East Africa leads the continent in economic growth according to the Economic Commission for Africa, with Tanzania the pacemaker, pushing 6-7% gains in the last decade according to the World Bank. Most Tanzanians are rural and struggle to access traditional financial services. Digital solutions are closing this rural access gap. According to NGO Twaweza, FinTech and mobile money have boosted financial inclusion to an overall 86% in 2016. Mobile money penetration now exceeds traditional bank use at 53%. This is just the beginning of the complex journey toward inclusion and growth.
We had the pleasure to interview Tanzanian FinTech innovator Benjamin Fernandes. In part one of this series, Fernandes describes the financial services and startup ecosystems in his country.
How would you describe Tanzania’s financial ecosystem?
The government’s push for stricter tax enforcement has decreased citizen spending. Further, there is less credit being pumped into the private sector. For example, according to one Bank of Tanzania official, private sector credit created an annual growth rate of 23.6% in March 2016. By March 2017, that figured slowed to just 3.7%. There is much less movement.
That subject brings up another, major concern: an emerging consumer credit crisis. Consider the rapidly growing betting industry in Tanzania. People are borrowing money to bet, stretching their families and financial prospects thin. Worse, gamblers are borrowing to pay back earlier lenders after gambling losses – the definition of a Ponzi scheme! This hits the poor the hardest: easy access mean users can bet with as little as 300 shillings (€0,11). The betting industry grew 95% in just 2 years (2014 to 2016). Are the short-term government tax revenues worth the long-term credit risks to Tanzanian consumers?
How difficult is it to break into the Tanzanian FinTech market? Who are the incumbents, and what are they doing?
There are three primary players in the financial services space: banks, mobile money operators and payments aggregators.
Banks are super slow to innovate. Based on my extensive research and field interviews, only 19% of Tanzanians have accounts, and only about 5% are active. The primary activities are cashing out (withdrawing salaries, for example) and sending money to mobile money accounts. After chatting with other FinTech founders, it seems banks are warming up to collaboration with startups. However, banks typically only collaborate long enough to steal startup ideas and clone them within their own systems.
As much as people say otherwise, banks and mobile operators do not like each other. Mobile money enjoys much greater transaction frequency and volume than banks do. Here are some reasons why:
1. Cost of storage: Mobile wallets are free for users to hold float, while bank accounts cost a couple of US dollars a month.
2. Agent network: Mobile networks have been able to scale largely through giving people access to their agent network. In 2016, there were over 250,000 agents across the country. Banks, on the other hand require access to scarce brick-and-mortar locations. This is the heart and soul of what makes mobile money function well right now.
3. Mobile operators’ defense: They want to keep the entire financial operation within their networks. My startup team met with every major Tanzanian telco and found this defensive attitude everywhere. Some of them saw us as their competition. Others looked down on us as a mere tech partner and tried to boss us around. It was clear that they want to dominate financial services and ask for exclusive agreements.
What tips do you have for corporations who want to engage startups?
For Mobile Networks Operators (MNOs):
MNOs are understandably concerned—they’ve been sued before by young entrepreneurs. Still, this fear chills huge partnership and innovation opportunities that MNOs need to stay competitive. So, why not consider building an in-house innovation lab or incubator? MNOs could set ground rules and conditions before these partnerships start. By helping entrepreneurs early in their development, MNOs can build trust and benefit from others’ ideas and work with them on execution. I truly believe execution is everything.
Banks need young entrepreneurs, especially in FinTech. Banks are already too far behind. Local banks will struggle the most because multinational banks (e.g. from South Africa) have more resources and appetite for innovation. By opening up to the entrepreneurial ecosystem, banks can join in the innovations that will ensure their future success against competitors.
What do you think will be the state of financial services in Sub-Saharan Africa 5 years from now?
There is going to be a transformation in digital payments. There are loads of startups getting into this space. There will be lots of competition, and launching and scaling will be more difficult. Banks will likely fall even further behind.
Interoperability is one of the major obstacles to financial inclusion. Do you see a better infrastructure coming in the near future?
Thankfully, Tanzania leads Africa in mobile money interoperability. This is what really helped my startup and why mobile money scaled so much. It’s expensive, but it works. The big issue is individuals’ digital identity. According to a study from GSMA, Tanzania has one of the lowest rates of birth registration in Sub-Saharan Africa. According to the 2012 census, more than nine in ten under-fives do not have birth certificates. This means loads of citizens have no legal identity – and, therefore, no platform for entering and building trust in the digital financial world. Mobile service providers have a huge opportunity to help solve this problem. Identity will be the platform for mass inclusion.
In the second part of this series Benjamin will explain what his startup NALA offers, his story, and human-centered approach to product design.
Image credit: all rights reserved to East Africa Trade and Investment Hub