INSTANT PAYMENT SYSTEMS EMERGING ROLE & POSITIONING OF FINTECH IN DRIVING THE INCLUSIVITY OF (IPS) IN AFRICA

Jacqueline Jumah Director, Advocacy & Capacity Development AfricaNenda

Africa has made significant progress in digital financial services, propelled by the widespread mobile money rails and fintech innovations. These developments are contributing to improving financial inclusion, facilitating economic growth, and empowering individuals and businesses with greater access to financial services. In this paper, we will adapt the fintech definition by the WorldBank series ‘Fintech and the Future of Finance’1 . Here, fintech refers to advances in technology that have the potential to transform the provision of financial services, spurring the development of new business models, applications, processes, products, and services. Fintech therefore constitutes; firms specialised in technology-enabled financial innovation, big tech firms involving large technology companies whose primary activity is platform-based digital services, and incumbent financial service provider institutions transitioning to platform models. The ongoing collaboration between fintech entities and regulatory authorities is expected to further drive the expansion and impact of digital finance in Africa.

Despite the advancement of DFS, payment scheme decisions are dominated by central banks and commercial banks and in many countries, scheme governance largely rests with these two entities types only, thereby excluding non-bank participants e.g. fintech entities, and therefore the scheme playing field is largely not yet open and level.2 Across the continent, banks and mobile money operators (MMOs) are key IPS participants. Fintech entities are fewer but with growing participation as direct participants, third-party service providers, or aggregators.

The majority of IPS are not inclusive. While the rise in the number of IPS is a substantial achievement, the analysis of the IPS landscape shows significant constraints to inclusivity. Not all IPS offer access to most in-demand channels; most do not yet enable cross-domain interoperability for the greatest end-user choice, and the majority of them do not allow non-banks (fintech) to participate in decisions. Many of them also only offer limited use cases, and only a handful have integrated B2P, P2G, and G2P payments. These limitations are challenging the ability of IPS to scale in Africa.

HOW MIGHT FINTECH ENABLE THE INCLUSIVITY OF IPS IN AFRICA?

Fintech is revolutionising the financial services space by driving innovation and development in several areas including payments, marketplace lending and alternative underwriting platforms, insurance, capital markets, and wealth management, among others. As investment in fintech initiatives targeting payments continues to boom,3 there are several ways in which fintech could be leveraged to drive the inclusivity of instant payment systems in Africa. These are:

Augmenting the capabilities

of regulating authorities, and influencing regulatory reforms.

As the market continues to grow driven by fintech innovation, regulators and financial services supervisors continue to face challenges in effecting optimal regulation and supervision, considering the rapidly changing and increasingly digital remit, as well as emerging financial globalisation and cross-border solutions.4 Increasingly, regulators are taking up technology solutions - regtech and suptech to enhance their capabilities and commitment to meet the challenges posed by increased digitisation and expansion of their mandates. Increased use of fintech solutions could improve oversight into payments by enhancing several aspects, including regulatory reporting, risk management, identity management and control transaction monitoring and compliance, among others. Examples of the emerging use of regtech and suptech in Africa include data-driven financial system stability in Rwanda and Nigeria. The National Bank of Rwanda uses an electronic data warehouse to automate and streamline reporting processes for the supervision of more than 600 financial institutions.

5 Data is automatically pulled every 24 hours or even every 15 minutes in the case of mobile money and money-transfer operators. The Central Bank of Nigeria (CBN), the Nigeria Inter-Bank Settlement System Plc (NIBSS), partnered with the BFA team to redesign their data infrastructure to guide supervision and policy-making more effectively and generate richer open datasets for public and private use.6

1 Fintech and the Future of Finance

2 SIIPS in Africa 2023 report, AfricaNenda

3 Fintech Investment Pours into Africa, KPMG 2022

4 Financial Authorities in the Era of Data Abundance RegTech for Regulators and SupTech Solutions

5 Leveraging ‘suptech’ for financial inclusion in Rwanda

Propelling infrastructure development to enhance IPS functionality.

Common payment system barriers include technological inefficiencies, costly delays, vulnerabilities to fraud and cybercrime, and compliance challenges, among other issues. Standards are therefore necessary to unify how these systems ‘speak with each other’, present and interpret data and information and process payment transactions, to minimise the risks associated

Enhancing domestic and regional interoperability.

Full interoperability of retail payment systems is necessary to improve efficiencies in payment processing, improve competition and innovation, expand the availability of financial services access points and improve transparency and regulatory oversight. However, this is yet to be achieved in several markets and regions in Africa.8 This is because of the complexities and moot nature of the processes coopetition among payment system participants, robust incentives to encourage participation by all participants and safe and reliable operational models including the technology infrastructure for efficient integration. At both the domestic/country and regional levels, many of these payment systems operate as closed-loop systems with slow progress in interoperability through bilateral agreements, multilateral agreements or through third-party solutions. There is a growing opportunity for fintech to standardise how payment systems connect and promote the enforcement of common technical standards, data architecture and terminology at the scheme levels. This is through fintech entities playing the role of intermediaries along the IPS value chains by offering optimal Application Programming Interfaces (API) solutions and or playing the role of API aggregators. Since the ecosystem of API deployments is not yet mature there is a need for improvement in building more user-centric APIs, strengthening FSP middleware as an on-ramp to APIs, enhancing the capacity of technical teams especially in bank FSPs and staying abreast of perceived regulatory risks.

6 Regtech for Regulators Accelerator: Payments and Transactions “Data Stack” in Nigeria

7 World Bank Fast Payments Toolkit, Scheme Rules In Fast Payments Focus Note, 2022

8 SIIPS in Africa 2023 report, AfricaNenda

9 Interoperability in Digital Financial Services, CGAP, 2021

10 Fintech and the Digital Transformation of Financial Services: Implications for Market Structure and Public Policy, BIS, 2021

11 The Mobile Economy 2023, GSMA

Alleviating cost constraints as well as frictions related to scaling instant payment systems and reducing time to market.

Fintech is enabling reduced costs and facilitating economies of scale through enhanced connectivity and computing power.10 These have reduced the costs of data and information transfers as well as processes. Enhanced connectivity and scalable infrastructure for data storage all enable the development of cloud-based services which are cheaper options than servers. As technology advancements increase data and information exchange and reduce transaction costs, the production of financial services continues to be disaggregated introducing FSPs offering unbundled financial services, which promote product, service and channel choices to end users. Non-bank FSPs are increasingly gaining exceptional competitive advantage by applying data analytics to optimise their operations. Core operations such as account opening, product innovation, risk assessment, etc. are constantly being reinvented and the the scale and pace of these changes often lead to new business models, which attract low-tier licensing requirements e.g. offering-specific licenses like payment-related licenses, and easier as well as reduced time to market.

Improving consumer redress mechanisms.

Africa is among the fastest-growing smartphone adoption markets in the world, due to increased affordability from falling average selling smartphone prices, and because most new phone users rely on devices for multiple activities beyond traditional voice calls and SMS. It is against this backdrop that FSPs are introducing the use of chatbots to enhance financial services products and service delivery.12 Increasingly, FSPs are leveraging artificial intelligence (AI) to redefine chatbots to engage and delight customers with human-like interactions and enhanced personalised experiences. Examples of these deployments in Africa include; Proto AICX by the Bank of Ghana,13 which is an automated consumer protection solution that collects and analyses complaints across multiple FSPs and channels; Kudi AI in Nigeria,14 which allows users to conduct funds transfers, track account details, buy airtime, and pay recurrent utility bills e.g. DSTV payments and the Pesakit Smart Agent App by an FSP in Kenya,15 which has an AIbased chatbot to improve liquidity management for mobile money agents through responding to agent queries about a variety of liquidity management issues, as well as carrying out predictive analysis tasks for mobile money float management. One of the mature IPS inclusivity level requirements is transparent and efficient consumer mechanisms. The above chatbot deployments present opportunities for IPS to leverage fintech to make provisions for and enforce transparent and efficient consumer recourse mechanisms through chatbots, in addition to other consumer protection structures.

Delivery of more and enhanced digital payments use cases.

Fintech is expanding the use cases for digital financial services by supporting innovation across various sectors, leveraging emerging technologies, and increasingly addressing the specific needs of households and businesses. Through increased accessibility, automation, and customisation, fintech solutions are transforming the way financial services are delivered, making them more inclusive, efficient, and tailored to user requirements. Here are some key ways fintech is driving these additional use cases:

Enhancing financial health through improving personal finance and budgeting, wealth management, digital lending and crowd-funding - This is through allowing individuals and small businesses to invest low-value funds in diversified portfolios, empower users through intuitive tools such as apps and robo-advisors, monitor investments and goals, expense tracking, customised financial insights, provide alternative capital leveraging enhanced data analytics, among others.

Improving the gig economy and providing rails for e-commerce - Fintech caters to the needs of the growing gig economy workforce by providing specialised financial services. Fintech offers features like income tracking, tax management, instant payments, and financial tools tailored to the unique requirements of gig economy participants and accelerating e-commerce

Promoting cross-border payments - Fintech is addressing the challenges of costly and time-consuming cross-border digital payments. Leveraging digital payment systems and fintech enables faster, more affordable, and transparent international funds transfers, promoting the resilience of households and businesses

Promoting open finance - Fintech is promoting the concept of open finance, which allows authorised thirdparty providers to access FSP financial data securely with user consent. This opens the door to diverse products and services that can leverage financial transaction data to provide personalised recommendations, financial insights, and customised solutions

Fintech can support Government-to-Person (G2P) digital payment use cases by providing innovative technology solutions that enhance the efficiency, transparency, and accessibility of government payments, improve choices for beneficiaries in handling funds, and benefits, as well as to ensure a seamless and inclusive experience for individuals.

The above ways in which fintech is driving additional digital finance use cases if optimised, could support the integration of the full range of payment use cases in addition to person-tp person (P2P) and person-to-business (P2B) use cases, which are currently predominant use cases supported by IPS in Africa.16 This is necessary as it could create a holistic digital payment ecosystem that enables the circulation of digital liquidity while addressing different payment points in Africa

Looking Into The Future

It is important to catalyse the growth of fintech, to move Africa’s instant payment systems into coming inclusive instant payment systems. Some considerations are at play:

Firstly, regulators serve as enablers of fintech innovation and development in payments by providing the necessary regulatory framework e.g. risk-proportionate regulation, fostering collaboration, and ensuring consumer protection. Their active involvement is crucial to maintaining a balance between innovation and regulatory compliance in the financial services industry. Through the adoption of fintech, they may enhance the regulation and supervision responses to market evolution in payments. Regulators have been establishing regulatory sandboxes, innovation hubs and other frameworks, which provide a controlled environment for fintech innovators to test their solutions without the burden of full compliance. This allows for the experimentation of new ideas while ensuring consumer protection and financial stability, and could be optimised to support the full participation of fintech in scheme governance and the journey to IPS inclusivity. Streamlining regulations will also help regulators to keep pace with the rapidly evolving digital financial services landscape.

Lastly, all DFS ecosystem actors could prioritise approaches to reducing fintech tension by exploring a better understanding of developing technology and regulatory concerns to improve the interpretation of the application of regulations to newly developed solutions. Indeed fintech is growing and could introduce certain risks, but there are immense opportunities to scale the instant payment systems and deliver on inclusivity as stated in this write-up. The imperative to promote public and private sector engagements as platforms for collaboration, open dialogue and communication is growing and is useful in promoting awareness of evolving innovation, risks and building trust among stakeholders to promote co-opetition at the payment scheme level or in the marketplaces at large.

12 The potential of AI chatbots in driving financial inclusion: Assessing ChatGPT

13 Case study: Financial consumer protection automation in Ghana

14 Kudi AI is putting a human feel to online payments in Nigeria

15 Distribution 2.0: The Future of Mobile Money Agent Distribution Networks, GSMA, 2018

16 SIIPS in Africa 2023 report, AfricaNenda

BANKING ON CHANGE:

AFRICA’S ROLE IN GLOBAL PARADIGM SHIFT

Long-entrenched paradigms can and do change. Just as America once stimulated the move to industrial capitalism and expanded global trade, Africa now stands ready to lead a global shift towards addressing inequality more effectively. Banks, with their pivotal roles, are primed to both drive and benefit from this evolution. However, each nation, along with its private entities including banks, must carve out its vision and decide its position in this evolving landscape.

THE AMERICAN ‘EXPERIMENT

The world finds itself in what can be dubbed the “American age”, a transition that saw the evolution from feudalism and agrarian-based economies to industrial capitalism. This shift bolstered international trade and the establishments enabling it. As Alexis de Tocqueville, the 19thcentury French diplomat observed about the American democratic spirit and emphasis on individual prosperity: trend is that while disparity between nations might be shrinking, the inequality among individuals within these nations is intensifying. The pressing need now is for frameworks that harness these technological marvels in ways that diminish, not exacerbate, this inequality.

AFRICA – FOR THE WORLD

(Source: American Academy of Arts and Sciences, www.amacad.org, accessed 25 October 2023)

By challenging and reshaping global paradigms, the American ‘experiment’ instigated tremendous growth primarily for G7 countries, laying the groundwork for modern globalisation.

The Case For Change Today

With the rapid progression in Internet and Communications Technologies (ICT) and Artificial Intelligence (AI), the world is at a pivotal juncture. The worrying

The endeavours of African nations embodies a similar spirit of reinvention. Their aspirations go beyond emulating Western or Eastern models, aiming instead for an approach that holds global and local relevance, addressing flaws in the visions for ICT and AI. Moreover, contemporary focus leans more towards marketoriented cooperation over rigid political ideologies. It was my privilege to be a part of the BRICS Business Summit in Johannesburg in 2023, and observed that coalitions like BRICS and AfCFTA, emphasising collaborative growth without stringent political prerequisites, shine as beacons for a new path, in today’s intricate global scenario.

Multiple factors place Africa in a unique position to influence global economic paradigms. These include resource richness, a vast young tech-savvy population, immediate practical needs, and importantly, the absence of strict adherence to old economic models. By learning from past oversights and leveraging its strengths, Africa can catalyse a global economic structure that might not so much rival but improve on the profound shifts ushered in by the emergence of the USA as the global powerhouse.

Banks

Banks are central to driving this African evolution and are being presented with unparalleled opportunities in this era of change. With their dual role, they stand uniquely poised to shape the continent’s future. On one hand, they are indispensable vehicles for implementing and stabilising financial regulations in line with national visions and policies, ensured by rigorous oversight for the stability and integrity of the financial system, especially in the crucial function of money creation.

On the other, as profit-driven entities, they consistently adapt, innovate, and offer diverse financial products to ensure shareholder returns, making them pivotal for long-term economic growth.

Their inherent ability to store, create, and facilitate financial movements, both domestically and globally, solidifies their position as the bedrock of the worldwide financial network.

AFRICA ISN’T A COUNTRY

It is essential to remember and constantly re-emphasise that Africa is not one country. It is a vast continent comprising fiftyfour diverse countries, with unique challenges and opportunities. Success for the continent depends on the individual visionary ambitions of these nations, respectful of the values, uniqueness and sovereignty of each country.It is plausible the success of BRICS+ may well be that it does not follow the established paradigm of political alignment, but recognises each member states sovereignty to form a new, improved trade alliance

It is however observed that despite different eco-political structures, countries that invest in unlocking the potential of their human capital, with strong national visions and coordinated efforts to improve domestic capability, are moving ahead.

More importantly Case in point, Rwanda.

RWANDA: NATIONAL VISION AND AMBITION

Rwanda stands as a testament to the transformative power of vision and coordination. Once synonymous with a devastating genocide, it’s now a beacon of progress. By enhancing digital and physical infrastructures, Rwanda’s Vision 2020 laid the groundwork for its transition from an agrarian to a knowledgebased economy, that targets digital literacy and smart city initiatives, able to leverage ICT and AI for rapid socioeconomic progress. for rapid socio-economic betterment, highlighting areas like digital literacy and smart city solutions.

Rwanda set the foundation for its digital economy with Vision 2020. Vision 2050 now builds upon this, setting clear and bold socioeconomic goals for 2035 and 2050. This is evidence of what leadership, vision and shared purpose can achieve.

THE RWANDA WE WANT: PROSPERITY AND HIGH QUALITY OF LIFE FOR ALL RWANDANS

The overarching goals for the Vision 2050 are:

• Economic Growth and Prosperity Rwanda aspires to become an upper-middle income country (UMIC) by 2035, and a highincome country (HIC) by 2050. Specifically, this means realising the following key economic targets:

• By 2035: GDP per capita of over USD 4,036; and

• By 2050: GDP per capita of over USD 12,476

Source: Rwandan Ministry of Local Government, https://www.minaloc.gov.rw/, Accessed 25 October 2023

• High Quality and Standards of Life for Rwandans

• The aim is to achieve high quality and standards of living

• Rwanda will build on the strong progress made in reducing poverty over the last two decades, reducing the poverty rate from 78% after 1994 to 38% in 2017, with the aim of eliminating poverty altogether

• This will be achieved through ensuring all walks of society have increased opportunities to contribute to national development, including by growing investments in human capital and ensuring universal access to amenities, safety and security

• Youth, women, men, and elderly people will contribute as actors of sustainable development, ensuring that no one is left behind in benefiting from development.

• Vision 2050 is informed by the aspiration of Rwandans of leaving to Rwandan children a better world to live in

• As such, growth and development will follow a sustainable path in terms of use and management of natural resources while building resilience to cope with climate change impacts.

• Rwandans’ aspiration for high quality of life will be further appreciated through the quality of the environment, both natural and built

RELEVANT PRODUCTS, ALIGNED TO LOCAL NEED

While state policies lay the groundwork, the market, especially pivotal players like banks, must contextualise and deploy technologies aligned with Africa’s evolving needs. A prime example of this synergy is MasterCard’s FarmPassTM, designed specifically for the African landscape.

“Mastercard’s Farm Pass platform, piloted in Kenya in 2015 and since expanded to Uganda, Tanzania and now India, brings together people from both the supply and demand sides in an agricultural marketplace to support farming communities. Farm Pass connects farmers directly with buyers, empowering them to negotiate the best price for their produce. Farmers can also access quality farming products like fertilisers and review farming information such as weather forecasts and pest control advice through the platform, as well as get paid and pay digitally. A digital record of their transactions means they have the validated financial history they need to apply for loans to finance and grow their businesses. And buyers can source their products more efficiently.

(Source: MasterCard, www.mastercard.com, accessed 25 October 2023)

FarmPassTM stands as a testament to the power of technology when tailored to national visions and local needs.

Conclusion

In summation, the intricate dance between stateset objectives and market responses is rife with challenges. Yet, with harmonious synchronisation, there lies a path to combat inequality, harness technology, and prioritise human development. In this journey, banks, given their foundational role in economies, stand at a pivotal crossroads, holding the potential to catalyse transformative change. This is not simply only an opportunity for advancement of human rights and dignity, but the opportunity for good sustainable profits – for the early entrants.