Harnessing Tanzania’s Fintech potential

At the same time, a youthful population, increasing smartphone penetration (over 40 million registered active mobile money wallets making nearly 10 million monthly person-to-person transactions), and a focused regulatory drive to increase financial inclusion and cashless payments, are combining to create an attractive platform for the fintech sector. In 2015, Tanzania counted a third of mobile money accounts in East Africa, with individuals and organisations transacting the equivalent of over 50% of Tanzania’s GDP each month.

In line with the evolution of fintech in other markets, fintech activity in Tanzania started in mobile money payments and moved into other areas. With a humble beginning in early 2008, the fintech company E-Fulusi launched the first mobile wallet in Tanzania, MobiPawa, shortly followed by the launch of M-Pesa by Vodacom in April 2008. Over the next two years, the three other major Mobile Network Operators (MNOs) launched their own mobile financial services, Z-Pesa (Zantel), Airtel Money (Airtel) and Tigo Pesa (Tigo).

With several providers competing for market share, a range of new use cases have been introduced, including digital credit, savings, bill payments, and more. In 2018, nearly a decade after the first mobile money deployment launched, 70% of Tanzanians had used mobile money in the past 12 months. Payment-focused solutions have surged, spurred in part by the Central Bank’s financial inclusion drive and favourable regulatory policies, including revised Know your Customer (KYC) requirements for lower-tier accounts and incentives to accelerate development of agent networks across the country.

In the meantime, SME owners have had to contend with limited access to financing and value-added services. Loans offered by banks typically come with steep interest rates, a lengthy application process, and collateral and guarantor requirements that SMEs and micro enterprises find difficult to fulfil. Looking beyond the opportunities for the SME customer segment, there are also opportunities in the growing mass market, which has the added benefit of having low competitive intensity. Individuals in this segment mostly require low-cost accounts for their financial transactions, such as access to loans at affordable rates and affordable pay-as-you-go financial services.

One of the key factors preventing the sector from achieving its full potential has been that to date, fintechs have had limited appetite to develop commercially viable use cases to serve the mass-market segment owing to the significant investment required. This is changing, in part as a result of the impact of the COVID-19 crisis. With consumers turning to digital options during lockdown and economic stakeholders using digital channels to roll out aid packages, it has become clear that there is an untapped opportunity to convert the underbanked and unbanked to fintech solutions and unlock the economic and social benefits that this promises.

The widespread use of mobile money demonstrates growing consumer trust in digital financial services, although this has been the result of considerable effort on the part of MNOs and their agents to provide face-to-face product demonstrations and SMS alerts to explain how to use services. As a consequence, in the coming years, we expect that access to financial services should at least triple to about 80% of the entire unbanked population while creating a new market of additional customers. Fintech activity will also need to expand into the savings and investments segment.

Beyond this, consumer lending—and, increasingly, asset management—are focal points for improved fintech activity. It is an untapped opportunity for those that can leverage technology to provide affordable healthcare premiums, enhance insurance distribution, and also create differentiated pricing based on customer data.

As consumers seek convenient means to earn better returns locally and gain access to investment options, fintechs should help to democratise their options by offering flexible products with attractive interest rates. Significant opportunities also exist for fintechs to enable solutions within education and health to address societal challenges such as student financing, digital learning and affordable health insurance.

For example, Mipango, an artificial intelligence app focused on the informal mass market, aims to help Tanzanians manage their personal finances while deepening financial literacy. With a rapidly developing financial industry in Tanzania, the popularity of financial apps in Tanzania for consumers is on the rise. Many banks and MNOs (with their mobile wallets) have launched, apart from having physical branches or agents, their own mobile app in the past few years. More recently, the market has seen an influx of asset management fintechs such as SPENN, Nala Money Manager and Tala, offering users an opportunity to apply for credit and receive an instant decision, regardless of their financial history through their app.

A very important factor that will influence growth of fintech in Tanzania will be the extent of interoperability of systems across banking, telecommunications and the internet. This would also increase the amount of data available but it would also lower transaction costs – including through increasing competition, making a cashless economy possible and transforming many business models to become more profitable than they were (for example, loans and insurance policies could be much smaller and still achieve scale, making them finally affordable to even the poorest). The idea of interoperability for digital financial services, where consumers can transfer funds between network providers, has been widely discussed for many years. Now, person-to-person (P2P) transactions are available between the four major MNOs.

Despite the increased activity in the fintech sector in Tanzania and the positive multiplier effect in the economy, there is significant potential for further growth. Fintech accounted for only around 6% of retail banking revenues in 2019. Fintech investment in Tanzania grew to approximately $20 million in 2019; this was only a small fraction of the $36 billion invested in fintech globally.

Fintech’s potential to help counter the impact of the COVID-19 pandemic and support the eventual economic recovery is large and should not be taken for granted. Fintech is proving to be a useful tool in ensuring access to financial services and helping deliver governments’ support measures. Its role in the recovery phase, however, will depend on the industry’s resilience to the shock and how the fintech landscape evolves post-COVID-19.

Fintechs can create impact in three broad dimensions: through stimulating economic activity, by creating a multiplier effect and by driving progress towards development goals. Economic impact will primarily come from expanding revenue pools and attracting foreign direct investment to the country. The sector can unlock economic benefit by driving increased productivity, capital, and labor hours through digitization of financial services. Increased fintech activity could also indirectly grow the digital economy by, for example, providing business-to-consumer (B2C) marketplace tools such as payment integration on social media platforms, and further enabling the Tanzanian e-commerce industry.

And finally, fintech can support Tanzania’s human capital development by driving financial inclusion and literacy through the provision of accessible and affordable financial products that are innovative and cater to the needs of unbanked and underserved segments of the population across culture, gender and geography.