Why E-Commerce Is A Catalyst For Africa’s Digital Growth

Africa’s rapid urbanization, expanding internet access, and widespread mobile phone usage are fueling a shift from traditional retail to online shopping, creating a fertile ground for e-commerce platforms to flourish. As African economies continue to grow and integrate into the global digital economy, e-commerce is poised to play a pivotal role in driving innovation, improving consumer access to goods and services, and contributing to sustainable economic development across the continent. Adebiyi Aromolaran, dLocal’s Head of Africa Expansion, offers valuable insights into the immense potential and unique challenges of e-commerce in emerging African markets, particularly in Nigeria.

Question: Can you briefly explain the need and opportunity for e-commerce merchants in emerging African markets?

Answer: Emerging African markets present a remarkable opportunity for e-commerce merchants, especially those seeking their next billion customers. Driven by a young, rapidly urbanizing population and the continent’s unparalleled population growth, Africa is poised for a digital commerce boom. With a median age of just 20 years, and projections indicating that most Africans will reside in metropolitan areas by 2045, the demand for online shopping is set to soar.

The pandemic has further accelerated this shift towards mobile-based alternatives, as internet and mobile access become more widespread and affordable. By 2025, Africa is expected to have over half a billion e-commerce users, with connected Africans reaching 613 million. This growth represents a massive, largely untapped market for digital payments, particularly given that over 350 million adults remain financially excluded as of March 2023. Africa’s fragmented payment landscape, coupled with the rising influence of mobile money, offers e-commerce merchants a unique chance to expand their reach by providing solutions tailored to local payment preferences. For merchants focused on global expansion, Africa’s emerging markets are a goldmine of potential, offering access to an expanding, yet still relatively untapped, customer base.

Question: How have the rapidly rising smartphone and internet penetration rates in Africa affected the opportunity for improved e-commerce infrastructure in the region?

Answer: The rapidly rising smartphone and internet penetration rates in Africa have significantly enhanced the opportunity for improved e-commerce infrastructure in the region. In Nigeria, where the internet penetration rate stands at 55.4 per cent, alternative payment methods (APMs) like mobile money are becoming crucial for conducting business, especially since more people now either have a mobile money wallet or a bank account. This is despite over 70 percent of account holders having a debit card. The success of mobile money platforms like Kenya’s mPesa, with over 56 million users (across Africa), underscores the potential of mobile-optimized checkout flows in the region. The proliferation of smartphones and mobile money channels offers a convenient way to transfer funds, make payments, and access financial services. As mobile and internet penetration continues to grow, merchants have a unique opportunity to integrate these APMs, streamline transactions, and capture a larger share of Africa’s growing digital economy.

Question: How exactly does dLocal enable global companies to expand to Nigeria?

Answer: dLocal enables global companies to expand to Nigeria by offering tailored payment solutions that cater to the country’s rapidly growing digital payment landscape. With Nigeria’s digital payments segment projected to reach $16.69 billion by the end of 2023, and a compound annual growth rate (CAGR) of 13.7 per cent expected through 2027, dLocal provides a crucial bridge for businesses entering this dynamic market. The company’s platform supports local currencies and alternative payment methods, such as bank transfers and local debit cards like Verve and Afrigo, which are essential for accommodating Nigerian consumers’ preferences. By leveraging dLocal’s expertise and localized solutions, global companies can navigate Nigeria’s fragmented payment environment, ensure fast and secure transactions, and optimize the checkout and experience, thereby enhancing their market presence and growth potential in one of Africa’s most promising digital markets.

Question: Can you elaborate on the hurdles companies face when expanding to Nigeria?

Answer: Expanding to Nigeria presents several challenges for companies, including a fragmented payment system that requires the integration of diverse methods like local debit cards, bank transfers, and mobile money. Despite the impressive growth in mobile payments—rising by 128.4 percent from 67 million users in 2021 to 153 million at the beginning of 2022—companies must also contend with a complex regulatory environment.

Companies must also navigate a complex regulatory environment, including recent changes by the Central Bank of Nigeria (CBN) that have impacted foreign exchange and liberalized the exchange market. The CBN’s previous restrictions aimed at stabilizing the Naira led to a complicated currency situation, with differences of up to 65 percent between exchange rates and challenges in expatriating and repatriating funds. Successfully expanding in Nigeria requires a deep understanding of these local dynamics and the ability to offer payment solutions that align with the unique preferences and needs of Nigerian consumers.

Question: If alternative payments are not optimized for the local Nigerian market, how does this affect merchants?

Answer: If alternative payments are not optimized for the local Nigerian market, merchants face several issues that can significantly impact their operations. Firstly, failure to support popular local payment methods – such as mobile money, bank transfers, and local credit cards – can lead to a poor customer experience and reduced transaction volumes, as consumers may prefer or rely on these methods over others. This misalignment with local preferences can result in lower conversion rates and missed sales opportunities. Moreover, merchants may struggle with regulatory compliance and financial integration, complicating transactions and increasing operational costs. Given Nigeria’s reliance on APMs, which account for a significant portion of digital transactions, not adapting payment strategies to the local market can hinder a merchant’s ability to effectively reach Nigerian consumers and capitalize on the growing digital economy.

Question: What are the essential payment methods merchants can use when expanding to the Nigerian market?

Answer: When expanding to the Nigerian market, merchants should integrate popular alternative payment methods such as OPay and Paga, which are widely used for mobile money transactions, as well as Verve, a prevalent local debit card scheme. OPay and Paga facilitate mobile payments and financial transactions through their platforms, while Verve serves as a widely accepted local debit card option. Consequently, people are capitalizing on electronic payment methods such as mobile money accounts, QR codes, and USSD for their financial transactions. Not only are these methods secure, but they also offer a more efficient alternative to traditional banking processes. Including these methods ensures merchants can cater to local consumer preferences and enhance their payment processing capabilities in Nigeria’s growing digital economy.

Question: How do improved cross-border payment solutions improve the Nigerian economy as a whole?

Answer: Improved cross-border payment solutions enhance the Nigerian economy by facilitating more efficient international transactions, which boosts economic activity and attracts global investment. Investment in African infrastructure, including the acceleration of e-payments both domestically and across borders, has transformed the payment landscape. The emergence of real-time infrastructure now allows for instant money transfers between accounts, significantly reducing transaction times and costs.

According to a McKinsey report, the e-payments market is expected to grow by approximately 150 percent between 2020 and 2025, reaching nearly $40 billion in revenue from domestic payments alone. Nigeria’s ranking as the sixth most advanced real-time payments market globally underscores its potential for economic growth, placing it alongside leading economies like South Korea and China. Enhanced cross-border payment solutions contribute to this progress by integrating Nigeria more effectively into the global economy, supporting local businesses, and strengthening financial inclusion, ultimately driving a more dynamic and resilient economic environment.

Question: As the majority of global vendors, almost by default, expand to markets that only take credit cards, how would this affect merchants, specifically in Nigeria?

Answer: Nigerian merchants may face several challenges. In Nigeria, the amount of mobile money users starkly contrasts with the 1.6 percent of the population who own a credit card. This disparity means that merchants could miss out on a substantial portion of potential customers who rely on alternative payment methods such as mobile money, bank transfers, or local debit cards like Verve. Consequently, vendors not accommodating these preferences might experience lower transaction volumes, higher cart abandonment rates, and difficulties with regulatory compliance. To effectively tap into Nigeria’s market, global vendors need to adapt their payment strategies to include local methods and align with the diverse financial practices of Nigerian consumers.

Question: In contrast with other eCommerce markets in Africa, what makes Nigeria unique?

Answer: Nigeria’s e-commerce market is distinctive due to its large, youthful consumer base, diverse payment landscape, and advanced real-time payment infrastructure. With a population exceeding 200 million and a median age of just 17, Nigeria boasts a substantial and youthful consumer base, fueling significant demand for online shopping and digital services. The country’s payment landscape is notably diverse, featuring methods such as mobile money, local debit cards like Verve, and bank transfers, unlike other markets with more uniform payment preferences. APM usage is particularly high, contrasting sharply with the low credit card ownership, which highlights Nigeria’s unique approach to digital transactions. Furthermore, Nigeria is recognized as one of the world’s most advanced real-time payments markets, with transaction volumes expected to grow by nearly 150 per cent by 2025. The regulatory environment, influenced by recent changes from the Central Bank of Nigeria (CBN), adds complexity not seen in other African markets. Despite the growth in digital payments, cash remains a widely used payment method due to its accessibility, especially among those without bank accounts or credit cards. These factors make Nigeria’s e-commerce market unique, necessitating tailored strategies for businesses to effectively navigate and capitalize on its opportunities and challenges.

Question: How have Nigeria’s cashless policies affected the country’s eCommerce market?

Answer: Nigeria’s cashless policies have profoundly influenced the country’s e-commerce market by accelerating the shift from cash to digital payments. The government’s redesign of banknotes and imposition of cash withdrawal limits – reduced to 500,000 Naira per month (approximately $1,000) in December 2022 – has driven this transition in a society traditionally reliant on cash.

Withdrawing over $1000 over the counter has become a distant memory, pushing consumers and businesses to adopt mobile money, bank transfers, and digital wallets. This move towards cashless transactions has enhanced the efficiency and speed of payments, which is crucial for e-commerce growth. Additionally, while the Central Bank of Nigeria’s (CBN) restrictions on foreign currency and the removal of certain controls have introduced their own unique challenges, these developments have nonetheless contributed to the broader adoption of digital financial solutions. The evolving regulatory landscape continues to shape Nigeria’s e-commerce environment, highlighting the need for adaptive strategies to leverage the benefits of cashless policies while navigating the associated challenges.