Originally published Sep 29, 2021

In 1895, eighteen year old Samuel Zemurray started buying overripe bananas off of boats from Central America that, using existing distribution networks, would have rotted before getting to market. He put the cheap bananas on trains running from New Orleans to its neighboring cities but telegraphed his customers ahead of time to pick them directly from the train car when it arrived. An initial $150 invested returned 20% in a matter of days: it was that simple.

Within three years, “Sam the Banana Man”, had banked over $100,000, and in the decades to come, built the Cuyamel Fruit Company, an agricultural corporation that got acquired for $31.5 million in 1929; took over its acquirer, the United Fruit Company; made a fortune; exploited thousands; and nearly single-handedly took down the Honduran government — an act that helped coin the term “banana republic”.

Zemurray’s ability to spot opportunity, a work ethic to be admired, and his ruthless tendency made him incredibly successful. But what really enabled the development of his business (and a clear abuse of power in Latin America) were the billions invested in transportation infrastructure that allowed Cuyamel to move goods farther and faster than before.

It cost roughly $1 billion in today’s dollars to build the Union Pacific railroad. In the US, over $328 billion in bonds were issued to build out the railroads through 1897. Businesses across the US were literally built on the rails of this massive investment in infrastructure.

It took 5 weeks to go from NY to Michigan in 1800. You can do it in one hour today. We’ve come a long way. Source: City Metric

This idea of ‘invested infrastructure’ is one that recurs in East Africa, or, for that matter, elsewhere across the continent. It shows why the past — the infrastructure ‘today’ is built on — is inextricably linked to the future. It describes path dependency, and the high cost of change in complex systems. But perhaps most pertinently, it explains why financial services have developed differently in developing economies than in developed ones.

Benefits V. Pain

In the West, swiping a credit card is the standard way to pay for goods and services. The point-of-sale device is connected to a phone or fiber network, which is only part of a vast, largely unseen communications infrastructure. The benefit of credit cards was unlocked through enormous investment by the major card networks who house trust and facilitate transactions. These networks were built for a time when phones were not as ubiquitous and hard-wired ethernet was increasingly common.

From: Ben Thompson’s ‘The Problem With Payments

They have since gained ubiquity, and because mobile phone-based services can only offer marginal improvements, the system stays resilient — it is challenging to overcome the inertia of this invested infrastructure.

On the flip side, the lack of infrastructure in frontier markets prevented financial services from being offered profitably to most consumers. Traditional financial institutions, while immensely profitable, still only serve a small fraction of the population and leave a huge gap in SME financing. The selfsame lack of infrastructure created the conditions for new kinds of financial services, leveraging the hockey-stick growth in mobile phone usage, and the prepaid airtime business model. By investing in the development of vast agent networks, telcos have laid down infrastructure that serves as an onramp for mobile money to explode.

Recommended Reading: How Africa’s Airtime Currency Traders Birthed A Fintech Innovation Playbook

Put in simple terms, mobile money is an electronic wallet where the interface for account ownership, value storage, transactions, etc. is tethered to a mobile number. In Africa, more often than not, this account is accessed via a basic feature phone’s USSD menus.

USSD (Unstructured Supplementary Service Data) is a communications protocol introduced to the GSM telecoms standard in 1997 that allows for 182 character-long alphanumeric characters to be transferred between a mobile phone and an application on the network. The designers of the USSD standard (probably) never envisioned a scenario that would have the protocol being used for applications outside of the internal operator network and so its usage for consumer user experiences is often limited.

The eight steps of a USSD payment on Vodacom Tanzania. It includes six USSD steps, a phone number from memory and an SMS confirmation. Image and caption credit to Hover.

A Legacy Leapfrog?

However, USSD’s simplicity and robust nature is exactly how it’s catapulted itself into “leapfrog” status in Africa. It works in 2G coverage areas. It works on almost all mobile phones. Remember, while Africa’s mobile penetration is immense, its mobile internet adoption stands at only 24%. The gap between ‘subscribers’ and those who can access and afford mobile internet is what USSD filled. Combined with a trusted, in-person agent network, USSD allowed mobile money providers to increase the benefits of using digital payments enough to overcome the inertia of invested infrastructure for 400 million registered accounts.

Recommended Reading: How a 20-year Old Mobile Technology is Revolutionising Africa (With Numbers)

It will take time for internet adoption to challenge the infrastructure being built over the USSD-based mobile money network, and fintech developers must come to grips with that limitation when trying to serve a large portion of African consumers. As a benchmark, Reliance Jio spent $35 billion building out 4G and driving down data costs to $0.60 per GB in India, increasing data usage per month by 800%. In Africa, data costs just over $7 per GB.

However, innovation doesn’t stop at that 182 character limit. Like Samuel Zemmuray and his bananas, African startups have seized the opportunity provided by the new infrastructure to scale in ways that were previously unimaginable. Further still, we’re beginning to see efforts to capitalize upon USSD’s far-reaching capabilities as a transit infrastructure while modernizing its user experience. Mobile money networks have started to break the stranglehold of cash-based infrastructure in Africa, and in the next chapter, we’ll see just how far this first-generation of fintechs have taken us.