Originally published on Bobsguide.com
Transport and technology limitations in sub-Saharan Africa has led to 80% of the population being considered ‘unbanked’. Much has been made of African consumers and businesses’ openness to innovation, illustrated by the expanding footprint of mobile money. Despite 80% of the Africans have access to mobile phones or other online systems (this figure is expected to grow by 4.2% annually according to TA Telcom), it is interesting that many areas of the continent still lag behind when it comes to the next big thing: digital currencies.
Adoption of digital currencies and associated technologies across Africa is behind the curve when compared to some other geographies. This is exemplified by the lack of regulation on the issue. Numerous governments have issued draft proposals for regulatory legislation of digital currencies, such as California which has granted digital currency a ‘legal money’ status. Other countries have announced that they will begin issuing a new digital currency through their central banks – Ecuador has committed to doing this by December 2014. The Island of Jersey has granted an official license to a Bitcoin investment fund, opening the door to major investment into the currency by pension and insurance funds. In Africa however, only South Africa has expressed any form of official discourse on digital currencies, stating that it has ‘no legal status or regulatory framework’. There has been no mention of timeframes for assessments or when decisions on its future regulatory stance might be taken.
But why? Africa provides a fertile market for all firms operating in the digital currency space. Africa’s lack of regulation and openness to innovation presents firms with a huge opportunity to experiment with new and existing business models. The potential for digital currencies to replace the US Dollar as the common currency for intra-African payments would also drastically cut the high transaction costs that all cross border transfers in the region currently suffer as a result of the current settlement process involving global banks. As digital currencies are starting to play a bigger part in the global financial system, it will not be long before an organisation wins through providing a service specific to Africa.
There are a host of opportunities that can be further explored in the digital currency space within the African continent. Three of the most interesting are:
- Revolutionising B2B payments using digital currencies
- Developing a secure custodian service for consumers and businesses
- Introducing an African specific remittance platform
1. Revolutionising B2B payments using digital currencies
Most of the established digital currency transfer platforms in Africa focus on B2C transactions. Recently BitX and Payfast have established a joint venture in South Africa that has opened up 30,000 online merchants.
The lack of established firms offering a secure, insured and accessible B2B facility to support the transfer of all digital currencies in Africa presents a very real opportunity for companies to enter this market. A firm doing this could accelerate the digital currency trend and payments market in Africa.
The creation of an insured and secure B2B facility will help to eliminate general business and market fears over the security of using digital currency for transactions. It would represent a genuine alternative to costly transfer methods, enabling providers to rapidly grow market share in this space.
2. Developing a secure custodian service for consumers and businesses
Concerns over the security of digital currencies are valid and wide ranging – for example the lack of encryption for digital ‘wallets’, and theft of passwords. Creating a secure, insured and accessible custodian and vault facility for improved services on digital wallets for businesses and consumers would calm these concerns. The key differentiator would be the provision of an insurance policy underwritten by a financial institution that could cover the loss of any currency under custody.
A virtual vault that stores digital currency, accessible through secure coded account ‘keys’ (one public; similar to a bank account number and one private, secret key representing ownership credentials) on offline servers for clients could suit a range of customers. As a service offering this idea has two distinct advantages. Firstly, it instils confidence in the concept of digital currency, which is still viewed with some suspicion across the continent. Secondly, it is a service that is not yet widely available in Africa, providing any entrant with first mover advantage. Despite these obvious benefits there a few potential pitfalls, namely whether firms and individuals would be willing to pay a premium when free wallet solutions are readily available.
3. Introducing a Remittance Platform
The global market for remittances is estimated to be $600bn annually. It is common knowledge that traditional methods of sending remittances (e.g. through Western Union) take a fee of roughly 12-20% on transfers to African countries – almost double the global average. Creating a digital currency remittance service that levies a percentage of foreign exchange margin per transaction would enable funds to be transferred at reduced transaction costs compared to traditional channels.
Bit-Pesa is currently a leading player in this space, providing money transfer services (including remittances) specifically to Kenya. There is a clear opportunity to replicate the Bit-Pesa service across a wider geography, tapping into the markets across Africa. Firms will need to be cautious of any regulations – namely Anti Money Laundering (AML) and Know Your Customer (KYC), which have arguably led to the high fee rate that traditional transfer channels experience across the continent and could hinder any progress in this area. That said, a successful early entrant could influence regulation by collaborating with policy makers.
Although digital currencies may be transmitted freely by users, there is still a strong argument for creating businesses focused on providing remittance specific transfers. Existing remittance senders and receivers do not share many characteristics with digital currency users, and may not feel comfortable with traditional banking systems and card services. Yet if such a service is pitched through the appropriate channel and in a way that truly meets the needs of these customers, the potential adoption of digital currency is significant.
Africa provides an opportunity to develop and iterate a business in a large market that is receptive to innovation. Firms willing to enter the market early, negotiate regulatory hurdles and experiment with existing business models will find that Africa presents a golden opportunity for digital currencies.
The abundance of affordable smartphones with features such as NFC (Near-Field Communication) sets the scene for digital currencies to thrive. Apple has recently allowed Bitcoin apps in their AppStore and coupled with the launch of Apple Pay, there is another opportunity – to develop a mobile digital currency. Could it be that we are seeing the early signs of a paradigm shift toward a mobile-based digital currency revolution across Africa? Time will tell.
Digital currencies are not tied to a nation-state, making them more ‘placeless’ than any other we have seen. Firms can still succeed by pursuing location-specific strategies, and the opportunities that Africa presents are unique. It may be the world’s least banked continent, but its potential should not be ignored.