In Sub-Saharan Africa (SSA), a momentous shift is underway in the fintech space, with Big Tech companies such as Google, Amazon, and Facebook ramping up their investments in the domain. With their colossal customer bases, cutting-edge technological prowess, and formidable financial resources, Big Tech giants are orchestrating a seismic disruption in the region’s traditional banking and fintech space. Amidst this change, the fate of homegrown fintech startups hangs in the balance. Ultimately, Africa’s startups, which risk erosion of their market share and stifling of their growth potential, may find it too challenging to compete with Big Tech.

Additionally, the entry of Big Tech into the African market presents new complexities for regulators who face the delicate task of balancing innovation with protecting customer interests and establishing safeguards against monopolistic tendencies. This is the second part of a series on fintech in Africa being published by Bot Populi. The first piece examined the issue of predatory lending within Africa’s fintech space. Meanwhile, this second feature probes into the influence of Big Tech in the space and the challenges for regulation.

Big Tech’s Foothold in Africa

Big Tech’s presence is undoubtedly being seen and felt in the fintech space in SSA. Google, for example, has launched Google Pay, a mobile-based digital payments service in Nigeria. Users can use their mobile phones to make payments and transfer money to one another through this service. Amazon, on the other hand, is expanding into the African market through its e-commerce platform, allowing small businesses in South Africa and Nigeria to reach new customers and sell their products online. These companies are also investing in local startups and collaborating with local businesses in order to better understand the needs of the African market and tailor their products and services accordingly.

While Big Tech companies are touting innovative financial products, their growing presence raises concerns about market dominance, regulation, and the potential consequences for traditional banking actors. The companies’ expansive business models include several key elements, with each company demonstrating varying degrees of influence. These include leveraging economies of scale and network effects, cutting-edge technologies such as cloud services and seamless connectivity, consumer behavior data for personalized insights, and employing advanced analytics such as artificial intelligence (AI) and Machine Learning (ML). Big Tech companies flex their financial muscles with significant cash reserves, stellar credit ratings, and access to lower-cost funding, allowing them to generously support new ventures. While some fintech players share these characteristics, Big Tech companies have a distinct combination of power and resources that distinguishes them from other players in the fintech sector.

While Big Tech companies are touting innovative financial products, their growing presence raises concerns about market dominance, regulation, and the potential consequences for traditional banking actors.

Existing fintech companies provide various services to small and medium-sized businesses (SMEs), including retail banking, lending, wealth management, and payment systems. However, the structure of the fintech industry is evolving, and a new spirit of collaboration between fintech organizations and incumbents is emerging. Fintech companies are increasingly collaborating with established banks to offer business-to-business (B2B) products and services. The trend toward B2B is most noticeable in corporate and investment banking (CIB), which accounts for 15% of all fintech activity across markets.

Meanwhile, traditional banks continue to dominate the digital banking space, having developed robust and secure digital channels and processes, as well as unparalleled customer service support. Fintech companies, on the other hand, are transforming how people save, bank, budget, and spend money. Mobile wallets provide convenience, security, and integration with digital services, whereas traditional banks provide trust, complex financial services, and tailored relationships. The demand for quick transactions is driving the shift to digital payments, which has been accelerated by the Covid-19 pandemic. Traditional banks provide fintech/mobile money services, but the end-user experience is currently lacking and could be better.

In an insightful conversation with an app developer from a fast-growing Kenyan fintech startup, I was able to gain an understanding of the far-reaching effects of Big Tech’s involvement in SSA. Initially he observed that, “the presence of Big Tech companies such as Google, Amazon, and Facebook has created an obvious feeling of optimism in the region. They have the potential to revolutionize financial services accessibility and drive innovation to unprecedented levels. There is a real opportunity here to address persistent financial disparities and provide services to populations that have long been underserved.”

However, as the conversation progressed, he revealed a more intricate aspect of the story. “It is critical to recognize the challenges that emerging fintech startups face in this scenario,” he said, noting that it was difficult for them to compete with the significant resources and brand recognition of Big Tech players. He added that, “there is genuine concern about smaller players struggling to establish themselves and gain visibility in the face of such overwhelming dominance. Furthermore, there is growing concern about data concentration and privacy issues stemming from these Big Tech companies’ advanced data analytics capabilities. We must ensure that innovation does not come at the expense of user privacy and data security.”

Effective regulation in this area should aim to create an ecosystem where healthy competition drives constant innovation.

The conversation highlights the critical role of regulators, policymakers, and industry stakeholders in fostering an environment in which both disruption and protection can coexist. In another interview with a fintech legal expert, a thought-provoking statement emerged: “While we often associate Big Tech with Western companies, it’s important to recognize that the concept takes on a distinct form in many African countries.” There are African Big Tech companies, such as M-Pesa and Flutterwave, that have monopolized their respective domains and are associated with local innovation and services. The legal expert further stated, “the rise of these homegrown ‘Big Techs’ presents a unique regulatory challenge.” There is a need for adaptive regulatory frameworks that respond to the market dynamics created by ‘African Big Tech’ and fintech startups. This includes not only understanding the unique market positions held by these entities but also recognizing the potential synergy between ‘African Big Tech’ and fintech startups.

Effective regulation in this area should aim to create an ecosystem where healthy competition drives constant innovation. This way, consumers can benefit from both established companies and companies that are just starting out. This can be done by making the playing field level for all players, no matter how big or small they are, and by encouraging transparency and accountability in the industry. A first step towards ensuring a more equitable fintech landscape would be putting reasonable regulations in place applicable to all entities regardless of their size.

Balancing Innovation and Competition in Markets

Traditional financial services were reliant on fixed assets, which hindered new entrants. However, technological advancements have enabled startups to operate virtually. Neobanks, for example, such as M-Pesa, rely solely on digital infrastructure.* M-Pesa has 50 million monthly users without any physical branches and offers services such as loans via open finance and data sharing. It now operates in Kenya, Tanzania, Mozambique, the Democratic Republic of Congo, Lesotho, Ghana, and Egypt. M-Pesa exemplifies the transformative power of the Big Tech model in the financial sector. Its disruptive approach to banking and financial inclusion, driven by its extensive digital reach and data-driven services, showcases the potential role of Big Tech in remolding the financial landscape, especially in regions underserved by traditional banks.

Payment processing, a pivotal area in banking, is the most popular area to usurp, and lending is the most profitable area of banking in terms of revenue generation, which is attracting the attention of many African governments. This massive technological push into banking in most African countries is not a coincidence. It corresponds to a broader opening up of the banking value chain in Africa and internationally, with open finance and internet connectivity allowing account holders to share their banking information with other businesses, enabling services such as loan provision. It allows Big Tech companies to provide banking services without becoming banks.

Since many SSA countries struggle with lower levels of financial inclusion, there is a high unmet demand for financial services provided by Big Tech firms. The high cost of running bank branches outside of cities, especially in places where electricity and internet connections aren’t always reliable, makes it harder for people to get financial support. If a customer does not have the right paperwork or a good credit history, this can present additional challenges. Many SSA households rely on remittances from family members working abroad. Although remittances are significant in relation to the size of local economies, they are still expensive in comparison to those in advanced economies. This is primarily due to the high costs of holding, storing, and transferring cash, particularly in rural areas. In this context, there is a heightened appeal for Big Tech firms’ financial services. By digitizing payments, Big Tech firms are able to offer lower-cost cross-border remittances. In 2020, remittance services accounted for a significant amount of sales for Big Tech companies in Kenya and Saudi Arabia, according to the Financial Stability Board.

Google, for example, uses data from its search engine and maps to gain insights into the financial needs of African small businesses.

Another noteworthy issue is how important user experience has become in all aspects of our lives. In order to capture and analyze insights and tailor recommendations to individuals, real-time data must be used. It’s a process that has long been at the heart of Big Tech’s operations, but it requires significant advancements from traditional banks. These advancements are undeniably taking place, and there is a renewed emphasis in traditional banking on the integration of AI and ML to improve customer experience. However, when it comes to innovating and using vast swaths of data to respond quickly and at scale to consumer trends, Big Tech has a significant advantage. Furthermore, Big Tech firms frequently swoop up the best and brightest in technology talent, leaving many traditional banks scrambling to fill the roles.

Mobile payments and digital wallets are two of the most significant ways in which Big Tech companies are influencing traditional banking in SSA. Google and Facebook, for example, have launched mobile payment platforms that enable customers to make payments and transfer money using their smartphones. These platforms are gaining traction in the region and posing a challenge to traditional banks, which have struggled to keep up with the rate of innovation in mobile payments. M-Pesa is another example. M-Pesa allows users to deposit, withdraw, transfer money, and pay for goods and services using a mobile device. It has become so popular that many people in Kenya use M-Pesa as their primary banking service. This demonstrates how large technology companies are leveraging their strengths in mobile technology and digital platforms to disrupt traditional banking and financial services in SSA.

Meanwhile, as traditional banks continue to require extensive documentation for loan applications, Big Tech firms are increasingly making inroads into the lending space, offering easy online and mobile lending services to consumers and small businesses. Branch International is one such example. A mobile lending platform, it uses data analytics and ML to assess creditworthiness and approve loans to African customers. The company assesses creditworthiness and approves loans in minutes by using data from a user’s mobile phone, such as call and text records. Branch International has been successful in providing loans to customers who would not have had access to traditional credit otherwise, particularly in Kenya and Nigeria. Another example is Lendable, a fintech platform that uses ML and Big Data analytics to improve the efficiency of lending to small businesses and individuals in Africa. The platform uses data from various sources to assess borrowers’ creditworthiness and approve loans. Borrowers can use Lendable’s platform to apply for a loan online and have the funds transferred to their mobile money account in minutes. Paylater is a mobile-based lending platform that provides short-term loans to Nigerian consumers. It assesses customers’ creditworthiness using a proprietary algorithm and aims to approve loans in minutes with minimal documentation. These examples show how large technology companies are disrupting the traditional lending market in SSA by utilizing advanced technology such as data analytics and machine learning. Their digital platforms and mobile-based services make loan applications more efficient and streamlined, which is especially beneficial for consumers and small businesses who may not have access to traditional credit or may be excluded from the formal banking system.

When it comes to accessing and analyzing large amounts of data, Big Tech firms have an advantage over traditional banks. Google and Facebook, for example, collect massive amounts of data on their users via their various platforms. Customers’ financial needs and behaviors, such as spending habits, income levels, and creditworthiness, can be gleaned from this data. Big Tech firms can create financial products and services tailored to their customers’ specific needs by analyzing this data, such as personalized loan offers or savings plans. Google, for example, uses data from its search engine and maps to gain insights into the financial needs of African small businesses. This information has been used by Google to launch Google Station, a platform that provides free Wi-Fi in public places to assist small businesses in connecting with customers and growing their businesses.

In contrast, Facebook is using its data to launch Facebook Pay, a mobile payment service that allows users to make payments and transfer money to one another via the Facebook platform. In addition, the company uses data from its social media platform to create personalized loan offers for users based on their creditworthiness and financial behavior.

The arrival of Big Tech in SSA’s fintech scene is creating waves like never before. Google, Amazon, and Facebook are using their technological clout to upend traditional banking. While this shift opens up opportunities for financial inclusion and new ideas, its impact necessitates careful consideration. Big Tech’s towering presence may cast a shadow over competition, putting smaller fintech startups in a difficult position. To navigate, let alone effectively and confidently, the path of innovation, competition, and consumer protection necessitates a finely tuned regulatory roadmap. Mobile payments, digital wallets, and data-driven lending platforms are reshaping the financial landscape by bridging gaps and providing access to the underbanked. However, as Big Tech wields its data prowess, privacy and equitable benefit sharing become focal points. Joining forces between policymakers, regulators, startups, and established financial players is a critical step toward creating a protective environment for Africa’s domestic companies.

However, it is critical to note that this game-changing journey will not be easy. The rapid rise of Big Tech may tip the scales in favor of monopolies, stifling innovation and competition. The urgent task is to fine-tune the balance between innovation, fairness, and consumer protection. A prudent examination is a compass to capture the best of Big Tech’s shakeup while taming its potential downsides in SSA’s journey toward financial transformation.

*Neobanks are digital-only banks that operate entirely through online banking rather than traditional physical branch networks, providing apps, software, and other technologies to streamline mobile and online banking. They generally specialize in specific financial products such as checking and savings accounts.

This essay has been published as part of IT for Change’s Big Tech & Society Media Fellowship 2022.