The Future Financial Market in Africa: Financial Technology Revolution

The 21^st century economy has experienced tremendous disruption in virtually all industries making some organizations obsolete while new ones come up. 21^st Century companies must scan their business environment anticipate competition from both traditional and nontraditional  competition noting that advance in technology is fast becoming  the great equalizer.

To do this organization must invest in research and development or die. To bring the point home, Viffa Business Intelligence would be examining how financial technology will cause a major paradigm in the financial sector in Africa by examining the current trends in the rest of the world.

In early 2000 many financial institutions did not anticipate getting competition from telecommunication companies and therefore inventions such as Mpesa and other mobile money transfer products got most banks in Africa and beyond flat footed. Companies such as Safaricom have gone ahead and made tidy profits while at the same time eating into the market share of entire East African market share.

Commerce in Africa on the Internet relies almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. The current trust model has led to increased transaction costs since financial institutions have to cope with fraud and invest in control mechanisms.

These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party. What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party and this is what technologies such as Bitcoin are solving.

Bitcoin is a digital currency that exists in the virtual realm, unlike physical currencies like dollars. A growing number of proponents support its use as an alternative currency that can pay for goods and services much like conventional currencies. Bitcoin is the first and easily the most popular currency that uses cryptography to control its creation, administration and security.

The fact that bitcoin can be anonymously used to conduct transactions between any account holders, anywhere and anytime across the globe, makes it attractive to criminal elements. Most countries have not clearly made determinations on the legality of bitcoin, preferring instead to take a wait-and-see approach. Some countries have indirectly assented to the legal usage of bitcoins by enacting some regulatory oversight. However, bitcoin is never legally acceptable as a substitute for a country’s legal tender.

Unlike their developed counterparts that are actively engaging financial technologies such as Bitcoin through enacting regulation and the likes African governments and financial sector players are completely ignoring such technologies.

The Financial Technology battle already underway in developed economies is going to create surprising winners and losers among some of the most powerful names in the African financial world. The most contentious conflicts will be between startups that are completely reengineering decades-old practices, traditional power players who are furiously trying to adapt with their own innovations, and total disruption of established technology & processes:

• Traditional Retail Banks vs. Online-Only Banks: Traditional retail banks provide a valuable service, but online-only banks can offer many of the same services with higher rates and lower fees
• Traditional Lenders vs. Peer-to-Peer Marketplaces: P2P lending marketplaces are growing much faster than traditional lenders—only time will tell if the banks strategy of creating their own small loan networks will be successful

It is impossible not to notice the potential fluid environment with cost saving potential for existing companies or development of new players. These new players have the potential to become the next Visa, Pesapal or Jambo Pay because they have the potential to transform important areas of the financial services industry like.

If you work in any of these sectors, it’s important for you to understand how the financial technology revolution will change your business and possibly even your career. And if you’re employed in any part of the digital economy, you’ll want to know how you can exploit these new technologies to make your employer more efficient, flexible and profitable.