Digital Transaction Prospects and Vacuums

Reduced physical engagement with cash due to COVID-19 triggered an increased demand for digital transactions and was coupled with the central bank’s measurements towards limiting cash withdrawals. The number of digital payment and online delivery companies has boomed to 35. Although the time is ripe for fintech companies and software developers, newly placed regulatory frameworks by the central bank are stunting the sector along with banks’ stubbornness in sticking with bricks and mortar. Ashenafi Endale, explores how de facto payment and delivery companies are struggling to transform into independent operators under the new directives of the central bank.

In 2020, the coronavirus pandemic gave a devastating blow to the world economy. The shutdown measures taken to contain the pandemic have plunged the global economy into recession. The lives of billions has been affected by the pandemic and businesses were hit hard with a massive drop in revenue.

However, COVID-19 pushed more consumers online, resulting in a bump in sales for many e-commerce businesses. This can be attested by the experience of Bedilu Mekuria.
Bedilu established Akrabi Trading in 2017, providing a digital trading platform for the construction sector. But after a few months he closed the company due to low demand.

But when the pandemic halted human mobility and cash-based transactions became risky, Bedilu re-opened his company. Currently, Akrabi facilitates digital transactions worth ETB1 million monthly.

Bersufekad Getachew, Founder and General Manager of Guzogo Travel, also testifies that the demand for electronic payment is taking off in Ethiopia. “Although business activity slowed down due to the pandemic in 2020, the need for digital transactions is increasing,” explains Bersufekad. Guzogo Travel in partnership with the Commercial Bank of Ethiopia (CBE) launched the electronic flight booking application in September 2020.

Although late compared to the rest of the world, e-commerce and electronic payment are expanding in Ethiopia, especially in recent times. The number of companies in the digital transactions sphere is now around 35. Some of these companies are launched or operated by a single financial institution. Amole Payment Services and CBE-Birr are examples in this regard.

EthSwitch and Premium Switch Solutions were established as a consortium of financial institutions. On the other hand, HelloCash and M-Birr were established by foreign firms partnering with financial institutions. Still others such as YenePay and Hisab are launched independently without the involvement of financial institutions.

The types of services given to customers of financial institutions varies amongst these companies. Their offerings range from enabling regular transactions digitally like withdrawals, deposits, and transfers; to the purchasing of goods, services, and airplane tickets; and the payment of bills of utility providers and Ethio Telecom.

The electronic payment system allowing funds to be transferred through an electronic signal exchange between institutions, rather than through an exchange of cash, is expanding worldwide. Especially in the developed world, these systems have changed the traditional way of exchanging goods and services by creating a flexible, convenient, and inexpensive platform integrated with the banking system.

In Ethiopia, the history of electronic payment goes back to 2001 when CBE installed the first Automated Teller Machine (ATM) to serve its clients. But digitizing banking remained in its infancy for many years thereafter.

The slow progress, however, has started to accelerate in recent years after commercial banks operating in Ethiopia started to embrace technology and invest more on digital banking platforms. Especially in the last three years, the electronic payment landscape has seen a steady growth in Ethiopia, according to data obtained from the National Bank of Ethiopia (NBE).

Currently, there are 5,059 ATMs, 9,983 Point of Sale (PoS) terminals, and 15 million payment card users in Ethiopia. The value of transactions conducted through ATMs reached ETB87 billion in 2019/20, showing an increase of a staggering 796Pct compared with 2017/18. A significant jump in the use of PoS was also registered.

The use of mobile and internet banking increased in a similar manner during the period. For instance, in 2019/20 transactions worth ETB15 billion have been conducted using internet banking, an increase from ETB1.8 billion in 2017/18.

Despite such progress, the economy largely remains cash based. Out of Ethiopia’s 20 million total account holders, close to 98Pct still transact with cash. In addition, 83Pct still go to banks to withdraw money, according to data of the Ministry of Innovation and Technology.

“This should be changed,” says Dereje Zebene, President of Zemen Bank. “The brick and mortar system is no longer viable for the financial industry and country.”
According to Dereje, additional works on bank-to-bank interoperability is critical to boost digital transactions. “In this digital era, a single bank cannot provide an efficient service for its clients without integrating with others.”

Because of this limited interoperability, the use of electronic payment and digital transaction is very low in Ethiopia, even compared with neighboring countries. Under current circumstances banks only serve their own clients on their digital platforms, except for ATM cash withdrawals.

Dereje argues banks don’t want digital transaction interoperability fearing it will drain their deposits. “So, they only allow digital transactions amongst their own branches.”
In a bid to expand the system, NBE amended the proclamation regulating the banking sector in 2020 by enabling financial technology institutions (fintech) to offer payment processing services. This was followed by four directives introduced to facilitate the proper implementation of the new law.

Based on the new law, existing companies that offer digital payment platforms must be re-established as an independent operator. Companies can apply for a switch, ATM, PoS and other payment operator licenses. Applying for multiple operator licenses is possible. The national switch operator license is exclusively reserved for EthSwitch.

NBE stresses that due to the high cost of doing business and the lack of ability or willingness of financial institutions to invest more on digital channels, the expansion of the electronic payment system has been hampered. So, the recent move is intended to take the digital channel business to the next level by involving new players committed to inputting the necessary investment.
Yilebes Addis, CEO of EthSwitch, says non-bank operators are coming to the scene after NBE introduced the new legal framework. “After the new law passed, 10 companies are in the process of securing licenses from the national bank.”

The latest law ended the marriage between banks and payment companies by forcing existing companies to be re-established as independent operators. Bersufekad says this will kill the existing payment companies since they cannot operate without banks’ deposits. “The minimum paid up capital requirement is not enough to be an independent operator.”
In addition, industry players say the sector needs various incentives in a country like Ethiopia. “Only banks have the resources to provide such incentives for clients. If we have to be independent operators, we need our own deposits,” argues Bersufekad.

However, Dereje stresses banks should not be allowed to play the role of fintechs. “The duties of banks are to mobilize savings and disburse credit. Digital payment services should be left to independent and fintech companies.

Yilebes stresses that the recent law does not allow fintechs to excel. “Ethiopia uses a bank-based payment model. This is unlike Kenya, which uses a telecom-led payment system.”
Baheru Zeyenu, Founder and CEO of AFRICOM Technologies, also agrees that the new approach is rigid and does not enable fintechs to excel like M-Pesa in Kenya. “Ethiopia can create successful firms like M-Pesa. But they must be allowed to operate under the existing bank-led model.”

The new law also allows foreign operators to engage as gateway operators and offer online payment processing services. This will allow renowned international companies to enter the market, according to NBE.

Yet, Bersufekad argues Ethiopia should not allow foreign payment companies to operate in Ethiopia. “Local fintechs must grow first before allowing giant foreign companies that are likely to dominate the business.”

There are additional hurdles hampering the creation of a successful local fintech industry in Ethiopia, according to stakeholders. The first is the limitation on the amount of money that can be transacted using digital payment channels.

For instance, an individual can only withdraw up to ETB10,000 using an ATM and e-wallet users cannot transact more than ETB6,000 per day. This amount of money is barely enough to buy an international travel ticket online.

The absence of infrastructure is also among the hurdles. “I doubt if it is possible to conduct efficient digital transactions under the existing telecom connectivity,” argues Dereje.
“To store data, we rent servers from abroad that cost us large amounts of foreign currency as it is unavailable in Ethiopia,” explains Bersufekad. “Digital payment systems cannot be expanded without the appropriate telecom infrastructure.”

Bersufekad stresses developing local servers will have an immense contribution in expanding the electronic payment system. “But it will be useless if the power and telecom fluctuations continue.”

Cyber security is another concern. “Ethiopia’s financial industry is highly exposed to cyber security,” argues Baheru. “Once Ethiopia’s financial system integrates with foreign companies, it will be highly exposed to hackers.”

To minimize such problems, the new law states that all payment operators are obliged to be certified by the Information Network Security Agency before integrating their systems with financial institutions. EBR

9th Year • Jan 16 – Feb 15 2021 • No. 94