Norman Frankel, Chief Growth Officer, Stanchion Payments Solutions
Ethiopia’s capital, Addis Ababa, is home to over 5.7 million people and buzzes with vibrant energy. The government is also driving its digitalisation programme forward as part of its 2025 and 2030 digitalisation plans.
With a population of at least 132 million, Ethiopia is the 10th most populous country in the world and the second largest in Africa, following Nigeria.
My visit nearly eight months ago was a surprise. The city surprised me on the upside, as it was not what I was expecting, and neither was the level of ambition amongst the banks and payment switches. We arrived in a city full of infrastructure projects, with what seemed like almost every major artery road under construction. Banks (the larger ones) had moved into new, modern, skyscraper-like buildings.
This latest trip focused on meeting with our local in-country partner, Savvy Information Technologies. Together we
- hosted two seminars under the banner of driving digital experiences, one for issuing and one for acquiring, and
- featured as headline sponsors for the 1-day Digibank event, with a keynote talk on “how bank card issuers can deliver hyper-personalised experiences at fintech speed (like Revolut)” and a panel session on “building a cash-lite economy: Ethiopia’s digital payments journey”, and
- having key meetings with executives of the two industry payment leaders and some of the largest banks
Rapid Progress
Whilst the few days in the market were busy, Addis Ababa pleasantly surprised us once again. Those roads that caused traffic congestion on the last visit were completed, now allowing a fast 20-minute journey from the airport into the city’s heart, saving over 40 minutes. These same roads are now adorned with tall, bright lighting compared to dark roads previously. Along most of the completed roads are new buildings constructed, some finalised, many in the final stages.
In some areas, complete zones are finished with new green spaces and parks for the public to enjoy. In other areas, ambitious re-development plans are still starting.
More broadly, the government’s 2030 vision will see huge investment projects in many fields. Addis Ababa is already the seat of the African Union and hosts the seat of the United Nations of Africa. Already, the national airline is the largest in Africa and flies the most connecting routes in Africa. The government has recently started the rollout of digital identity cards.
Within the last few months, the government devalued its local currency (Birr) to float freely against the $ USD. This has created significant short-term impacts on the economy and its citizens, as it’s caused the local currency to drop 50% of its value, making USD$-based costs double in real terms for Ethiopia. Banks are having to scale back some of their ambitious investments, however the government has also passed laws allowing foreign property and foreign company ownership e.g. the local banknote supplier has just been bought by a Japanese company. In addition, laws have been implemented to expand the Ethiopian Stock Exchange, introduce investment banking and foreign exchange trading and allow foreign banks to now enter the market.
This creates new opportunities and threats for the market’s banks, so key decisions and investment decisions have to be made.
Two Sides of the Same Coin
Against the above backdrop, the payments industry is desperate to innovate and digitalise. The local mobile money scheme run by Ethiopian Telecom has grown rapidly in a relatively short period of time.
For cost and sovereignty reasons, the local payments industry has its own domestic scheme, which is on the verge of rolling out contactless cards. The primary challenge this has faced is the choice to use CPACE as its standard. This is selected as a domestic alternative to Visa and Mastercard schemes. Many African countries are implementing or exploring the same strategy as the fees that can be saved versus international scheme solutions, which can be substantial for such a populous nation (circa 132m people).
The issue is that there are no or few known vendors that support CPACE within Digital Wallets (NFC Host card emulators like Google Pay/Apple Pay), which can then support tokenisation. Another issue is that while a high volume of changes are still being pushed through, there is a mandate to have on-soil (not public cloud-hosted) solutions. This makes moving the project forward challenging for banks that operate their own card-issuing capability and the two national switches (EthSwitch and Premier Switch Solutions).
In the absence of a clear, proven, and tested solution to this problem, many large banks are turning to issuing debit cards from the major schemes Visa and Mastercard. Only two or three banks have recently launched credit cards, which will be a further area of future growth for the schemes.
If a solution to CPACE is not found soon, one must question at what point Ethiopia will decide to leapfrog CPACE and seek to adopt the future open standard C-8. The banks and national switches will need to include this area in their future scenario planning.
As things currently stand, Ethiopia would be well advised to look at their neighbour Kenya, which, faced with strong mobile money competing solution, chose to accelerate the rollout of virtual card issuance. For many Ethiopian banks and the national switch, this is a good strategy that can also build local knowledge and learning as tokenisation of the virtual cards can be done in the bank’s mobile wallet (currently none of the X-Pay Apps (Google/Samsung) appear to have immediate launch plans for the market despite its size). The benefit of a virtual card issuance strategy is that it can be launched much faster and is a simpler integration project. As there are no plastic production, printing, or personalisation costs, this is a lower-cost option, especially with a currency that continues to devalue.
A surprise on the visit was the lack of awareness of virtual card issuance and little to no awareness of the fact that many leading fintech and neo banks have successfully used this as a launch strategy that has underpinned their growth and success. It would be worth the local banks being aware of some of the digital journeys that leading fintechs from Europe have taken.
The other side of the coin
In markets where a major X-Pay Wallet has not entered, most banks struggle to educate customers on how to use the tokenised card in their bank wallets. After all, you get little volume if you can’t use and spend your funds on the contactless card.
Contactless POS terminals are in the market. My colleague successfully paid for coffee using his phone and tokenised card in his digital wallet. However, the volume of these terminals is limited to major cities and is still not in great volume. A fast way to accelerate these would be to introduce SoftPOS or Tap-to-phone solutions that use smartphones. Another hurdle is that low-cost smartphones often don’t have the chipset for NFC capability. Making them ineligible or incompatible with SoftPOS payment acceptance.
As such, the market will need to figure out how to leapfrog this and provide the relevant smartphone devices to merchants.
Whilst this symbiotic ecosystem develops, launching a virtual issued travel card with currency capability is an ideal launch strategy for banks aimed at business owners and higher wealth customers who travel internationally.
The Iceberg
Perhaps not surprisingly, given all these new concepts in the industry, the other aspect that caught our attention was that little thought had been given to what happens after the initial phase of digitalisation. Case studies and knowledge like this are what international vendors like Stanchion Payment Solutions can greatly add to banks in emerging markets.
For example, when you digitalise either the issuing or acquiring functions, there is an increased need to use calls to cryptographic encryption devices like hardware security modules. Few banks realise that several months after a customer adopts tokenisation, the ease of use via on-device biometric authentication means many customers forget their PIN. If the ability to view or set a new PIN is not offered in the bank’s mobile app, the bank will face increased costs and be overwhelmed in their branch and contact centres from customers seeking help.
Another example is that when you go digital, there is an increased need for better, faster transaction monitoring and fraud management solutions to reduce fraud, especially as cards will be increasingly used in eCommerce scenarios. We discovered a lack of current awareness for initiatives like dynamic CSC/CVV2, which can be valuable in reducing fraud.
With all the above said, Ethiopia is proving it’s on a mission—a rapid one to digitalise. They have a good track record of executing their ambitious goals. We believe the industry will find solutions to some of its current obstacles, and the larger banks do have substantial customer bases through which to recover the business case return on investment.
Having completed our second visit, we remain of the opinion that we can add value to the industry and bring international experience, solutions, and payment fabric product technology to help the banks deliver their product roadmap. We are looking forward to our next visit in a few months.
