Moonshot by TechCabal is the conference that brings together Africa’s tech ecosystem in person to network, collaborate, share insights and celebrate innovation. Join us in Lagos on October 11 and 12. In this second article built around the conference, Abraham Augustine offers suggestions for designing a future for the financial services sector that is defined by government and private sector collaboration to create shared prosperity and thriving economies.
What the future of financial services will look like depends on who you are talking to. Crypto advocates believe in a future where financial services are decentralised and both real-world assets and virtual assets are tokenised. Governments around the world seem to be coming to a consensus that the future of money is programmable central bank digital currencies that can rival crypto stablecoin dreams. And in the development sector, financial inclusion advocates affirm little more than simply providing access to digital wallets.
No programme embodies the development sector focus on digital wallets as the future of financial services like the Better than Cash Alliance of the United Nations.
And they have a point. Financial services is a broad range that includes banking, insurance and investing. The unspoken consensus is that the form in which these will be delivered will be digital. That helps us narrow it down to one overarching theme. Which is that the future of financial services is mostly digital.
Digital technology has a strong presence in the back offices of the financial services sector. Banks are run on software architecture that help them manage customer and account information. Bond, equity and commodity investors all over the world rely on software to execute trades. Insurers are beginning to store massive amounts of customer information in large databases. And you pay for groceries or a Spotify subscription with your credit/debit card or digital wallet.
Despite what seems like peak digitalisation, there is still a lot of room for change and growth. Even in developed economies. For example, despite the significant digitisation of its financial sector, the United States only recently launched its real-time payments (RTP) network. Almost 20 years after its southern neighbour, Mexico launched a national RTP in 2004. RTPs change what a bank transfer means—from a days-long process to a near-instantaneous activity.
Clearly, the future of financial services is not only digital; it is how progress in basic areas such as faster payments will change how the everyday person interacts with the remaining pillars of financial services.
With the financial services sector receiving or managing trillions of dollars in investments, transactions and system failures every day. These changes will impact:
- How people and businesses save and borrow.
- How people and businesses invest in capital markets.
- How people and businesses get insurance protection.
- And how people and businesses raise capital.
Some of this is already happening. Especially in more developed countries. But in the African context, we have not made much progress beyond how digital technology has changed how people receive payments or pay for services or products. And there is a history behind this.
From microfinance to digital financial inclusion
From the late 1990s to the first decade of the 2000s, microfinance banking dominated the approach towards increasing participation in formal financial services. Especially in developing and low-income parts of the world. Propelled by the advocacy and example of Pakistani economist, banker and Nobel prize winner, Muhammad Yunus, development banks supported the micro-finance model as a pathway to increasing formal financial access.
As big money flowed into the nascent industry, mixed results trickled out. Small successes were hailed as exemplary, social costs like increased indebtedness were downplayed, and massive profits were collected.
Digital financial inclusion is an outgrowth of this era, as innovations such as M-Pesa caught on. Mobile technology and better access to the internet promised to help scale access to financial services. As a result, increasing the number of formal financial accounts mainly through digital payment wallets became a priority for the development industry. And ultimately the priority of private sector investors and entrepreneurs.
From financial inclusion to financial health
Unfortunately, contrary to popular narrative, access to one form of financial services that mainly sought to replace cash with digital options, has not created consistently positive upliftment. “Since 2010, financial inclusion has been a great focus for our community. Today, however, I would like to make the argument that it is time to move on from financial inclusion because it has not fulfilled its promise of helping the poor make their way out of poverty,” Iyin Aboyegi who co-founded one of Africa’s most valued payments company and has invested in several more, said at the Inclusive Fintech Forum.
A lot more people now agree that Africa needs to move beyond the singular focus on payments which is only one pillar in the financial services sphere. Financial inclusion advocacy institutions, like Financial Sector Deepening Africa (FSD Africa), now use indicators that measure financial health instead of only financial access.
What financial health looks like
This new focus on financial health (a measure of a person’s financial soundness and economic well-being) can become the standard around which the future of financial services is built.
For the payments layer, a focus on financial health will compel governments, the development industry and private companies to evolve their policies and products. Simple access models with poorly aligned incentives will be replaced by payment products that focus on facilitating commerce. And the government’s rentier taxation of digital payments will be eliminated.
Instead of focusing on how many people are given loans, the future of digital financial services will see entrepreneurs using technology in line with government policy to extend credit in a way that supports an inclusive economic agenda. This will mean an increased use of data to monitor and measure progress towards economic well being. As a result, Africa’s data industry, as well as data protection standards, will need to evolve from where it is today.
By the same token, poorly thought-out economic policies that disincentivise financial institutions from extending credit to lower-income earners will have to be changed.
Making the financial services sector aligned with financial well-being means leveraging digital technology to extend and enhance comprehensive insurance protections to people and businesses. Economies and individuals with better risk protections and insurance portfolios tend to be more resilient in the face of sudden economic shocks. Technologies such as embedded insurance can help protect against short-term risks, while greater adoption of long-term protection such as life insurance will allow insurers to invest capital pools in businesses that can support economic growth in the medium term.
Better capital availability means a deepening of the capital markets in Africa. Deeper markets mean the ability to support local economic growth and curb capital flight from Africa, thereby ensuring long-term progress. Productive economies rely on equity capital to spur and support long-term growth. The future of a financial well-being-oriented Africa will mean capital markets reform to protect investors from predatory schemes and the broader economy from over-financialisation.
Regional integrations through policy and technology will allow investors to support African firms in multiple African markets seamlessly.
This future will require significant changes in how governments work and manage the economy. It will require new business models and will reward participants who engage transparently. The real question is whether African entrepreneurs and most importantly, government leaders are ambitious enough to pursue this vision.
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