early 2000s.
Based on GSMA data, Africa’s mobile money transactions grew by 39 per cent to more than $700 billion in 2021. In addition, the proportion of adults in Sub-Saharan Africa who have an account via a mobile money service provider or at a financial institution has grown two-fold over the past decade, reaching 55 per cent.
Mobile money users do not enjoy the benefits of traditional banking, such as receiving interest on banked deposits and establishing a credit score based on spending history. Interoperability in Africa also poses a significant concern for this alternative banking method.
Blockchain and crypto could eliminate all the prevailing challenges, allowing people to make digital payments directly between themselves without relying on credit or incurring multiple settlement fees along the way. Digital currencies bring financial power to people who would otherwise have none.
Blockchain and crypto as alternatives
Africa has an enormous cash and informal trade economy. However, financial exclusion is at the root of many challenges Africans face. A vast majority of the population remains unbanked. The traditional financial structure leans toward the urbanized, serving a limited group of people. This bias has contributed to slowing down financial inclusion in the past. People who do not fit the mould that the financial system is designed to serve to struggle to save, participate in the economy, and generate wealth.
Consequently, making the traditional financial model work on a diverse continent has been challenging. Africa desperately needs a monetary system to bridge its economic and cultural diversity and succeed economically. New economic infrastructure is necessary for the fastest-growing and demographically youngest continent globally.
The popularity of blockchain technology kicked off in 2009. However, conversations on the technology suggest that the concept remains challenging for many people. The technology initially introduced as a peer-to-peer network transferring value built on the internet formed part of the Bitcoin proposal. However, blockchain technology has changed the world as we know it.
Blockchain technology can solve Africa’s financial needs—precisely the disruption needed to level the playing field. This parallel financial structure can serve a tangible social good, offering an onramp to Africa’s financial landscape for people who would otherwise be excluded.
The local currencies’ depreciation in Africa has made them no longer a safe store of value. While remittances comprise a hefty portion of GDP, international sanctions complicate linkages to the global economy. Thus, blockchain and crypto can offer a lifeline for the survival of Africa’s digital financial landscape.