… test for banks in Africa
Global Trade growth over the past two decades averaged 6% per year, almost two times as fast as world output. According to the World Trade Organisation (WTO), world trade volume is 45 times the level recorded from 1950 to 2022. Global trade remains one of the most difficult and complicated endeavours in business today, yet it has proven to be the backbone of the global economy. Global trade, according to United Nations, is estimated at US$32trillion – an increase by more than 12% largely driven by energy products. Trade has been and will continue to be the crust of economic growth for a very long time globally.
Digitisation of global trade enables commercial transactions of goods and services that can be either physically or digitally supplied to concerned consumers, enterprises and institutions. Global trade digitisation is characterised by the movement of data, both as a means of production and as a tradable asset itself. It also means an increase in the scale, scope and speed of trade, and the opportunity for businesses to offer new goods and services to a larger variety of clients through the use of digital tools such as online platforms, cloud data storage and electronic payments. It implies, as well, downsizing the distance between buyer and seller.
The digital economy has risen significantly in the global landscape, and many developing countries including those in Africa have seen a boom in digital activity over recent years. The development of a digital economy has seen an expansion in digital financial services (DFS) in Africa and other developing regions. As the digital economy grew, mobile money-driven activities also expanded, resulting in notable outcomes in certain African countries such as Kenya (M-Pesa), Zimbabwe (Ecocash) and South Africa (E-wallet) among others. It is evident that Africa is on the rise, and leveraging technologies such as Artificial Intelligence (AI), blockchain, cloud and data will only allow the continent to significantly improve traction in global trade finance & digital payments.
Most African banks identify the importance of digital technology, with only 4% considering it less relevant while 51% see it as the most important factor – many banks have yet to build their overall strategies around digital technology.
According to the World Bank (2020): “Digital financial inclusion involves deployment of the cost-saving digital means to reach currently financially excluded and underserved populations with a range of formal financial services suited to their needs, which are responsibly delivered at a cost affordable to customers and sustainable for providers”. Through digital financial inclusion, a greater part of the previously excluded and underserved vulnerable population is transitioning away from solely using cash-supported transactions, toward formal financial services and channels such as savings, payments, insurance and credit, using mobile money or other digital technology.
Digitising global trade
This encompasses digitally-enabled transactions of trade in goods and services that can either be digitally or physically delivered, underpinning digital trade is the movement of data. Data is not only a means of production, but also an asset that can itself be traded and a means through which Global Value Chains (GVC) are organised and services delivered. It also underpins physical trade less directly by enabling implementation of trade facilitation.
The digital transformation has reduced costs of engaging in international trade, facilitated coordination of global value chains (GVCs), helped diffuse ideas and technologies, and connected a greater number of businesses and consumers globally. But even though it has never been easier to engage in international trade, the adoption of new business models has given rise to more complex international trade transactions and policy issues (OECD).
In today’s fast-paced and interconnected world, governments are facing new regulatory challenges; not just in managing issues arising from digital disruption, but also ensuring that the opportunities and benefits from digital trade can be realised and shared inclusively.
How digitisation is changing global trade
Digitisation improves the scale, scope and speed of global trade. It allows organisations to bring new products and services to a larger number of digitally connected customers across the globe. It also enables firms, notably Micro Small Medium Enterprises (MSMEs), to use new and innovative digital tools to overcome barriers to growth; helping facilitate payments, enabling collaboration and avoiding investment in fixed assets using cloud-based services.
Digitisation is also changing how goods are traded across the globe. For example, the growth of online platforms has led to a rising number of small packages being sold across international borders. This is giving rise to a range of issues for policymakers – ranging from the physical management of parcel trade, through to the implications for risk management and revenue implications in relation to collection of taxes and tariffs.
This very critical transformation leads to digitisation of processes regarding document operations in trading finance. From digitied presentation of documents, such as letters of credit, to the digitisation of document processing, the digital absorption offers an opportunity for businesses and institutions to expedite the sales and dispatch of goods through the use of advanced technologies – such as artificial intelligence (AI) content – in the examination of paper documents presented in the use of letters of credit and other credit documents. In addition, the absorption of digital technology offers greater security and interoperability between companies, governments and Customs agencies around the world, making it available for businesses to exchange data in real-time and electronically, thus facilitating and deepening commercial transactions across the globe.
Rapid technological developments also facilitate the rise of services in international cross-border trade. Information and communication technology services form the backbone of digital global trade, providing the necessary network infrastructure and underpinning the digitisation of other service types. New technologies have also facilitated the rise of digitally-enabled services that are supported by a range of new services building on data-driven innovative solutions, such as cloud computing.
In the world of digitisation, old trade issues may have new consequences; such as the impacts of uncooperative border procedures on parcel trade, or restrictions on newly tradable services – and new issues for trade policy are emerging, such as differing regulations among nations in relation to data flows. Further understanding of the nature and extent of these changes is needed to help policymakers create an environment that supports innovation and promotes digital trade in goods and services.
A test case for banks in Africa
The financial services sector in most African countries was traditionally characterised by an underdeveloped market. This market included traditional banks, building societies, savings and loans financial institutions and microfinance houses. Traders’ resolve to shift to new products has presented both opportunities and pressure for banks and non-banks to innovate in the trade finance space. The excitement around new technologies such as AI has also transformed trade finance into a centre of innovation, attracting sustained investment in digital trade ecosystems.
Access to banking on the continent
Banking access in Africa has increased in 2022, with 48% of the population having access to banking services compared to 45% in 2017. This growth can be attributed to the popularity of mobile money and digital banking. Approximately 50% of the continent’s population, however, remains unbanked; indicating significant potential for further growth in the sector (Africa Business, 2023). Nonetheless, a new generation of urban, middle-class customers is emerging, who prefer conducting transactions online. Younger people are more inclined to adopt digital technology than are their parents and grandparents, suggesting that the uptake of digital banking services will continue to grow. McKinsey predicts a 10% annual growth rate in the African financial services market, generating US$230bn in annual revenues by 2025.
Evolving digital solution and challenges
Cash still dominates financial transactions in Africa, accounting for about 90% while electronic or digital channels represent only 5% to 7%. In comparison, Asia and Latin America have a higher digital banking adoption rate of around 50%. Convenience of digital banking is not solely dependent on the availability of digital platforms; it also requires potential customers to have the ability to access these – particularly through mobile phones. Mobile phones dominate online access in Africa, accounting for approximately 75% of all online traffic. Consequently, bank digital platforms are designed primarily with mobile use in mind – although it is essential for customers to switch seamlessly between devices.
The main obstacles to accessing digital services include high mobile handset purchase prices and data charges. According to the World Wide Web Foundation, mobile Internet costs accounted for 5.8% of average income in Africa in 2020, making it the most expensive region of the world for digital access. The average cost for 1 GB of data and for smartphones have however decreased significantly between 2018 and 2021. This indicates a potential for increase in the number of people able to access mobile banking.
Uneven market access and challenges
Kenya and Ghana have been leaders in adopting digital payments, with mobile wallet transactions in Kenya accounting for 87% of its GDP in 2021. Kenya has achieved one of the highest levels of fintech penetration globally, increasing access to banking services from 26% of the population in 2006 to 83% by 2021. In South Africa, where 84% of the population had access to traditional banking services in 2021, digital banks such as Bank Zero, Discovery Bank and Tyme Bank face the challenge of demonstrating the advantages of their services over physical bank branches and ATMs, rather than solely focusing on unbanked individuals.
Preferred channel for banking transactions
Despite this division, the digitisation of banking services has significant potential across all African economies. In Somalia, 70% of adults regularly use mobile money services (Africa Business 2023). This popularity is driven partly by the prevalence of counterfeit banknotes. Generally, countries with more stable economies and governments have made more progress in developing mobile money and digital banking services compared to more fragile nations such as francophone states of the Sahel.
Conclusion
There is doubtless no market in which the growth of and demand for more inclusive and accessible financial services is more prevalent than in Africa. The banks in Africa should leverage on the teeming youth population and bountiful opportunities which come with the digital economic drive across the globe. Structural changes on how commercial activities are carried out have started, and this is only the beginning of more transformations to unfold which will obviously be spearheaded by digitisation.
Transaction banking in Africa must invest in state-of-the-art infrastructure and business technology to support solutions ranging from payments and complex settlement solutions. Banks need to embrace technology while leveraging on success stories in other markets to produce the best new age solutions for the African market. Mobile money solutions have vast potential to evolve into more complete banking products, including lending, saving and investing – and banks in Africa must lead that charge.
Africa has demonstrated its tendency for embracing new technologies, particularly in the financial services sector. Ultimately, the aim is to contribute toward sustained economic growth and development in Africa; and we are likely to move toward this faster through partnerships with the fintech startups and mobile network operators which are often more innovative and agile in solution delivery.
The writer is the Head-Transaction Banking, Consolidated Bank Ghana Limited
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