#31 First we must build Infrastructure

What Fintech Infrastructure must be built before the African Fintech Revolution takes off

Hi all - This is the 31st edition of Frontier Fintech. A big thanks to my regular readers and subscribers. To those who are yet to subscribe, hit the subscribe button below and share with your colleagues and friends. 🚀

Sponsored Content:

This week’s post is sponsored by Hyperverge. As onboarding and KYC goes digital, fintechs, banks, telcos and any other consumer facing company will need to develop capabilities to digitally onboard and verify their customers. Hyperverge is an industry leading digital KYC platform that uses advanced Artificial Intelligence and Machine Learning to help customers with their onboarding. With Hyperverge, companies can minimise fraud, minimise operational costs and provide a seamless customer experience.

I liked Hyperverge because they have proven KYC capabilities in a large market such as India which shares numerous similarities with Africa such as; limited bandwidth in some areas, diverse facial features, low quality smartphones and high rates of attempted fraud. Hyperverge has offered digital KYC to the State Bank of India, Jio and Bajaj Finserve. In Vietnam, they have partnered with FE credit. Hyperverge has performed over 400 million checks over the last two years and are currently in advanced talks with two prominent Fintechs in Nigeria.

As a proof of their AI capabilities. Hyperverge has been Ranked #2 in the US, among top 10% global Face Recognition vendors as per NIST benchmarking and is 1 among the only 3 providers in the world to have a single-image based passive liveness detection solution, certified for Level-1 PAD as per the ISO 30107 standard.

I am bullish about this solution in Africa largely due to cost and reliability. Customers could include Fintechs, Banks, Insurance companies, Asset management companies, hospitals, schools and vendors in the financial space such as CBS and DBP vendors who want to add them onto their market place. For more information, reach out to me on samora.kariuki@frontierfintech.io

Introduction

African Consumer Fintechs have been raising significant amounts of money over the last few years. The promise of a young and growing population coupled with low levels of financial inclusion have driven investor interest across the continent. This year, Africa is on track to almost double the VC investments received in 2020. What a year it will be and the promise for 2022 looks even brighter.

What becomes clear whenever you’re building a fintech company in Africa is the lack of infrastructure. My experience has not necessarily been from a start up perspective, but rather intrapreneurship within an organisation. Whenever you build something, it always becomes clear that other operators may need your service more than your target customers do. In my case, other savings associations and micro-finance institutions needed our payments platform more than our target customers. It soon dawns on you that sometimes the demand for the underlying infrastructure is the bigger business.

Similarly, a number of African consumer fintechs are pivoting to offering B2B APIs that have been built out from scratch. 

I’m reminded of a situation in 2019 when the former president of the United States, Donald Trump was on the warpath with Jeff Bezos over the US Postal Services. Jeff Bezos got himself in trouble by saying "I didn't have to build a transportation network to deliver the packages,... It existed: It was called the post office." The idea was that the success of Amazon was directly tied to the existence of the US postal service. If it hadn’t existed, Amazon would have had to build its own delivery network, probably costing billions of VC dollars whilst shifting attention from its core product and mission. Potentially, we wouldn’t have AWS now. Trump argued that the US Postal service is subsidising Amazon, but it could equally be argued that it’s doing exactly what it’s meant to be doing - enabling parcels to be delivered thus driving commerce.

In Africa, Amazon-like services such as Jumia have failed to get similar traction due to the lack of cheap last mile infrastructure such as the US Postal Service as well as well structured address systems. 

For consumer fintech to explode in Africa, there will have to be a period of infrastructure development. Just in the same way some cities quickly grow due to the finalisation of a nearby port, road network, train station or canal. 

Therefore what sort of infrastructure needs to be built, which countries are further ahead in their infrastructure journeys and what needs to be done? To answer this, one must first start with some stated principles.

Principles of African Fintech;

Hopefully these will be called the “Samora Fintech Declaration” ten years from now. To arrive at a goal, first you must state it, otherwise you may end up doing something completely different. In my view, financial services in Africa should drive the following principles;

1. Enabling easy inter continental money movement;

2. Drive financial inclusion;

3. Enable credit to get to whoever deserves it;

4. Drive trade and commerce via easy payments;

5. Africans should be able to transact anywhere;

6. Lastly, just like Visa does, infrastructure should enable transactional identities so as to allow customisation and personalisation;

That list is not exhaustive but it does a decent job of highlighting the key areas that need to be targeted.

The Underlying Stack

Different elements of infrastructure need to be built and each piece can either be built by the private sector or by the government. The core consideration is whether the element is non-exclusive or non-rivalrous with the latter being the definition of a pure public good. Public goods are thus best built by governments. 

Identity

Underpinning any financial service is the ability to prove an identity and link that identity to a payment request or store of value. There are many approaches to identity but ultimately, the most reliable is a sovereign identity issued by a national government. ID systems in Africa lie within a spectrum with countries such as Kenya and South Africa having robust ID systems whilst countries such as Nigeria have multiple ID systems. The gold standard is an Estonia type digital Identity that is built around open data sharing through permissioned access. 

The Aadhar system is the most ambitious global ID system covering over 1 billion people and enabling full identification and life-cycle management through biometric verification. Bank based systems such as Bank-ID in Sweden only work if there are high levels of financial inclusion. Nigeria has the Bank Verification Number (BVN) that enables unique identification of everyone in the banking system independently of your bank issued account number. It has enabled fintechs to do onboarding, but it's contingent on having a bank account and thus may not be useful for driving inclusion. The Nigerian government is introducing a new identity system based on having a National Identity Number (NIN) issued by the National Identity Management Commission. This should enable a single ID system thus improving identification.

Kenya and South Africa have already embarked on modern ID systems with the former issuing a new system branded “Huduma Namba” that is more service oriented. South Africa has already issued over 13 million ID cards with advanced security features.