African banks, behind the times with fintech, could actually become pioneers in developing new financial technologies like the blockchain and bitcoin. Because these banks largely left it up to telecom companies to assume the role of financial service providers in parts of Africa, the banks are now investing in digital currency startups, according to Quartz Africa. The question is how long will it take.

Mbwana Alliy, a managing partner at the Savannah Fund, a technology venture company, said a headwind of fintech disruption is blowing from Europe and Silicon Valley into Africa. Blockchain innovation is heating up in places like Rand Merchant’s Alpha Code in Johannesburg, which hosted last December’s Afrikoin conference and currently operates a fintech accelerator, as well as Barclay’s Rise in Cape Town, which hosts Fintech Africa’s blockchain conference on Feb. 25.

Blockchain Brings Africa Hope

Blockchain brings the promise of tracking and giving transparency to all transactions and making them tamper-proof since individual transactions are not kept in a single place but stored on computers globally.

Space Kenya Networks Limited, a Kenyan web development company, has announced the launch of its blockchain incubator BitHub, CCN.com reported in January. The company aims to bring together a consortium of individuals, organizations, and expertise to drive the development and adoption of blockchain technologies, especially within the African continent.

Africa has also been cited as a growth market for international currency transfers and remittances, via the bitcoin startup BitPesa, CCN.com has reported. California’s Pantera Capital Management LP provided BitPesa over $1 million USD in new funding for their African bitcoin operations.

In November, “60 Minutes,” The CBS TV show, gave an overview of how average Kenyans are conducting mobile commerce using their smartphones, catapults M-Pesa as a mobile payment service, CCN.com reported. The report explored the many benefits that mobile commerce can bring to a developing country.

African Banking Set To Disrupt

Vinny Lingham, the South African entrepreneur who started the Civic blockchain enterprise in Silicon Valley, said the banking sector will disrupt in Africa faster than in any place in the world. He said the blockchain and bitcoin provide a trustless operating method that does not require third parties such as banks. The blockchain will circumvent today’s existing financial infrastructure the way in which mobile technology circumvented fixed communication lines in Africa.

Barclay’s, in response to this challenge, in December 2015 established the first African branch of Rise, the company’s global network of innovation spaces. The branch’s goal is to support fintech entrepreneurs who otherwise would not be within the bank’s reach.

Arian Lewis, head of Barclay’s Open Innovation, said Africans bank on their mobile phones while the Barclay’s talent base rests on brick and mortar banking. “So we’re thinking, are we actually a tech company? To make that shift, you have to approach talent that sits at the front end of that change curve,” he said.

Barclay’s Supports Innovation

Barclay’s Africa operates in 13 African nations and hopes that the work space, run by TechStars, a U.S. chain, combined with access to its customers, will deliver new ways of thinking which Barclay’s can’t conceive by itself. Barclay’s Africa is 62% owned by Barclay’s Plc.

Warren Squires, head of Seeker Fund, Barclay’s Africa’s venture capital fund, said startups can grow faster and can find ways around problems that banks can’t since they don’t have the red tape and a wider global vision.

Consent, a startup that underwent the bank’s pilot accelerator in 2015 in Cape Town, is one of Barclay’s first blockchain collaborations.

Shaun Conway, the co-founder of Consent, said Barclay’s is attempting to define what it will become. He referred to it as a midlife crisis for the bank.

Consent initially used blockchain to build fidelity with individual medical records over different databases. The startup saw how Barclay’s can use Consent’s system to comply with the know-your-customer (KYC) rules in the short term and protect customer identities in the long term.

Following the accelerator, Consent secured a one-year contract to build a proof-of-concept for the bank for more than one million dollars.

Special Focus On Africa

Barclay’s is working with blockchain startups globally, but it sees special application in Africa. Lewis said blockchain could be the most important political and social innovation to affect Africa in 100 years. A blockchain-based digital economy can hold African leaders to a higher level of accountability. Lewis said digital currencies could significantly reduce government corruption and offer transparency to citizens.

Bitcoin’s application as a general-purpose ledger expanding beyond cryptocurrencies is open to debate. Marcus Swanepoel, CEO of BitX, a South African-born startup, says blockchain is not the magic ray of sunlight people seek. He said people think if they put something on the blockchain the counterparty risk goes away.

Considering deeds or diamonds or shares, you essentially tokenize something, but you still must trust the person who made the asset’s token really holds the asset. Fraud occurs when someone loads something onto the system. The fraud is not within the system itself.

Bitcoin, which has inherent and tradeable value, does not have counterparty risk, Swanepoel said, making it especially desirable in Africa.

BitX currently sees more uptake in Southeast Asia than in Africa, but it actually originated in an African bank. It began as Switchless which piloted a Standard Bank bitcoin system in 2013.

Switchless never debuted to the public, but it used its proof of concept to secure traction globally and later raised a Series A financing round from Naspers, South African e-commerce and media conglomerate, in late 2015.

Another Bank Enters The Fray

Standard Chartered, Standard Bank’s parent, is entering the fray. In mid-2015, the company’s chief innovation officer called blockchain a force for good in a posting and added that blockchain could eventually cut costs for financial services such as credit cards, remittances, and money transfers, opening these services up to people who can’t afford them.

Bitcoin as the interoperable system currency for converting between African currencies could make cross-border trade easier.

The Savannah Fund has invested in BitFinance, a Zimbabwean bitcoin startup, to test the above-mentioned thesis, which a Stanford Business School case study has detailed. The country’s national currency collapse gave rise to several currencies such as the U.S. dollar and the Chinese yuan, making it an ideal country to pilot bitcoin as a back-end trading currency. Equally important to the Savannah Fund’s Alliy was the local team’s good relations with the central bank.

Alliy said the company is working with the central bank to see how bitcoin can fit the Zimbabwe ecosystem. “We’re not just going in on a Silicon Valley-style disrupt model.”

Fintech Startups Face Challenges

Alliy said it is important to work with established players. In Africa, fintech startups face obstacles and have to comply with complex regulations and navigate political power networks that vary by country. The technology needed to handle money requires bank-grade security, and fintech talent is expensive.

Cash can be hard to secure in Africa. There are not a lot of venture capitalists, and they often require more proof of traction than a young fintech startup can demonstrate. As banks increase activity in the early stages, they seek to partner their big corporate cultures to the small early-stage startups.

Conway at Consent said the journey to getting things done is difficult. Even with top-level executive support, the organization is not geared to moving as quickly as the startup.

However, 454 fintech companies have applied to Barclays Cape Town TechStars accelerator, which begins on March 29.

Experienced entrepreneurs such as Lingham are skeptical any startup will be game-changers.

“I applaud what they’re doing but I’ve yet to see a corporate-sponsored VC fund, accelerator or incubator ever create a business that disrupts an industry,” he said.

Lingham, for his part, invests in African startups but not financial services.

Even the more optimistic observers acknowledge the journey for these startups will be long. Lewis at Barclay’s says it will be ten years before everyone has full access to the Internet, which is what is needed to enable a digital currency economy.

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