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The future of payments in Africa
By McKinsey & Company
Innovations, entrepreneurs, and capital are reshaping Africa’s fast-growing electronic-payments landscape with solutions for consumers and businesses alike.
Human commerce has always sought more efficient mediums of exchange, and now this innovation is accelerating. The 21st century has witnessed dramatic shifts in how people pay for goods and services, with electronic payments increasingly displacing cash and, more recently, cryptocurrency and digital currencies emerging as alternatives to traditional conceptions of money.
Africa has kept pace with—and in some cases even led—this innovation, and an influx of new investments and regulatory shifts continues to shape the e-payments landscape on the continent. Although cash is still king in Africa, a McKinsey survey suggests that its supremacy is likely to be challenged in the coming years as e-payments gain momentum.2 With banks and nonbank players alike innovating to reduce friction in domestic and cross-border payments and deliver much-needed new solutions to consumers and businesses, Africa’s domestic e-payments market is expected to see revenues grow by approximately 20 percent per year, reaching around $40 billion by 2025,3 compared with about $200 billion in Latin America.4 By comparison, global payments revenue is projected to grow at 7 percent annually over the same period.
This article presents insights from African experts along with our analysis of what is driving the growth of e-payments on the continent (see sidebar, “Our perspective”). It highlights the challenges and possibilities for organizations looking to find their niche in this rapidly evolving and increasingly competitive landscape.
An accelerating shift to digital payments in Africa
Globally, electronic payments are a booming industry, having attracted more investment than any other financial-services sector and delivered the highest returns and growth in the sector over the past decade.5Africa has been no exception. In 2020, Africa’s e-payments industry, across domestic and cross-border payments, generated approximately $24 billion in revenues, of which about $15 billion was domestic electronic payments. The domestic electronic-payments revenue of $15 billion was generated from 47 billion individual transactions totaling just over $800 billion of transaction values.6 However, on average, only 5 to 7 percent of all payment transactions in Africa were made via electronic or digital channels, compared with 50 percent or more in Turkey, for instance.7 This means e-payments are a major growth opportunity on the continent, especially as the convenience and scalability of payment methods improve and supporting infrastructure develops.
E-payments in Africa have been gaining momentum since 2000 and, as in the rest of the world, have taken a leap forward during the COVID-19 pandemic. Many African countries have seen record growth in e-payments over the past two years: mobile-money transaction volumes in Nigeria doubled to around 800 million in 2020, according to the Central Bank of Nigeria, while data from South Africa show that online commerce grew by around 40 percent during lockdowns in 2020 and 2021.8
Around 80 percent of respondents to McKinsey’s survey of payments experts across Africa believe that the shift to e-payments not only will endure but will accelerate, with 84 percent expecting e-payments to grow by at least 30 percent per year through 2025. A third of respondents expect a 50 percent annual increase. Overall, McKinsey anticipates that between 2020 and 2025, the e-payments market will grow by around 150 percent to reach almost $40 billion in revenues from domestic payments alone, with about 188 billion in transaction volumes (Exhibit 1).
However, this growth is likely to be uneven across the continent and will depend on infrastructure readiness, e-commerce penetration, mobile-money9 penetration, and regulation, among other factors, in each market.10 Some countries—notably Egypt, Ghana, Kenya, Nigeria, and South Africa—have managed the transition to digital faster than others and either have or are rapidly developing the appropriate infrastructure and relevant policy frameworks to deliver a sophisticated electronic-payments system. It is likely that around half of future electronic-payments revenue will come from these five countries, with the fastest growth in Nigeria, at 35 percent per year. Other countries that will see strong growth above 20 percent per year include Ghana, Ivory Coast Kenya, Senegal, and Uganda. As other markets expand, South Africa is likely to represent a smaller share overall while remaining the biggest e-payments market in Africa in 2025, with $5 billion in annual revenues.
Four forces shaping the outlook for e-payments
Favorable demographics and economic growth, technology innovation, and advances in payments infrastructure are working together to shape the future of payments in Africa. An additional force—the impact of newer disruptions such as digital currencies and open banking—is harder to predict.
Favorable demographics and economic growth, technology innovation, and advances in payments infrastructure are working together to shape the future of payments in Africa.
Young city dwellers and strong economic fundamentals
Young, urbanized consumers and strong economic fundamentals are providing fertile ground for growth. Africa has the fastest population growth rate in the world, averaging 2.7 percent per year, compared with a global average of 1 percent, and the youngest median age, 20 years.11 Most of these young people will likely live in cities by 2045.12 A young, urban population provides a ready market for e-payments, and growth already is resulting from shifts in how people transport themselves (e-hailing services), consume entertainment (streaming services), and shop (e-commerce).
Electronic payments are also likely to benefit from fundamental economic growth factors and falling data costs. African economies are showing signs of recovering from the economic setbacks of the COVID-19 pandemic. Across the continent, governments are looking to prioritize internet and mobile-phone penetration amid falling internet and mobile costs. Sub-Saharan Africa had more than 300 million mobile connections in 2017, 40 percent of which were smartphones, and this figure is expected to double to more than 600 million in 2022, with mobile-data traffic expected to grow sevenfold.
Proliferation of alternative payment methods
As technology has advanced, so too has innovation. Consumers in Africa continue to benefit from an increase in the proliferation of alternative payment methods across the continent, offered by local and international fintech players and telecom companies. According to GSMA, globally registered mobile-money accounts stood at 1.2 billion in 2020, roughly equal to the population of the continent, with more than $2 billion in daily processed transactions, equivalent to more than 40 percent of the GDP of sub-Saharan Africa.14 International remittances terminating in mobile-money wallets grew by 65 percent year over year in 2020 to around $1 billion, with no signs of slowing.15 Digital wallets that are linked to a variety of payment methods, including cards, accounts, and mobile money, also are growing in availability and adoption. Card-linked digital wallets, for instance, are a significant driver of growth in issuance and usage of cards, including virtual cards.
New and innovative technologies are also enabling easier consumer and merchant transactions and new business models and offerings. For instance, integrated universal QR codes, including those sponsored or built by central banks or similar institutions, are helping to reduce complexity as the number of payment methods grows. For example, Ghana’s Quick Response service (GHQR) enables payments from bank accounts, mobile money, and cards, and Nigeria has launched the NQR, a similar solution. Meanwhile, interoperability between competing mobile wallets has been achieved in most countries.
Payments infrastructure is reducing friction and boosting integration
Infrastructure investments are helping to accelerate electronic payments domestically and across borders, while offline channels are proving to be a critical bridge between Africa’s large stock of cash and fast-growing electronic payments.
On the domestic payments front, Africa is experiencing an increase in real-time payments infrastructure enabling instant account-to-account transactions. A few countries are investing in new rails or upgrading existing ones with modern technology, but only six countries were live with real-time payments at the end of 2021. A recent ACI report showed that Nigeria is already in the top ten of global real-time transaction rankings in absolute terms, ahead of the US, Japan, and Brazil, while Kenya is among the ten countries expected to experience the fastest growth in real-time payments.16 Egypt has approved regulations to enable instant payments, and Ghana has recently introduced instant payments. Tanzania and other countries are following suit.
While investments in real-time payments infrastructure have been led mostly by central banks, regulators, or associations of banks and focused on domestic payments systems, a new breed of fintech and other players are also rapidly integrating end points across countries, developing modern rails that enable faster and cheaper intra-Africa cross-border payments. We expect that these solutions will continue to be scaled up across more geographies and payment methods.
The Pan-African Payment and Settlement System (PAPSS)—which is being developed by the African Continental Free Trade Area to ease payments constraints across Africa’s complex network of more than 50 countries and about 40 different currencies—is a potentially transformative development for cross-border payments.17 At the same time, regional initiatives such as the SADC RTGS18 are already helping to improve transaction settlements within regions that would previously have required more complex and expensive correspondent banking arrangements and counterparties outside of Africa.
Because of the continuing dominance of cash in Africa, offline channels, especially agent networks, are another critical component of African e-payments infrastructure. With the rise of mobile money in the late 2000s, these networks have extended beyond cash-in, cash-out (CICO) services, expanding in size and complexity to facilitate electronic payments and provide a platform for the distribution of financial services. SANEF in Nigeria, Mukuru in Southern Africa, and Fawry in Egypt are just a few examples of non-telecom agent networks, all with more than 100,000 access points. For banks, these networks with their lower operating costs have become a critical channel for customer acquisition and servicing, enabling access to a new segment of customers.
Because of the continuing dominance of cash in Africa, offline channels, especially agent networks, are another critical component of African e-payments infrastructure.
Disruptive innovations: Quantifying the impact
Despite skepticism around private cryptocurrencies, a wave of disruptive innovation enabled by regulation and central banks is already in motion in Africa, Europe, Latin America, and North America. Currently, more than ten African countries are in the process of launching central bank digital currencies (CBDCs). While none of these have taken off yet, the potential use cases of CBDCs are relevant for some of the most enduring challenges with payments and transfers in Africa, including offline payment solutions, cross-border payments, and cash transfers that could be more easily directed to specific target populations.
In addition, several privately issued stablecoins are increasing their utility, with more than $150 billion in global circulation and up to $100 billion in transactions per day. Although several mechanisms have been tested to maintain their peg to a unit of fiat currency, it is likely that the most enduring stablecoins will be fully reserved by currency deposits. In that case, more consumers would have the confidence to employ this tokenized cash for cross-border payments and corporate transfers, giving them access to the benefits associated with crypto: instant settlement, low-cost transactions, greater security, and increased transparency.
Despite the absence of legal backing and outright restrictions in some markets,19 three African countries—Kenya, Nigeria, and South Africa—already number in the top ten of Bitcoin trading volumes globally, with Nigeria at third place, behind the United States and Russia.20 (Other sources put Nigeria at number one.)
Although the influence of such innovations is difficult to predict, we expect cryptocurrencies, stablecoins, and CBDCs to have material effects on the outlook for e-payments in Africa, given the promising use cases and the historical tendency of Africa to embrace innovation at scale and leapfrog into the future. These dynamics are reflected in our survey responses: while the majority do not see cryptocurrencies gaining wide adoption in the short term, around 28 percent of respondents see regulatory easing and CBDCs as the most important drivers of digital-currency adoption over the next three years (Exhibit 2). Other McKinsey research has highlighted the regulatory uncertainties that surround stablecoins and CBDCs, noting that the “market is far too nascent to confidently predict outcomes.”21 The research also highlights that the greatest unlocks to future utility are better consumer education about digital assets, stronger cybersecurity measures, and access via a familiar, trusted interface such as an online banking portal.