Past the Tipping Point? A Look at Zambia’s Digital Financial Services Market

Last year, I reported on the UNCDF Blog that the digital financial services (DFS) market in Zambia was at a tipping point. This year, we conducted an Annual Provider Survey, and I am happy to report that the growth trends which started in 2015 were sustained through the end of 2017. The DFS industry in Zambia went from having only 2 percent of the adult population with an active DFS account from four providers in 2014, to 24 percent of the adult population with an active DFS account from 18 providers in 2017.

Increased trust in digital financial services

A 2017 report commissioned by the International Finance Corporation and Mastercard Foundation on the perceptions and attitudes to digital financial services in Sub-Saharan Africa found that lack of information on the risk aspects of the financial system in general, and for DFS in particular, had created distrust and skepticism towards DFS in some markets, including Zambia. However, data from our survey shows that in 2017, DFS customers in Zambia were cashing in to their wallets much more than they were cashing out. The number of customers conducting cash-in transactions grew by 183 percent while the number conducting cash-out transactions grew by only 20 percent.

The choice to leave more money in their wallets could be a sign that customers are beginning to trust DFS more, prompting them to use their wallets as a store of value and to conduct more transactions. This is good news for providers and innovators looking to improve their product offerings, as there is potential for a savings product to be developed to address customers’ willingness to use their accounts to store value.

Moving towards interoperability

As Zambia inches closer to implementing the National Financial Switch - a government initiative to allow quick and affordable movement of payments between customers of different DFS providers – we are seeing an increase in the number of collaborations between banks and mobile network operators (MNOs) offering transfers to and from bank accounts, indicating that the Zambian digital financial services market is ready for this innovation. The volume of transactions is also increasing. In December 2017 alone, more than $5.2 million was transacted between bank accounts and MNO customer wallets, up from less than $10,000 in December 2016.

For a market once characterized as being stuck in a sub-scale trap, the rise in the number and complexity of transactions being performed by customers is a very promising sign. Customers now have a better understanding of the DFS products and services offered to them, and as their usage level increases, they are also beginning to demand more flexible and relevant products.

For a market once characterized as being stuck in a sub-scale trap, the rise in the number and complexity of transactions being performed by customers is a very promising sign.

As the number of active DFS customers grew from 1.3 million in 2016 to 2.3 million in 2017, there was a corresponding increase of 74 percent in the active agent base, from 13,216 in 2016 to 22,946 in 2017. Both the volume and value of transactions at agent locations increased significantly, by 93 percent and 149 percent respectively.

However, there is more to the story concerning agents. There are actually 62,876 registered agents, but more than half of them - 64 percent - are currently inactive. Most inactive agents are MNO agents.

What is at the root of this issue? It could be that providers in Zambia have yet to figure out the winning formula to implementing effective agent network management strategies and still struggle to provide their agents with the support needed to grow their businesses into profitable ventures. Or it could be that agents are setting up businesses in locations that are not commercially viable, pointing to the need for more timely and up-to-date information on the spread of agent locations across the country. We will need to conduct further research at the agent level to get to the bottom of this.

Innovation gaining ground in Zambia

A preliminary scoping exercise revealed that as of December 2017, there are at least 25 FinTechs in Zambia developing solutions across various sectors including financial services, pay-as-you-go solar, health, education and agriculture. These FinTechs are disrupting the DFS industry and showing that increased collaboration between FinTechs and digital financial service providers could be the key to bringing more Zambians into the formal financial service system.  Research on specific user groups such as farmers, refugees and mothers in Zambia revealed a demand for tailored digital financial products, highlighting opportunities for FinTechs to provide innovative digital solutions to meet the needs of Zambian customers.

What happens next?

The DFS industry in Zambia is alive and thriving. Considerable progress has been made in terms of improving the awareness and usage of DFS among the adult Zambian population. Providers and other institutions such as FinTechs are rising to meet growing customer demand by introducing innovative solutions to the market. The National Financial Inclusion Strategy for Zambia targets an overall increase in formal financial inclusion in Zambia from 38 percent  in 2017 to 70 percent  by 2022. DFS will play a key role in driving the projected increase.

However, there are still several challenges that need to be addressed if Zambia is to remain on course to meet its financial inclusion targets, including addressing customers’ financial literacy and improving DFS infrastructure and connectivity nationwide. In particular, there is a strong need for access to timely and relevant data to support informed decision-making by all the relevant stakeholders working to advance financial inclusion in Zambia.