African banks have been late to the fintech party, but after leaving huge swaths of the population to get their financial services from telcos (most famously Safaricom’s M-Pesa in Kenya), banks here are increasingly seeing the continent as a testing ground for new financial technologies like bitcoin and the blockchain.
“You have a headwind from Silicon Valley and Europe blowing into Africa now around the disruption in fintech. The banks are really nervous and they want to get ahead of this,” says Mbwana Alliy, managing partner at African technology venture firm, the Savannah Fund.
Blockchain is the hot topic at shiny new fintech innovation hubs like Rand Merchant’s AlphaCode in Johannesburg, which hosted the Afrikoin conference last December and is running a fintech accelerator this year, and Barclays Rise in Cape Town, which is hosting Fintech Africa’s blockchain conference on Feb. 25.
Blockchain is the “distributed ledger” that keeps track of bitcoin trades around the world. In the simplest of terms, the promise of blockchain is the tracking and transparency of all transactions, tamper-proof because no one transaction is kept in any one place, but stored on computers all around the world.
“The banking sector in Africa is going to be disrupted faster than anywhere else in the world.”
There’s good reason for banks to be afraid, says Vinny Lingham, a South African serial entrepreneur whose current blockchain startup, Civic, is based in Silicon Valley. “I think the banking sector in Africa is going to be disrupted faster than anywhere else in the world. What you have with bitcoin and blockchain is a trustless method of operating. You don’t need third parties like banks operating as trust brokers anymore. It’s all built into the code. The way mobile leapfrogged fixed lines communications in Africa, blockchain will leapfrog a lot of the financial infrastructure that exists today.”
In order to get ahead of that, Barclays opened the first African branch of Rise, its global network of innovation spaces, in December 2015. The goal is to work with fintech entrepreneurs who would otherwise be beyond the banking behemoth’s grasp.
“People in Africa do banking on their mobile phones, but our talent base is all built on bricks and mortar banking,” says Barclays’ Head of Open Innovation Arian Lewis. “So we’re thinking, are we actually a tech company? To make that shift, you have to approach talent that sits at the front end of that change curve.”
The 300-year old startup
Barclays Africa, which is 62% owned by UK-based Barclays Plc, operates in 13 African countries, hopes that a beautiful work space, an accelerator run by the US chain TechStars, and access to its customers will bring in new ways of thinking that the 300 year-old bank can’t conceive of on its own.
“Startups can build quicker, they can find ways around problems which banks can’t, they don’t have all the red tape, and they have a wider vision of the world,” says Warren Squires, head of Barclays Africa’s VC arm, the Seeker Fund.
One of Barclays’ first blockchain collaborations in Africa is with Consent, a startup who went through the bank’s pilot accelerator in Cape Town in late 2015.
“Barclays is trying to define what they become in the future. It’s like they’re going through a midlife crisis,” says Consent co-founder Shaun Conway, a medical doctor previously focused on m-health.
“Blockchain could be the most significant social and political innovation to impact Africa in 100 years.”
While Consent originally used blockchain to improve fidelity with individual medical records across different databases, Conway saw how Barclays could use his system to help comply with Know Your Customer (KYC) regulations in the short term, and safeguard customer identities in the long term.
After the accelerator, Consent won a year-long contract to build a proof of concept for the bank worth more than half a million dollars.
Barclays is working with several blockchain startups across the globe but sees special application in Africa. “Blockchain could be the most significant social and political innovation to impact Africa in 100 years,” says Lewis. A digital economy based on blockchain and bitcoin could hold African leaders to a new level of accountability. “If digital currencies become adopted in African nations, it could significantly reduce corruption from government, it could provide transparency and control to every day citizens.”
But the recent thinking that blockchain has a much wider application as a general purpose ledger beyond cryptocurrencies is up for debate. In a recent post “Beyond the Blockchain,” Marcus Swanepoel, the CEO of South African-born bitcoin startup BitX, argues the blockchain itself isn’t the magic ray of sunlight people are looking for.
“People think that if you put something on the blockchain all of the sudden the counterparty risk disappears,”says Swanepoel. “Take deeds or diamonds or shares. You’re effectively tokenizing something. But you still have to trust that the person who made the token for that asset actually holds that asset. The fraud happens when people load things onto the system, not within the system itself.”
A digital economy based on blockchain and bitcoin could hold African leaders to a new level of accountability.
Bitcoin itself, he contends, which has inherent and tradeable value, has no counterparty risk, making it especially appealing in Africa.
While BitX currently sees more uptake in Southeast Asia than Africa (where it sees only South Africa and Nigeria as viable markets), BitX actually owes its origins to an African bank. Its first incarnation as Switchless piloted a bitcoin system for Standard Bank in 2013. It was never released to the public, but used its proof of concept to gain traction internationally, eventually raising a Series A round of financing from South African media and e-commerce conglomerate Naspers in late 2015. Now it is developing use cases for online content monetization and cross-border e-commerce, two key areas for Naspers.
But Standard Bank’s parent, Standard Chartered, is getting into the game. In mid-2015, its chief innovation officer posted on the potential for blockchain as a “force for good,” positing that blockchain could dramatically cut costs on financial services like remittances, credit cards and money transfers, thereby opening them up to those who can’t currently afford them (aka most Africans).
On a continent with 54 countries, using bitcoin as the interoperable system currency to convert between, say Kenyan shillings and naira or rand could make cross-border trade infinitely easier.
The Savannah Fund invested in Zimbabwean bitcoin startup BitFinance to test that thesis, as detailed in a just-released Stanford Business School case study. The collapse of the country’s national currency has given rise to several currencies in circulation, including US dollars and now the Chinese yuan, making it an ideal country to pilot bitcoin as a back-end trading currency. But just as important to Alliy was the locally-founded team’s close relationship with the central bank.
“Our approach is very tactful. We’re working with the central bank to figure out how bitcoin can fit into Zimbabwe’s ecosystem. We’re not just going in on a Silicon Valley-style disrupt model.”
The regulatory challenge
The value of working with established players shouldn’t be underestimated, says Alliy. Fintech startups have uphill battles in Africa. They need to comply with complex regulations and navigate through political power constellations that vary by country; the tech to handle people’s money requires bank-grade security; fintech talent is highly specialized and expensive. ”Can you raise enough to survive as long as it takes? To build trust and a brand, that can take a lot of money.”
Lots of cash can be hard to come by in Africa. Venture capitalists are still relatively scarce, and often require more proof of traction than a young fintech startup can show. As banks step into that early-stage void, they hope to marry their lumbering corporate cultures to the agile but fragile early stage startups they’re working with.
“I’ve yet to see a corporate-sponsored VC fund, accelerator or incubator ever create a business that disrupts an industry.”
Consent’s Conway says getting things done has been painful. “Even with support from top level executives, the institution is just not geared toward working as fast as we do.”
That prospect hasn’t stopped 454 fintech companies from applying to Barclays’ TechStars accelerator in Cape Town, which starts Mar. 29. But experienced entrepreneurs like Lingham are dubious that any of these will be game changers.
“I applaud what they’re doing but I’ve yet to see a corporate-sponsored VC fund, accelerator or incubator ever create a business that disrupts an industry. They come out of the places you’d least expect them to,” says Lingham.
Lingham often invests in African startups, but stays away from financial services. “It’s not a quick win and it’s not gonna happen overnight. I’d say 5-10 years and then it will start accelerating. There’s just too much drag.”
Even the more optimistic acknowledge it’s a long road.
“10 years,” says Barclays’ Lewis. “It’s not the blockchain, it’s the internet. I chatted with (internet pioneer) Tim Berners Lee a few months ago, he estimated that in 10 years everyone in the world will have full access to the internet anywhere. That’s what it’ll take to enable a digital currency economy.”
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