Will mobile overtake cards as the dominant payment method in Africa?
By Osahon Akpata
Amid global economic challenges stemming from the pandemic and the war in Ukraine, payments are expected to increase by 7%, according to a recent McKinsey & Company Report. In Africa, income growth is expected to be almost three times faster, with financial inclusion rapidly expanding, mainly thanks to the adoption of mobile money and several innovative payment solutions introduced by banks, telecom operators and Fintech companies. While cash remains king and its reign is set to continue for years to come, the rapid growth of electronic payments challenges this notion.
The opportunities in the payments ecosystem on the continent are promising. For example, sub-Saharan Africa dominates the mobile money market, responsible for 70% of the $1 trillion in mobile money transactions processed globally last year. The ubiquity of mobile devices has naturally led to the proliferation of mobile payment applications, and the channel is rapidly becoming a leading payment method. However, mobile payments are not without challenges, the main one being interoperability. Consumers can use a mobile banking app to transfer funds to any other domestic bank account. However, this is not always the case for transfers between mobile money wallets, where this exchange is still in its infancy.
The cards are easy to use and provide benefits to consumers and the payments ecosystem. With regulatory pressures on prices in some markets and supply chain challengescould mobile payments overtake cards as the main electronic payment channel?
Offline and in-store payments
Cards are convenient for in-store payments because one can get a paper receipt from the POS terminal for easy reconciliation, which is usually integrated with the cash register. Most large and medium merchants are accustomed to accepting card payments. However, a POS terminal or card reader is not affordable for micro and small merchants as most struggle with merchant service fees. Additionally, with payment settlement typically occurring a day later, micro and small merchants are constrained by daily funding requirements for inventory.
Mobile payments are becoming increasingly attractive to consumers and merchants. For digital natives, using a phone as a payment instrument is completely natural. Payments are usually instantaneous and merchants do not need to obtain a point of sale or pay any fees to collect funds. Since these are push payments (initiated by a consumer), the risk of rejection is low. However, some merchants still struggle with confirming and reconciling payments. In Nigeria, Fintechs such as Traction Apps and Collect Africa are filling the gap by offering transaction confirmation, settlement and reconciliation services. By leveraging telecommunications infrastructure and local switches, mobile payments can avoid costly railroads, a key advantage for scale.
Online payments and e-commerce
E-commerce is booming around the world, accelerated by the COVID-19 pandemic. In Africa, e-commerce revenues have been $28 billion in 2021 and are expected to grow to more than $46 billion by 2025. Today, a merchant in Nairobi, Kenya can easily accept card payments with seamless payment validation and settlement services offered through payment gateways. payment. There are established processes for handling issues such as chargebacks and dispute resolution. The cards are also handy for recurring charges such as subscriptions, which have become popular with streaming giants like Apple Music, Spotify and Netflix rolling out their services across Africa. On the other hand, the risk of repudiation is higher for online transactions. This is included in online merchant acquisition fees, which can become prohibitively expensive for merchants and consumers.
Most online merchants do not yet accept mobile payments. However, this is gradually changing as major mobile money operators, such as Safaricom’s MPESA, are now available on streaming sites and other e-commerce sites. Given the much lower risk of repudiation with mobile push payments such as Quick Response (QR) codes and bank transfers, the costs are much lower than with cards. However, the lack of interoperability and international acceptance limits mobile payments for e-commerce.
A significant advantage of international cards is their worldwide acceptance. With rails reaching virtually every country, cross-border payments are more manageable with cards where local regulations are favorable. A young woman in Dakar paying for an evening dress on a French couture site with an international card has a frictionless experience. Several Fintechs offer online merchant payment services to African merchants who wish to accept cross-border payments.
The acceptance of mobile money or account-to-account payments through a mobile channel for cross-border payments is still nascent. Payments and settlements can be instantaneous. For example, Ecobank’s pan-African switch enables instant cross-border payments across its network of 33 countries on the continent. The emergence of the Pan African Payments and Settlement System (PAPSS), which aims to remove the burden of a third currency in African commerce, has great potential to accelerate intra-African payments through mobile channels. While multi-currency settlement and interoperability between mobile payments remain a challenge, a solution is on the horizon. Blockchain technology promises to have a significant impact on cross-border mobile payments by reducing transaction costs and improving security.
African consumers are rapidly relying on their mobile devices for payments. The growth of digital wallets has led to the issuance of cards linked to mobile wallets. The legacy payment infrastructure developed by international card schemes enables seamless transactions, creating significant value for the ecosystem.
In June 2022, pan-African mobile money hub MFS Africa announced the acquisition of Global Technology Partners, a prepaid card processor. Mobile money operators and card schemes will continue to work together to provide customers with a frictionless payment experience. Blockchain and other emerging technologies could be a game-changer. Cards will remain relevant in payments in Africa; however, mobile payments are undeniably the fastest growing.