African SMEs present next big growth opportunity for banks

African markets present a significant and strategic growth opportunity for the continent’s banks. While European and North American economies continue to grow sluggishly (or stagnate), the economies of developing nations continue to expand, giving rise to a $380 billion revenue opportunity related to providing the market with better access to financial services. Less known however, is how the bulk of this opportunity – $270 billion – lies in closing the small business credit gap.

Small businesses are a key segment of emerging economies. According to the World Bank, formal SMEs contribute to up to 45 per cent of total employment and up to 33 per cent of national income (GDP). Figures are even higher when the informal sector is taken into account. Ironically, however, these businesses have typically been underserved by traditional and, more surprisingly, digital-financial services. Banks need to act swiftly to develop products, services and a broader economy that utilities this sector.

Mobile money systems, often proclaimed to be the panacea to financial service access, are prevalent in many African countries, although many of the current platforms serve a small portion of the market; in accordance with their objectives, they have usually adopted a relatively narrow focus on consumer-to-consumer domestic money transfer or basic consumer bill payment facilities. In their defence, mobile money services to date have educated the market (particularly in Africa), making most of the population at least familiar with digital payments that are designed to be accessible to all. Financial institutions now need to leverage this market awareness to develop innovative financial services to specifically support SME businesses.

Research by Accenture has shown that only 40% of banks to date are actively targeting very small businesses (those which make up the largest type of business in most African economies). More broadly, there has been little evidence of institutions considering micro businesses when developing and marketing their services. This has resulted in a significant, underserved market that banks can tap. Given the substantial innovations in mobile technology, those segments can now be profitably served in large part due to the dramatic reduction in the cost of serving customers through digital means, and because of the omnipresence of mobile devices.

By adopting the latest developments within the platform space, the likes of real-time loan validation will enable SMEs to access the funds they need to grow their businesses much quicker. Banks benefit through new customer acquisition and compete better through best-in-market experiences.

In introducing such innovations and by leveraging the latest technology, banks will reinvent themselves, redefining both their customers and their services. Smartphone penetration is imminently expected to rise to 20% of the population across Sub-Saharan Africa, presenting further opportunities to financial institutions who have historically had to contend with mobile operator’s USSD gateways or STK applications to enable feature phone end-users to access their services.

We will continue to see even more significant developments in the future; break-through applications of technology like blockchain promise to fundamentally improve areas including international remittances. In markets where high costs, money laundering and fraud are particularly problematic, blockchain offers significant potential through its unique reference database where instantaneous reconciliation across all participants leads to greater transparency, trust and confidence.

Similarly, the use of open, standardised APIs and developing the concept of “banking as a platform” will be where the real transformations that banks will take in the next few years.

Exploiting the SME opportunity

Open technology will also allow banks to build new partnerships and new ventures with companies that might be more specialised and specifically focus on SMEs. In adopting a new approach to opening up once-closely-held infrastructure to the likes of fintech companies, micro insurers and micro lenders promise new models of growth and opportunity. Such approaches were possibly a daunting thought at one stage but these paradigm shifts are becoming increasingly popular and ring true of prior step-changes within the banking world. One only needs to consider how banks vigorously bolstered the growth of bond markets in the 1980s, actively matching third party lenders to savers.

As services like these grow it will lay the groundwork for the provision of other products for the SME market. Beyond credit, digital payment acceptance tools and supplier payment platforms are two areas of emerging market finance that are expected to grow exponentially over the next decade. Similarly, business-orientated digital savings and insurance products are expected to dramatically grow – all of which have the potential to transform how small businesses operate Africa.

This is a tremendously exciting time for the Fintech industry. As the regulated custodians of financial services, banks have the opportunity to lead significant changes across the fintech landscape; the opportunity is theirs for the taking.

(The author is the chief product officer, RedCloud Technologies)