Electronic Banking in Africa

Vinod Madhavan, Standard Chartered Bank - 13 September 2007

The adoption of electronic banking in sub-Saharan Africa is expected to surge during the next few years, despite it being a developing market. With improvements in delivery channels, the scope for automation and back-office integration - based on electronic banking - will grow.

For many investors, Africa conjures images of a continent plagued by the sort of systemic problems often thought to be typical of the developing world: poverty, illiteracy, unreliable power supply and poor telecommunications. How could electronic banking services develop and thrive in such an environment?

Consider the following facts:

  • Africa was the fastest growing cellular phone market in the world in 2005. From 1999 to 2004, the number of mobile subscribers in Africa rose to 76.8 million from 7.5 million, an average annual growth rate of 58%.1
  • Growth in Internet use in Africa from 2000 to 2006 was the highest of all world regions at 625.8%, compared with 479.3% for the Middle East, 245.5% for Asia, 193.7% for Europe, 141% for Oceania/Australia and 112% for North America. And the potential for further growth in Africa is significant, with only 3.6% of the population using the Internet. Africa accounts for only 3% of Internet use globally.2
  • More than nine out of every 10 Standard Chartered Bank customers who use electronic banking in sub-Saharan Africa do so via the Internet.

The economies and infrastructures of Africa's various markets and countries are at widely different stages of development. As a result, companies and financial institutions have widely varying expectations and requirements of the electronic banking systems. Regulatory regimes also vary, although the importance of developing adequate financial systems is being increasingly accepted.

Electronic banking covers all activities that used to be performed by account holders at their branches, which could, typically, take as long as half a day. For companies and financial institutions, it also usually entailed employing a courier to take documents to and from the branches. The expectations of customers and banks have changed significantly.

In broad terms and listed in ascending order of the volume of transactions that can be handled, electronic banking includes:

  • Fax banking (whereby faxes replace couriers).
  • Telebanking (conducted via manual or interactive voice-response call centres).
  • Mobile banking (using wireless application protocol or related technology).
  • Internet banking.
  • Proprietary workstation banking (using bank-specific software).
  • Tightly coupled electronic systems such as host-to-host (H2H).

This article focuses on the corporate and financial institutions' customer segment of electronic banking, for which the volume/throughput requirements can typically be met only by Internet banking and high-capacity delivery channels. It also examines the value of electronic banking from a management perspective, as well as the importance of security measures. The article also reviews the delivery channels available to corporate treasurers.

Typical Requirements

Figure 1 sets out the electronic banking cycle, highlighting the role of treasury systems in managing the financial working capital supply chain. It typically comprises four stages: information collation; decision-making; transaction initiation; and updating records (which, in turn, feeds back into the information collation phase).

Figure 1: The Electronic Banking Cycle

Banks work with corporate customers during the highlighted portion of the electronic banking cycle (the information collation and transaction initiation stages). During the information collation phase, most companies need timely and accurate information about:

  • Market data such as foreign exchange and money market rates.
  • Balances and positions of back accounts and dealing activity.
  • Positions such as foreign exchange, trade line utilisation and export letter of credit advice.
  • The status of transactions such as payments and collections, letters of credit and guarantees.

Based on analysis of the above information (as well as internal data such as the status of accounts payable and receivable) during the decision making phase, companies decide on the most efficient, convenient and secure ways to proceed. From a banking point of view, this entails giving instructions for payments and collections such as direct debits; trade transactions such as import letters of credit and guarantees; and foreign exchange and market transactions. An essential aspect of the transaction initiation phase is the provision of feedback about the status of various transactions. This is used in the updating records phase.

Information delivered through an electronic banking channel is only as good as is the information sent through the clearing system (especially in the case of electronic funds transfers). If a reference number is truncated by the clearing system, for example, then the company would receive only the truncated version.

Importance of Security in Electronic Banking

Banks try to ensure security during the three crucial processing stages, as detailed below: login and transaction initiation; moving data between the company and bank; and bank processing.

Login and transaction initiation:

  • building in controls so that only authorised company personnel have access to data; and
  • ensuring that no data is stored on local devices (in the case of Internet-based systems), and that if any data is stored, ensuring that it is encrypted and secure.

Moving data between the company and bank:

  • using security measures such as 128-bit SSL (secure sockets layer) to ensure confidentiality, authenticity and integrity of data during both the information collation and transaction initiation phases; and
  • the use by some banks of higher security standards for the transaction initiation phase because of the higher risk of direct operational loss. However, the industry increasingly is moving towards the same security standards for both phases.

Bank processing:

  • building in physical security in terms of access to system hardware;
  • securing all transaction data behind firewalls;
  • using high-end encryption to ensure no one can change transaction initiation instructions;
  • building in controls so that only authorised bank personnel can access data; and
  • adopting procedures such as regular internal and external reviews and information security audits.

In all cases, banks also use appropriate encryption such as 1024-bit public key infrastructure to ensure confidentiality of data (so that only authorised staff have access to data and are allowed to initiate transactions), and authenticity and integrity of data (to ensure, for example, that instructions have been issued by an authorised person using so-called non-repudiation techniques).

Delivery Channels

The choice of delivery channel is a critical element of any electronic banking system. It can also be a complex decision. Companies operating in Africa need to consider a range of factors, including proposed business growth, acceptable security level, the nature of the markets they operate in, and the costs and benefits of adopting different delivery channels, particularly in light of the higher costs of telecommunications in Africa.

Figure 2 illustrates the complexity of choosing the best delivery channel by examining seven different options, from Internet platforms to host-to-host systems, in light of two key considerations: total cost of ownership (which includes the cost of implementation and maintenance); and the volume of transactions and closer integration the company can have with the bank. Figure 2 highlights the trade-off between the volume of transactions and overall cost. Clearly, the ideal is the greatest volume for the least cost. A more detailed description of the seven options is given below.

Technological developments and improved infrastructure reduce the cost of high-volume delivery channels. Cheaper telecommunication, especially value-added networks, in a number of emerging Asian markets, for instance, has led to a marked increase in the introduction of H2H systems. Due to global connectivity, cost reductions in one part of the world often benefit other markets in which multinational companies operate.

Figure 2: Electronic Banking Delivery Channel Options
Internet platforms

With an Internet-based system, the company accesses a portal maintained by the bank which provides information about its account balances, line utilisation, foreign exchange positions and the like and also allows the company to initiate transactions. The quality of the system depends to some extent on the type of Internet connection (dial-up versus broadband, for instance). This type of channel is appropriate for low volumes of transactions and is relatively cheap to implement and maintain.

Proprietary workstations

These are so-called thick-client systems, whereby an application is installed on one or more of the company's personal computers (or its local area network). Both information collation and transaction initiation activities can be conducted. Although this system allows more transactions, the overall cost is higher, especially for maintenance and version upgrades.


The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is the primary communication channel between financial institutions, allowing for a high volume of straight-through processing transactions. SWIFT's Member Administered Closed User Group (MA-CUG) system is aimed at companies, allowing them to send SWIFT messages to and from a single bank. A new system, Corporate Access Groups (CAG), allows SWIFT messages to be sent to and received from more than one bank. SWIFT is cheaper to implement than host-to-host systems, and delivers benefits of scalability, as well as allowing companies to switch banks easily (simply by changing the bank's SWIFT address).

Host-to-host (H2H)

H2H electronic banking systems allow for large numbers of transactions (typically more than 10,000 a month) and result in a close integration of the bank and the company's treasury system. Transaction files generated by the company's enterprise resource planning system are automatically sent to the bank via a secure mechanism. Once acted upon, the status of the transactions, as well as information such as account balances and operating statements are automatically sent back to the company. There is little or no manual intervention in the process. Such highly automated systems are expensive. Internet and value-added network H2H systems offer a similar service using different communication channels that are relatively cheaper.

Availability of Electronic Banking in Africa

Although the region has enormous potential, the development of electronic banking is still in its early days for the most part. Consider the parameters, as detailed below: technical infrastructure, Internet use, and legal and regulatory frameworks.

  • Technical infrastructure: Most markets have relatively undeveloped infrastructure in terms of implementing a secure domestic financial telecom network or rolling out electronic payments and clearing systems.
  • Internet use: Penetration and use is low, as can be seen in Figure 3. Penetration is a good indicator of the quality of technical infrastructure. Although there is healthy growth in Internet use, the low penetration suggests that the adoption of electronic banking will be slow.
  • Legal and regulatory frameworks: Few African regions have a sound legal framework in relation to electronic systems and electronic banking, in particular, covering areas such as practices and terms of reference and engagement between companies and banking services providers.
Figure 3: Electronic Banking in Africa

Trends in Electronic Banking

There are three key developments, as detailed below, that will affect the future of electronic banking, particularly in Africa: desire for convenience and internal efficiencies; need for better internal controls and reduced operational risk; and preference for using more than one bank.

Convenience and internal efficiencies

Companies strive for greater operational efficiencies because of the direct impact on profitability. One of the most basic efficiencies is to increase the automation of the working capital supply chain - typically by introducing a treasury system augmented by electronic banking.

Internal controls and operational risk

Amid tighter oversight by central banks and securities regulators, companies are realising the value of greater internal controls and how these can reduce operational risks, which can result in financial loss and damage to reputation.

Using more than one bank

Increasingly, electronic banking no longer means being tied to one bank. Although there are clear benefits in conducting most banking activity with a single institution, sometimes there are good reasons for so-called multi-banking such as geography and varying credit-risk appetite. More banks in Africa are registering for MT101 (a SWIFT request for transfer instruction used for third-party payment initiation) to support multi-banking requirements, while companies are realising the benefits of more secure and reliable integration between their financial supply chains and banks.


There are numerous benefits of electronic banking, and banks are continually trying to improve security. There is a wide range of delivery channels available, depending on a company's requirements in terms of volume of transactions and overall cost. Most delivery channels can support cash management and trade functions in most African markets. Although electronic banking is still relatively undeveloped in Africa, it has significant growth potential.

During the next few years, the adoption of electronic banking in sub-Saharan Africa is likely to surge. The attraction of markets such as South Africa for the establishment of shared service centres will increase the take-up rate. As improvements in delivery channels are introduced, the scope for automation and back-office integration will grow. Corporate treasurers can look forward to being spoilt for choice.

1The New York Times; International, 25 August 2005.


3Standard Chartered Bank experience.

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