Governments in emerging markets are struggling in fintech

In the rapidly evolving world of fintech, a fascinating drama is unfolding. On one side, we have nimble, well-funded private sector players revolutionizing financial services. On the other, government institutions are attempting to enter the game, often with mixed results. This clash is not just about competition; it's about the future of finance in emerging markets.

The Fintech Investment Boom

Let's start with some staggering numbers. In 2016, African fintech startups attracted a modest $130 million in investments. Fast forward to 2021, and that figure skyrocketed to $2.3 billion - a mind-boggling 1,669% increase in just five years.

This isn't just about money changing hands. It represents a seismic shift in Africa's financial landscape. Companies like Flutterwave, Chipper Cash, and OPay have become household names, each valued at over a billion dollars. These "unicorns" are not just building products; they're reimagining financial services for millions of underserved Africans.

Government Initiatives: A Mixed Bag

As private sector fintech flourishes, several African governments have attempted to enter the space, with results that can be charitably described as mixed:

1. Ghana's e-Zwich: This biometric smart card system has struggled to gain traction, with less than 10% population coverage and declining usage.

2. Kenya's Huduma Card: Despite Kenya's reputation as a mobile money pioneer, the government-backed Huduma Card has failed to capture the public's imagination. Only 12.5% of the population is covered, and a staggering 40% of issued cards are left uncollected.

3. Tunisia's e-Dinar (2015) and Senegal's eCFA (2016): Both early attempts at government-backed digital currencies failed to gain significant traction and were eventually discontinued.

These consumer-facing stumbles stand in stark contrast to the success of government-driven enterprise payment systems. For instance, Nigeria's NIBSS (Nigeria Inter-Bank Settlement System) saw a 50% increase in electronic fund transfer value and a 77% growth in volumes in 2020 alone.

The Case of Wave vs. eCFA

To understand the dynamics at play, let's look at a revealing case study: Senegal's Wave vs. eCFA.

Wave, a private sector mobile money provider, grew to nearly 5 million subscribers in a remarkably short time. Its user-friendly interface, aggressive pricing, and innovative features resonated strongly with consumers.

In stark contrast, the government-backed eCFA struggled to sign up even a few thousand users. Despite state backing and integration with existing financial systems, it failed to capture the public's imagination or trust.

Interestingly, Wave's success was partly enabled by the West African Economic and Monetary Union's regional payment systems interconnectivity program - a government-facilitated infrastructure. This case powerfully illustrates a key theme: when governments focus on creating enabling environments rather than competing directly with the private sector, the results can be transformative.

CBDC Developments Across Africa

As Nigeria grapples with its eNaira challenges, other African nations are at various stages of exploring CBDCs:

- Zambia and Kenya have announced studies and discussions on CBDC feasibility.

- Ghana started a CBDC pilot in August 2021.

- South Africa is exploring a wholesale CBDC model, focusing on inter-bank settlements rather than consumer payments.

This diverse range of approaches reflects the complex calculus facing African central banks. They must balance the potential benefits of CBDCs - such as increased financial inclusion and reduced costs - against risks like cybersecurity threats and potential disruption to the existing financial system.

The Referee's Dilemma

The crux of the matter is this: African governments are trying to be both referees and players in the fintech game. As regulators, they're responsible for creating fair, stable financial systems. As CBDC issuers, they're competing directly with private sector innovations.

This dual role creates several problems:

1. Conflict of Interest: How can a government fairly regulate a market in which it's also a competitor?

2. Innovation Gap: Government institutions often lack the agility and risk-tolerance of private startups, leading to less innovative products.

3. Resource Allocation: Developing CBDCs diverts resources that could be used to improve regulatory frameworks or financial infrastructure.

4. Market Distortion: Government-backed products may have unfair advantages, potentially stifling private sector innovation.

The Way Forward

The evidence suggests that governments may be most effective as facilitators and infrastructure providers rather than direct competitors to private sector fintech innovations. Success stories point towards a model of public-private cooperation, where governments create the regulatory frameworks and foundational infrastructure that enable private sector innovation to flourish.

As Africa continues to navigate this intricate terrain, finding the right balance between public and private sector involvement will be crucial. The stakes are high: getting it right could unlock unprecedented financial inclusion and economic growth, while missteps could stifle innovation and leave millions underserved.

In the end, the referee's whistle might be more powerful than the player's boot. By focusing on creating a level playing field and robust financial infrastructure, African governments can best serve their citizens and foster a thriving, innovative fintech ecosystem.