A tipping point for digital payments | May 2020

A tipping point for digital payments | May 2020

May 2020

We are doing well, keeping up daily lockdown routines, and as of May 1st can go outside between 6 and 9 am (it’s nice to be back outside again!).  A good bit of my time has been maintaining a regular dialogue with our founders.  I’m proud of them and their teams.  We have partnered with truly resilient people who are showing leadership in an environment of significant disruption and unknowns.  We’ve seen incredible collaboration across our portfolio companies, from leveraging global partnerships to assist with COVID efforts to fast-tracking development of key products to ensure customers can transact despite lockdowns.  One thing that is clear: the pandemic is accelerating technological change.In this update, we will dive deeper into one of our accelerating trends: the digitisation of cash.  African payments continue to be digitised, and as consumer and business spending grows, payments technologies will be one of the biggest opportunities for Raba over the next decade.  I hope you all are well and I look forward to when we can meet again in person.

A tipping point for digital payments?

I believe that COVID will be the massive shock to the system that accelerates technology adoption faster than anyone could have conceived.  We are seeing that impact across our companies, especially in consumer payments.  Nowhere in the world is cash more dominant than Sub-Saharan Africa, where 92% of payments are cash (ex-South Africa).  The handling of cash is perceived to be a potential health issue, and central banks are taking measures to ensure physical bills are safe -- the US government, for example, instituted a policy in late February to quarantine dollars that it repatriates from Asia before recirculating them to the public.  The BOK (Central bank of Korea) is disinfecting cash, a process where bills are heated to 150 Celsius (301F) and then stored at over 100F before being packaged and recirculated to banks.  The Kenyan president went as far as to issue a statement to the country's citizens urging them to use digital payments.  There are many more examples, but you get the point...

Across sub-Saharan Africa, over $1.2 trillion in cash transactions are completed each year (for context, the North American cash and check market is about $4 trillion).  Digital payments and more specifically contactless payments for face-to-face transactions will be part of the new norm.  We are seeing this trend play out.  On April 29th during Mastercard’s earnings call, the company reported an increase of 40% in contactless payments globally (payments completed without handing over a card) vs. the same time last year.  In South Africa, Mastercard reported that contactless payments as a proportion of all face-to-face payments grew 10x vs. the same time last year.

I believe these new norms will stay with us.  Here is an excerpt from Mastercard CEO, Ajay Banga on the change in habits:

"Our recent consumer insights indicate that habits are being created today. It will last beyond the current situation, more than half of new tappers are saying they will continue to use contactless once this pandemic is over".  In South Africa, 71 percent of Mastercard users stated that they prefer shopping at merchants that accept contactless, and 78 percent also say they will continue to use contactless post-pandemic.”Digitizing cash and building digital-only financial services is one of the largest opportunities in the continent, and Raba payments infrastructure companies like Flutterwave, Yoco, Stitch, and another soon-to-be-announced investment will be key players driving these trends.

Africa and Visa?

During Visa’s 2020 investor day, the company’s regional leaders outlined Visa’s vision for the future.  Plans for Africa featured prominently, a notable change from years past where most countries across the continent barely registered.  Visa is pursuing a strategy of partnership and investment, laying the groundwork across Africa’s fintech ecosystems.  In our conversation with executives at the company, Africa represents growth and opportunity -- with the youngest population in the world (average 18.5 years old), the fastest population growth in the world (2.4x vs. global average), ~3% card penetration (ex-South Africa), and the highest percentage of cash usage globally, it is too big and fast-growing and strategic to ignore.

Below is an infographic of partnerships/investments that Visa has made in African fintech:


Visa also recently announced a partnership with M-Pesa (a Kenyan mobile money platform that really pioneered the concept).  Mobile money networks like M-Pesa are what I call payment 1.0 networks, which are closed-loop platforms (meaning they control the entire payment channel end-to-end) and started off as a simple, easy to use digital interface built on top of a large network of physical agents (agents help collect cash and load mobile money wallets and provide the same service when you want to access cash).  To put some numbers around their business scale, M-Pesa generated over $840M in revenue last year, and is ramping up offerings of additional services, like savings and lending, which grew 100% YoY.  M-Pesa is unique, however, as they were able to dominate Kenyan payments with an early competitive advantage by being bundled with the country's largest telecom company, Safaricom, that has over 60% market share.  It would be hard to replicate that advantage today unless you had significant funding.  M-Pesa and Safaricom built an integrated telecom and payment company similar to what Reliance Gio is building in India (albeit through a different approach).

Another example is MoMo, a digital wallet and payments network that operates across several African countries (it’s managed by MTN, a telecom company).  MoMo generated close to $500M in revenue last year, with its largest contributor market being Ghana, where MTN has 55% market share.  These platforms have been able to build scale despite representing only a small percentage of consumer transactions, and they have pioneered the path for fintech entrepreneurs to build on the potential that exists in African markets.