The Rise of Digital Banking in West Africa

The digital banking boom in West Africa has been marked by the rapid growth in mobile banking and fintech innovations, thanks to the widespread mobile penetration and the continent’s passionate youthful population.

It is a running joke in every fintech’s pitch to “bank the unbanked.” Yet, the achievements that fintechs have had does not go unnoticed. Today, there's a local fintech for everything: to send or receive money from abroad, or to buy and sell crypto coins, using Palremit.

Despite their tendencies to be susceptible to breaking things due to their move-fast DNA, fintechs have provided a different approach to onboard everyday people into the global financial ecosystem.

In a 2023 AfricaNenda report, only 350 million Africans—that has a population of 1.4 billion—are excluded from financial services. That means about 75%, in one way or the other, interface with accessible financial services every day.

While mobile money platforms like Safaricom’s M-Pesa opened the way two decades ago, technology has now taken over, and companies and fintech “disruptors” have now taken over.

How far has digital banking grown in West Africa? Who are the participants, the leaders, and the followers? Where is growth in digital banking leading the continent next, and what are the blockers?

What is digital banking?

Digital banking is the digitization of all traditional banking activities, allowing customers to conduct financial transactions online or via mobile apps without needing to visit a physical bank branch. It includes services that allow you to manage your money online, transfer funds, and pay bills.

Some Examples of Digital Banks Driving Financial Inclusion in West Africa

1. Kuda - A Nigerian digital bank offering no maintenance fees and budgeting tools.
2. Carbon - Provides loans, investment opportunities, and P2P payments in Nigeria.
3. PiggyVest - Focuses on savings and investment tools for users in Nigeria.
4. Fairmoney - Offers instant loans and banking services in Nigeria.
5. Alat - A digital banking app from Wema Bank, offering various banking services.
6. Bamboo -A wealth-tech fintech platform that allows everyday people to buy and sell stocks of US companies.
7. Opay - A mobile payment platform offering a variety of financial services in Nigeria.

West Africa's banking ecosystem blends history, regulation, and local banks meeting diverse needs. It’s shaped by colonial legacies, economic policies, and growing digitalization. The origins of banking in West Africa can be traced back to the colonial era when European banks established operations primarily to serve colonial interests. 

The first banks, such as the Bank of British West Africa (now First Bank of Nigeria), focused on trade finance and catering to expatriates. 

After independence in the 1960s, there was a significant push for indigenous banking institutions to serve local populations, leading to the establishment of several local banks aimed at promoting economic independence and financial inclusion.

Key Players in Traditional Banking

In West Africa today, several prominent banks have emerged as key players in the sector:

1. Guaranty Trust Bank (GT Bank): Known for its innovative banking solutions and customer service.
2. Zenith Bank: One of the largest banks in Nigeria, offering a wide range of financial products.
3. United Bank for Africa (UBA): A pan-African bank with operations across multiple countries.

How Digital Banks are Reshaping Financial Inclusion

Digital banks are playing a transformative role in reshaping financial inclusion across West Africa by leveraging technology to provide accessible, affordable, and convenient banking services to underserved populations. This shift is particularly significant given that a substantial portion (350 million) of the population in the region remains unbanked or underbanked.

Accessibility

Digital banking removes many of the barriers that limit traditional banking, such as the need for physical branches. 

With mobile phones and internet connectivity reaching the hands of the West African population, digital banks can reach individuals in remote areas who previously had limited access to financial services. This accessibility is crucial in a region where traditional banks often have limited networks outside urban centers.

Cost-Effectiveness

Digital banks typically operate with lower overhead costs than traditional banks due to their absence of physical branches. For example, digital banks like Monzo and N26 have significantly reduced fixed costs by not maintaining brick-and-mortar locations, resulting in operational costs that can be 60% to 70% lower than those of traditional banks

While fintechs may incur partnership fees, the savings from reduced staffing and real estate expenses often outweigh these costs. This enables them to offer more competitive rates and lower fees, attracting a larger customer base. This allows them to offer services at reduced fees or even for free, making banking more affordable for low-income individuals. 

The cost savings can also be passed on to customers through lower transaction fees and better interest rates on savings accounts, which are particularly beneficial for the underserved segments of the population.

Financial Products Tailored for the Underserved

Digital banks are designed products that cater specifically to the needs of underserved populations. They often utilize alternative data sources for credit scoring, enabling individuals without formal credit histories to access loans and other financial products. 

This innovation is crucial for fostering entrepreneurship and supporting small businesses, which are vital components of economic growth in West Africa.

Partnerships with Telecoms and Other Sectors

To enhance their reach and effectiveness, digital banks frequently partner with telecom companies and other service providers. These partnerships help digital banks tap into existing customer bases and leverage established infrastructures for mobile payments. 

For example, collaborations with mobile money providers like MTN and M-Pesa have allowed banks to onboard millions of previously unbanked individuals, significantly boosting financial inclusion rates.

Impact of Digital Banking on Small Businesses and Entrepreneurs

Small businesses and informal traders are the backbone of most countries. For instance, in Nigeria, the informal economy contributed 50% to Nigeria's gross domestic product (GDP) in 2023, according to a report by Moniepoint.

This was thanks to fintechs that are increasingly churning out products that target this SME market—think credit lending, payroll management, mobile money, and savings accounts.

With traditional banking, accessing loans was almost elusive, and due to the countries shifting toward cashless economies, it was harder for small businesses to fit in, until mobile money rode along.

In Nigeria, for example, banks had to eventually adapt after the cash crunch of 2023, allowing for a more competitive market that opened up fintech dominance. It didn't end there; fintechs still do more for SMEs.

Improved Cash Flow Management: Digital platforms facilitate quicker transactions for SMEs, allowing businesses to manage cash flow more effectively.

Access to Credit: Entrepreneurs can apply for loans online, often with less stringent requirements than traditional banks, increasing funding opportunities.

Cost Reduction: Lower transaction fees associated with digital banking can help small businesses reduce operational costs.

Market Reach: Digital banking supports e-commerce, enabling businesses to reach broader markets beyond local boundaries

Challenges Facing Digital Banking in West Africa

Despite the progress of fintechs in West Africa to bring digital banking to the center of financial innovation, there are still lapses.

Infrastructure Limitations: Many regions lack reliable internet and electricity, hindering access to digital banking services.

Regulatory Issues: Inconsistent regulations and compliance requirements can create barriers for both consumers and service providers.

Security Concerns: Cybersecurity threats and fraud remain significant risks, undermining consumer trust in digital banking platforms.

Financial Literacy: A lack of understanding of digital banking tools among consumers can limit adoption and usage.

High Transaction Costs: Fees associated with digital transactions can deter small businesses and low-income users from fully utilizing these services.

Notable Digital Banking Players in West Africa:

ALAT: A product of Wema Bank, it is Africa's first fully digital bank and one of Nigeria's most resilient banks.

Palremit: A digital wallet that enables safe and convenient financial transactions across borders in different currencies.

Moniepoint (Nigeria): A leading payment platform offering merchant services and financial solutions, enhancing business transactions across Nigeria.

Fairmoney: Focused on instant loans, it has raised significant funding to expand its offerings.

Flutterwave: A leading fintech providing payment infrastructure across Africa, recently valued at over $3 billion after significant funding rounds.

Paystack: Another major player in the fintech space, offering seamless payment solutions and recently acquired by Stripe, enhancing its capabilities across Africa.

Chipper Cash: A cross-border payment platform facilitating instant money transfers across several African countries, enhancing financial connectivity.

It is worth noting that Nigeria boasts the largest tech ecosystem in Africa, with over 2,000 technology startups, of which 40% are fintechs.

This early commitment to fintech has established Nigeria as a primary player in the sector, housing 217 fintech startups, significantly more than South Africa’s 140 and Kenya’s 102. The country’s fintech landscape has attracted nearly 50% of Africa’s fintech funding, underscoring its market dominance and diverse player base

Future Prospects for Digital Banking in West Africa

1. Increased Digitisation

• A significant number of banks (76%) are prioritizing digital transformation.
• 60% of banks have already digitized most of their operations.

2. Investment in Infrastructure

• The World Bank has launched a $266.5 million initiative to enhance connectivity.
• Efforts are being made to promote a single digital market to reduce barriers.

3. Focus on Financial Inclusion

• Mobile banking is thriving, with Africa leading in mobile banking services and transactions.
• Digital banking initiatives are aimed at reaching unbanked populations.

4. Regulatory Support

• Governments are increasingly recognizing the importance of digital banking and are creating favorable regulatory environments.

5. Technological Advancements

• The adoption of technologies like artificial intelligence, blockchain, and big data analytics is expected to enhance banking services.

6. Rise of Fintech Companies

• The growth of fintech startups is driving innovation and competition in the banking sector.

7. Consumer Demand for Convenience

• There is a growing demand for convenient and accessible banking solutions among consumers.

8. Partnerships and Collaborations

• Banks are forming partnerships with tech companies to leverage expertise and enhance service delivery.

9. Cybersecurity Investments

• As digital banking expands, there will be an increased focus on cybersecurity measures to protect customer data.

10. Sustainable Practices

• Digital banking initiatives may incorporate sustainable practices, aligning with global trends toward environmental responsibility.

These factors collectively indicate a bright future for digital banking in West Africa, with the potential to transform the financial landscape significantly.

Digital banks are fundamentally redefining financial services in West Africa by making banking more accessible, affordable, and inclusive. Through innovative mobile money solutions and partnerships with fintech companies, these banks provide instant and reliable transactions that reach both urban and rural populations. 

By significantly reducing transaction costs and enhancing financial inclusion—especially for micro, small, and medium-sized enterprises (MSMEs)—digital banks empower marginalized groups to engage with formal banking systems.