Issue #11. Address Systems in Africa & Sending Digital Remittances
Discover how a company is tackling the absence of a formal address system in many African countries and explore the challenges faced by digital remittances.
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No major changes this week, so that’s good.
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Company of the Week: OkHi
Kenya, like many other countries in the region, faces a problem: a lack of a formal addressing system. It's pretty clear what kind of issues this causes, from arranging meetings to delivering packages and dealing with emergencies. Only 1% of the population gets their mail delivered at home, compared to 86.7% globally. In Nairobi, a city of over 4 million people, 50% of the roads don’t have names. Honestly, that’s one of the craziest stats I’ve ever heard.
Part of the address problem stems from a lack of coherent naming policy and historical context. After gaining independence, renaming Nairobi’s streets while considering various ethnic interests was a challenging task. The living conditions don't help either: 60% of Nairobi’s population lives in slums, with 90% in shacks on land they don’t own.
As on of the results, delivery delays are common, with 58% of delays occurring due to insufficient address information, and 25% of parcels not being delivered at all. It's typical to deliver a package to the recipient's general area and then have them guide the courier through the district's streets and buildings.
Attempts by the government to establish a National Addressing System have been ongoing since at least 2016, with legislation proposed only this year to establish such a system. If passed, it would take some time before every building in the country has a unique address.
This problem isn’t unique to Kenya. In Nigeria a bank sends an agent to verify a person’s address. There must be a better way, right?
Enter OkHi, which aims to solve this problem using AI. The company claims that 4 billion people globally don’t have an address, costing businesses $200 billion annually.
Founded in 2014 by former Google employee Timbo Drayson, who worked on launching Google Maps in emerging markets, OkHi arose from his experiences in East and West Africa. He struggled with tasks like registering a SIM card and ordering meal deliveries due to address issues.
And now building on his experience, OkHi addresses two main challenges:
Enabling mobility businesses to move people and goods efficiently.
Solving address verification issues.
In Kenya, OkHi initially focused on mobility. On the consumer side, they built a database with 300,000 addresses using GPS coordinates and photos of location entrances, converting them into unique addresses. Users could share these addresses with others via WhatsApp, SMS, or email. For businesses, OkHi developed a custom delivery technology stack for easy integration.
In practice, instead of a traditional address like "Piccadilly Road, 1," Uber drivers would look for coordinates and a green door.
The results were impressive. Working with Uber, OkHi cut pick-up times by 40%, and helped KFC reduce delivery costs by $0.20 per order.
However, in 2020, OkHi pivoted to digital address verification in Nigeria's finance sector, seeing it as a more lucrative opportunity. Before OkHi there were three ways a bank could verify an address:
Use a utility bill — which 60% of Nigerians don’t have, and bills are prone to fraud anyway.
Send agents — which is expensive and takes weeks.
Do nothing — which risks regulatory issues.
In Nigeria, OkHi started out using the same playbook, and its business model is built on three products. OkCollect is the photo and coordinates collection tool for consumers; OkVerify is a verification tool that uses data from a customer's smartphone; OkGo is a web app for navigation.
Now, I mentioned this AI thing. What does AI have to do with confirming GPS coordinates? Well, OkHi doesn't just take the customer's word that they reside where they say they do. OkHi analyzes how much time a consumer's phone spends at a specified location, and thus understands whether or not they really reside where they say they do.
In Nigeria, OkHi has seen early success. Working with a local bank, they proved to be 30% more accurate, 4x faster, and 50% cheaper than using an agent. The company claims hundreds of thousands of users in Nigeria, charging $1 per verified address. By 2022, with two clients in Nigeria, their revenue was likely in the $0.3-1.3 million range.
The potential for OkHi is massive. It remains to be seen how much of the market they can capture.
Random Story of the Week: The Challenges of Digital International Money Transfers
In 2022, global remittances reached $831 billion, an increase from $791 billion the previous year. In 25 countries, they account for more than 15% of GDP. Over the last 20 years, global remittances have grown at a 7.7% CAGR, outpacing the 4.8% GDP CAGR. India leads in remittances inflows with a 13% share, while other countries receive 7% or less.
Looking at this data, the question I started pondering is whether technology has enabled growth in remittances. The short answer is no, it hasn't. However, technology has helped. Here's how.
One major challenge in remittances is the cost of sending money. On average, senders pay a 6.3% commission on a $200 transfer, down from 9.7% in 2009. While commissions on cash transfers have remained around 7.5%, digital payments have become cheaper. In the early 2010s, these commissions were over 10%, but have since fallen to under 5%. This reduction is partly due to regulatory pressure, and significantly because of services like Wise, which charges an average fee of 0.65%, compared to Western Union's 5%. Since Wise’s launch in 2012, the average digital transfer commission has been declining, though it still has a way to go to reach Wise’s rates.
But digital remittances are still in minority. Before the pandemic just 4% of all transfers were purely digital with the additional 10% that were digitally initiated but picked up in a traditional way. The pandemic has transformed the market with purely digital transfers now capturing a 13% share, while digitally initiated payments are at 21%. Still, digital remittances are lagging, and there are several reasons for that.
1. Limited Awareness: Only 16 million people use Wise, while there are 281 million migrants worldwide. In Nigeria, Wise’s website gets under 200,000 visits a month, despite the 281,000 Nigerians living in the UK alone.
2. Unbanked Population: Many top remittance-receiving countries have low bank account ownership. Solutions like Wise require a bank account, yet 30% of adults globally don’t have one. Financial and digital literacy barriers also impede digital remittance adoption.
3. Underdeveloped Infrastructure: Digital payment systems face challenges like interoperability, non-uniform messaging standards, and outdated technology. And, as we’ve discussed previously, the ATM infrastructure is also lacking.
4. Cash Preference: In most developing countries, cash is still king due to both cultural and developmental reasons. In Nigeria, 62% of all POS transactions are made with cash, in Thailand it's 56%, and in Indonesia, it's 45%.
That said, although on a global scale tech solutions have helped people increase their digital money transfers, specific cases are not affected by technology but rather by shifts in labor markets, economy, or political landscape.
In China, remittances in the last 10 years have fallen by 15%. The country is getting both older and richer, so there’s more need for workers locally, and the income differences between China and the developed world are shrinking fast, especially when considering cost of living differences. On the other hand, you have Mexico where transfers have grown 163% in the last decade. The main drivers were increased longer stays in the country (12 years in 2010 to 20 years in 2020), rising wages, and low unemployment.
The challenges that digital remittances are facing are substantial, and technology is not the only answer to those challenges.