Credit cards in Africa: continent lagging behind...but that's great potential right there

Modern credit cards have been around for nearly seven decades, and less than half that time on the African continent

AFRICA is still the world’s least banked region, presenting huge potential not just for banking growth, but also mobile and card payment systems.

Modern credit cards have been around for nearly seven decades, and less than half that time on the African continent. Despite massive advertising and investment by global payment companies such as Visa, credit card penetration in Sub-Saharan Africa remains low, estimated at below 5 percent. Most of these cards issued to the upper middle class and to high net worth individuals.

A 2012 study done by Moody’s Analytics for Visa on the impact of payment cards in 56 economies showed that in South Africa, the total contribution to GDP was USD 7.8 billion. South Africa has an average 1.25 payment cards per person compared to Morocco, Nigeria, Egypt and Kenya which have between 0.18 and 0.33.

This discrepancy can be attributed to South Africa’s early adoption of payment cards.

South Africa’s card holders are the busiest in the region with an average 38 to 40 transactions per year. However, Egypt has the highest average transaction value from payment cards in the region. Nigeria is a distant fourth after Morocco and South Africa.

The big card boost

A similar but wider March 2016 report by Moody’s Analytics showed that African countries recorded, unsurprisingly, the lowest economic impact of electronic payments. At 0.05 percent average increase in GDP due to card use, Africa’s economies are lagging behind but showing the highest potential. The study found that 1% increase in usage of electronic payments could produce on average about $104 billion in consumption.

In Nigeria, the use of payment cards added $640 million cumulatively to the GDP and 16,880 jobs annually between 2011 and 2015. Nigeria’s efforts to move towards a cashless economy drove its payment card statistics from 30.5 million in 2009 to 49.5 million five years later. Despite this massive growth, credit cards only grew from 300,800 in 2008 to 729,000 in 2012.  By 2018, the total number of payment cards in Nigeria will hit anywhere above 81.4 million.

In Kenya, the use of electronic payment injected $70 million into the economy, with only 5,330 jobs added per year (2011-2015). A 2014 report by Market Research Store showed that Kenya’s credit and debit cards increased from 3.8 million in 2009 to 9.7 million in 2013. At the midpoint, in 2011, there were only 55,235 credit cards in Kenya compared to 7.1 million debit cards. The disproportionate growth applies to most other African countries, despite efforts by banks and some governments to encourage use of cards.

The hurdles 

In the most developed credit card market in Africa, South Africa, some banks such as First National bank and Standard Bank now issue credit cards to students. This is unheard of in most other markets, with credit card penetration beyond specific income levels being nil. A study into the low penetration of credit cards in Ghana said the main obstacles to rapid growth was lack of: a proper address system, a proper identification system, efficient internet facilities, a central database system, and a high rate of default.

A bank doesn’t really need to know where you live or how much you earn to issue you with a debit card. They only do so for data collection and Know Your Customer (KYC) policies. If it’s a prepaid card, the bank doesn’t even need to know your credit history but if it’s a credit card, then it is the primary ask.

Since credit reference systems are also relatively new on the continent outside of South Africa, the risk of default is still considered to be high in several countries. Most governments recognise this and are trying to solve it with single national identification systems. In some countries, this could be linked to national payment systems to further tighten the noose on corruption, tax evasion and money laundering.

Most Sub-Saharan African countries do not have the infrastructure to support widespread credit card use. While ATM penetration is at its highest, there are relatively few places outside of upscale hotels and destinations where you can use a credit card. 

World Cup effect

Even in South Africa, you couldn’t pay for fuel with a credit card until 2010. The global tourism prospects of the World Cup forced the South African government to change the rules to boost consumption. This situation is mostly because the demand for credit cards is not as high as it is for prepaid ones.

The main problem seems to be the psychology behind a credit card. Even people who can afford to carry credit cards view them as facilitators of impulse purchases. The Ghana study also suggests low literacy rates are another reason for the low success of credit cards. Another one may be cultural systems that allow borrowing outside of banks, and the stiff relationship between banks and customers. In most cases, the only people who can afford to have such a credit line are high income earners and commercial customers.

But there’s a fluke in Kenya, for example, where mobile payment systems are cannibalising on the little progress payment cards had made. Between November 2014 and November 2015, for example, card payments in Kenya reduced by 18.2% while mobile payments grew by 25%. 

A puzzle

The growth doesn’t even make much sense, at first. M-Shwari, Safaricom’s mobile credit system, charges 7.5% interest on loans. Compare this to credit card interest rate offers which are as low as 2% in some cases. The more expensive offer is winning, and by a wide margin. Mobile wallets carry the inherent advantage of mobile money; that your phone is the pay point.

A growing market for credit cards in Africa is the original market, high net worth individuals. Most offers now come tailored for specific income segments. In South Africa, Centurion “Black Card”, issued through Nedbank, is an invite-only credit card. To make one, titanium metal is heated to 1,688 degrees, handcrafted into a card and then emblazoned with the member’s name. There are similar or slightly less exclusive credit cards on offer in most countries, mostly through international banks.

In December 2015, Nigeria’s central bank announced a ban on credit and debit card use abroad. Among Nigeria’s famously wealthy elite, the use of a credit card in high-end shops in Johannesburg and London is a way of life. The market has grown so big that BBC reports that some high-end shops in London have welcome signs in Hausa.

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