While people in the Global North generally take banking for granted, across much of the developing world, access to a secure bank account remains the exception rather than the norm. For most of the world’s population, financial transactions continue to be conducted in cash, in kind, or through mobile-based payment systems that charge fees per individual transaction — and end up costing users a lot more over time.
Fabio De Masi is a former MEP and MP for Die Linke, where he was vice chair of the parliamentary group and its spokesperson on financial affairs. He is currently a research fellow with the Financial Innovation Hub of the University of Cape Town in South Africa.
Translated by Joel Scott and Marty Hiatt for Gegensatz Translation Collective.
The problem is particularly acute in Africa, where, in recent years, so-called “FinTech” (short for financial technology) companies have sought to exploit this gap by launching new digital banking products seemingly accessible to the millions of Africans who do not have access to a regular bank account. Fabio De Masi took a closer look at the rise of FinTech in a recent study, When Finance Meets Big Data: Financial Technology and the Scramble for Africa. He spoke about his findings with Caroline Hüglin from the Rosa Luxemburg Foundation.
Why is the topic of FinTech — companies that use data-based technologies to provide financial services — so relevant?
When data capitalism and big data meet financial capitalism, new, powerful finance corporations can emerge, which essentially become large, unregulated shadow banks.
For example, for a while, the parent company of Facebook, Meta, was looking to create its own digital currency. Meta has a customer base that comprises roughly a third of humanity, and has access to massive caches of data on people’s social behaviour. Next to that, Deutsche Bank looks like a lemonade stand.
In response to the new role of big tech corporations in finance markets and their potential market power, as well as the fact that an increasing number of people purchase essential goods on the internet and make payments digitally, the world’s leading central banks have been discussing the possibility of creating government-issued digital currencies.
Why did you decide to focus on Africa in your study, and on Kenya and South Africa in particular?
Worldwide, some 1.4 billion people are considered “underbanked” because they earn irregular incomes in the informal economy and do not have bank accounts. Around 60 percent of these people live in Africa. This is a treasure trove for FinTech companies.
With the explosion of mobile communications and the internet in Africa, countries such as Egypt, Nigeria, Kenya, and South Africa have established themselves as centres of the African FinTech boom. With user behaviour data from the internet and telecommunications services — such as the frequency with which they purchase phone credit — companies can cheaply and easily generate credit ratings for potential borrowers who have no collateral assets or regular income.
Because traditional banks are active in many sectors, they are unable to concentrate exclusively on digital strategies. FinTech companies are filling this gap and incorporating the world’s poorest populations into the digital exchange cycle. Kenya’s M-Pesa is one of the most widely used financial technologies in Africa, and it works with the simplest of mobile phones. Due to its high distribution of smartphones and its (for Africa) comparatively high levels of financial inclusion, South Africa is considered a particularly fertile FinTech market.
What are the downsides to financial inclusion and data-based technology?
Financial inclusion can be a valuable thing. Loans are indeed important for investment, and data-based technologies can play a significant role in this. There may also be isolated examples of poor people having been able to establish a livelihood as business owners thanks to these kinds of loans.
That said, the vast majority of people use these loans out of necessity to pay for everyday consumption and to cover their basic needs. Many FinTech companies drive people on poverty wages into excessive debt, reduce purchasing power in the local economy, and then distribute the profits to international investors.
We need public alternatives for the digital age, but here, the devil is in the details of implementation.
In Nigeria, for example, there have actually been cases where companies have written to the telephone contacts of people with overdue loan repayments to place social pressure on them, a form of so-called “debt shaming”. The Cape Town-based FinTech company Jumo calculates creditworthiness from the driving data of Uber drivers, and Tyme Bank analyses the living habits of poor people in South Africa based on their grocery purchases.
What are some of the examples from Kenya?
The Kenyan mobile provider Safaricom developed M-Pesa together with the UK Development Office and the British corporation Vodafone. This credit platform grew out of the practice common in many African countries of transferring prepaid phone credit via SMS to family members or friends. Safaricom, one of the most profitable companies in Africa, charges fees of up to 20 percent for services such as delivering payments for a basic income project in Kenya.
Previously, think tanks such as Financial Sector Deepening Kenya and the Gates Foundation funded studies by American economists that sought to show that 2 percent of Kenya’s population had been lifted out of poverty by M-Pesa. The methodologies of these studies have since come in for criticism.
More recently, there has been critical debate about the fact that even during the COVID-19 pandemic, Safaricom was forced to pay an almost feudalistic tribute to Vodafone UK in the form of exorbitant dividend payments. These dividends were generated on the backs of the poorest communities in Kenya, which ultimately led the Kenyan government to take action.
What alternatives are there to these developments?
Two possible courses of action would be taxing data-based profits or tightening antitrust legislation. It is also important to protect the use of cash, in order to avoid poor communities becoming even more dependent on FinTech companies. Recent events in Nigeria have shown that the introduction of new banknotes and the shift to digital payment methods in the informal economy can cause serious upheavals.
At the same time, we also need public alternatives for the digital age. This includes digital central bank currencies. But here, the devil is in the details of implementation. This will also be one of the topics addressed in a second publication by the Rosa Luxemburg Foundation, which will specifically concentrate on South Africa.
I’m also very interested in public FinTech companies, such as those emerging in Brazil. In an area with high levels of poverty near Rio de Janeiro, which is governed by Lula’s Workers’ Party, the community has used revenue from an oil corporation to introduce their own digital currency through the municipal development bank. The public FinTech company of this municipal development bank allows poor communities to receive social benefits via their phones and to pay municipal fees in the digital currency free of charge, and to make purchases in the local economy, for which local businesses pay transaction fees that are much lower than those charged by Visa or Mastercard. Changing the currency into the Brazilian real is simple and affordable. The municipality has cut their administrative costs and is using the savings to provide low-interest loans for the local economy. This model will also be analysed in our follow-up publication.