The continent of Africa is undergoing a dramatic shift as the banking and ICT sectors converge to drive financial inclusion through the adoption of cloud banking, reducing operating costs, accelerating innovation and reaching customer segments previously untouched by the digital banking revolution. Our new report: ‘Cloud Banking in Africa – The Regulatory Approach’, prepared by Genesis Analytics and Orange Business Services, with the support of the Bill & Melinda Gates Foundation, highlights the impact of cloud computing on financial services and economic development.
A coherent continental-wide picture is starting to emerge across Africa’s many countries and the patchwork of regulators and regulations that govern the banking sectors. Where e-commerce players, mobile network operators and fintech startups have so far led the digital disruption, traditional banks aim to follow as they see the potential of cloud computing as a means of overcoming the barriers of small size and high costs and ultimately to reach the vast majority of the continent’s underserved or unbanked population.
The bigger picture
Several factors are converging to make cloud banking a reality. Increasing investment in undersea fibre optic cable is set to improve connectivity to and from Africa, for example with Orange Marine (which has laid almost 190,000 km of undersea cables) and others such as Google (Equiano) and Facebook (Simba) laying their own dedicated cables into sub-Saharan Africa; with more fibre deployed this is opening up greater bandwidth and offering faster connectivity at lower cost.
Cloud service providers are responding. Recently, Amazon (with AWS – Amazon Web Services) and Microsoft (Azure) have opened up local Cloud access and services through data centres in Africa offering lower latency to end users across Sub-Saharan Africa and enabling African organizations to leverage innovative technologies such as AI, IoT, etc..
The banking response
The wider African banking sector is responding to these developments.
Fintech Jumo is attracting new and existing investors (including Goldman Sachs) to fund growth beyond its current five African countries, offering cloud-based lending, savings and insurance services. Branch is another fintech company which has more than 3 million people using its cloud-based application, and more than $350 million in loans distributed. Paga, a Nigeria based startup focusing on payments using cloud-based technology,now has more than 12.8 million customers served by more than 20,000 agents.
Large African banks are equally adopting cloud solutions. Standard Bank has expressed an ambition to become “Africa’s first bank in the cloud” and Ecobank has announced the launch of its cloud-based pan-African Banking Sandbox as part of its commitment to cloud banking and which will allow partners and fintechs in 33 countries to access its APIs and develop innovative solutions.
The stakes could not be higher
The development of these new financial services across Africa is essential; financial services play a vital role in driving financial inclusion, driving economic growth, protecting households from economic shocks (especially topical during the current global pandemic) and enabling household savings and investment.
Currently, the average rate of financial inclusion in Africa is around 41% which means that there are still over 700 million adults across the continent who remain either financially underserved or completely unserved. There is no doubt that the high cost of providing financial services plays a role in this situation and leaves many traditional banks with no choice other than to continue to focus on serving the wealthier and more profitable consumers.
Regardless of this, Africa’s financial services sector is growing and changing shape, comprising a range of players from the international banks, mobile money operators, state-owned banks and co-operatives, to smaller local banks, microfinance providers and, increasingly, new fintech players.
The rise of mobile money on the African continent is a clear indicator of the demand for low-cost financial services. MNOs and their mobile money solutions have grown exponentially in markets with large rural populations and strong domestic remittance corridors where there is little access to banks or their branches. Today, just six MNOs serve approximately 75% of all customers with active mobile money accounts across the African continent.
And increasingly fintechs in Africa play a part in the value chain of financial services with business models designed around cloud-based digital infrastructure that lowers their operational costs, increases their flexibility and allow for decreasing marginal costs.
The costs traditional banks face in managing their technology infrastructure put them at a competitive disadvantage to these new entrants, who have the added advantage of operating under different regulatory regimes. In many countries across Africa, MNOs and fintechs are much more successful in providing accessible and affordable products and services to consumers. But banks are fighting back by adopting cloud banking solutions.
Cloud’s compelling arguments
Cloud banking enables banks to significantly lower their ICT costs and increase flexibility - paying for only what is needed and with none of the costs of upgrading to the latest technology. It gives banks access to processing capacity, software, storage capacity, and to resources on demand with no investment needed in ICT skills.
While the most compelling reason to move to cloud is undoubtedly cost savings, there are other business benefits. The flexibility of cloud-based operating models allows banks to shorten new product development cycles with no need for infrastructure capital investments and to become more agile and responsive to the needs of banking customers. Cloud banking also improves business continuity for banks, where the cloud provider is responsible for ensuring that the technology remains operational.
A critical barrier to the adoption and effective deployment of cloud computing centres is the availability of a reliable internet connection. Cloud banking requires extensive and affordable broadband access. Equally important is the cost of data. Currently, Africa has a very low share of the global data centre capacity essential to power cloud computing and address some of the slowest and most expensive internet connectivity in the world.
Until recent, Sub-Saharan Africa had been the most underserved region in the world in terms of international fibre capacity, particularly in East Africa, which relied exclusively on costly and less reliable satellite connections. Due to increased support for telecom infrastructure projects, international internet bandwidth is starting to improve in several countries.
The East African Cable System (EASSy) linking Sudan to South Africa has provided the opportunity for access to cheaper high-speed international bandwidth across the region. The West Africa Cable System (WACS) consists of high capacity fibre-optic submarine cables between the countries in West Africa and Europe. The underdevelopment of fixed connectivity in Africa continues to constitute a challenge and obstacle to fully benefiting from advanced cloud infrastructure, especially in landlocked African countries.
Another major barrier to cloud adoption by African banks is a concern over security and compliance,.as banks give control to the cloud provider for infrastructure issues that may affect security and the reputation of the bank. Cloud service providers usually store and process data in different locations and sometimes between different clouds, making it difficult for banks to monitor and assess compliance with data protection legislation.
In Africa, financial service providers of all sizes however have started to explore the hybrid cloud model, where they combine the cost savings of public cloud infrastructure with the enhanced security of the private cloud model. Public cloud deployments are used to host office productivity tools used by employees (such as email, CRM and ERP), as applications used by employees are subjected to less strict/unclear cloud regulation. Core banking applications are in almost all cases (at least for the time being) planned for migration to private clouds.
A case in point
Stawi’s credit exchange platform is a recent initiative in Kenya to establish a digital credit exchange as a marketplace for borrowers and lenders, supported by the Central Bank of Kenya.. The cloud-based solution is designed to share the advances made in digital financial inclusion in personal finance in Kenya, and offer similar benefits to small and micro enterprises - the backbone of the real economy and the greatest opportunity for employment and wealth creation for the country. The Stawi customer value proposition includes low-cost term loans (capital investment) for Micro and SME customers; overdraft (working capital); and home ownership - an aspiration for many Kenyans. Several Kenyan banks have already adopted the cloud-based digital banking platform from Swiss vendor Additiv.
Regulators hold the key to unlocking the benefits of cloud
New competitor models from MNOs and fintechs, and new digital lending models that use digital infrastructures are offering customers low-cost and more efficient alternatives, which limit the scope for the traditional banks to sustain their high-cost pricing strategies, and therefore to compete.
To remain relevant and sustainable in the face of competition, banks will need to adopt low-cost operating models that are acceptable to their regulators. Meanwhile, regulators will also need to encourage the use of innovative technologies and at the same time embark on massive regulatory reforms that can level the playing and enhance access to finance by the underserved population.
Our research found that many African banks are hesitating or postponing adopting cloud banking because of the current lack of clearly defined regulatory frameworks on cloud banking. Before banks can invest with total confidence in cloud technologies, they need the reassurance from the financial regulators that cloud banking will be permitted.
Ultimately, our joint Genesis-Analytics and Orange Business Services report urges African regulators to develop policies and regulations to enable financial institutions – and the people of Africa - to enjoy the substantial benefits of cloud banking.