🇪🇹 Ethiopia (ኢትዮጵያ) : The Genesis of Mankind - Context

Ethiopia is famous for being the "Cradle of Humankind" with the most significant discoveries related to our early ancestors.

Fun Fact: Ethiopia was Christian before Europe. The Kingdom of Aksum was a powerful trading empire and one of the earliest to adopt Christianity, leaving a lasting cultural and religious legacy.

Ethiopia is also unique among African countries in that it was never fully colonized.

Amharic, the official language of Ethiopia, is one of the oldest written languages in Africa, using the ancient Ge'ez script adapted into its unique syllabary.

For instance: “Hi, my name is Pierre-Habté and I’m an entrepreneur” would be translated into:

“ሰላም፣ ስሜ ፒዬር-ሀቤቴ ነው። ስራ ፈጣሪ ነኝ። “(in phonetic: Selam, sime Pierre-Habtė new. s’ra fet’ari negn.)

I used to go to Ethiopia every 2-3 years when I was younger, as part of my family lives there.

Before attending my master's program at UC Berkeley, I even did a summer internship at a consulting company in Addis Ababa, specializing in helping foreign companies invest/adapt to the Ethiopian market.

Here is Ethiopia in a few numbers:

• Large Population: 126.5M in 2023 (in was 73M in 2003 😳). It’s the second most populous country in Africa after Nigeria.

• Population 2050: 205 million (projected)

• Agricultural Economy: 35-40% GDP

• Key Exports: Coffee, gold, oilseeds

• Inflation rate: 33% in 2022

• GDP Size: $315 billion (2023)

• Projected GDP Growth rate: 7.9% ( 2023)

Ethiopia still lags behind in mobile penetration, mobile banking, and the rate of banked citizens, but the country is changing rapidly. 

Only recently did the financial and telecom sectors open up to foreign investors.

I'm really excited to spend July there for an in-depth exploration of fintech.

I’ll be meeting with several entrepreneurs building mobile payments, payment gateways, insurance, etc., and will share all my learnings in this newsletter!

ps: Here is a great report for a full picture of mobile payment in Ethiopia.

💸 Part 2 - What actually happens when you pay with your debit card in a physical store?

Let’s say that you are in France and you want to buy a surfboard at Decathlon.

Here are all the stakeholders involved in the process:

• Cardholder: The individual who owns and uses the debit card to make a purchase (you).

• Merchant: The business or vendor that accepts debit card payments in exchange for goods or services (Decathlon).

• Acquiring Bank (Acquirer): The bank or financial institution that processes debit card payments on behalf of the merchant and maintains the merchant’s account. Ex: BNP Paribas

• Point of Sale (POS) Terminal: The device used by the merchant to accept debit card payments, which can read the card via chip, magnetic stripe, or contactless methods. Famous POS company include Square, SumUp, Toast, Verifone etc

• Card Network (e.g., Visa, Mastercard, Cartes Bancaires): The payment network that facilitates communication and transaction routing between the acquiring bank and the issuing bank.

• Issuing Bank (Your bank): The bank or financial institution that issued the debit card to the cardholder and maintains the cardholder’s account.

• Central Bank (e.g., Banque de France): The national authority that regulates and oversees the banking system and payment systems within the country to ensure stability and security.

Above is the simplified process. What really happens under the hood:

1. Initiating the Transaction

• Card Presentation: You’ll present your debit card at the POS terminal by swiping, inserting, or tapping.

• Merchant Requests Authorization: The POS terminal sends the transaction details to Decathlon’s bank.

2.Transaction Data Transmission

• Data Encryption: Transaction data is encrypted for security.

• Routing Through Payment Network: Encrypted data is sent through Visa, Mastercard, or Cartes Bancaires to your bank.

3.Authorization Request & Response

• Issuer Bank Verification: Your bank checks if the card is valid, ensures sufficient funds and runs fraud detection checks.

• Approval or Decline: Your bank sends an approval or decline back through the network to Decathlon’s bank. This response includes a status code indicating whether the transaction is approved or declined.

4.Receiving the Response at the POS Terminal:

• The acquiring bank forwards the response to the POS terminal at Decathlon.

• If the response is positive (approved), the terminal prompts you to enter your PIN.

5.Completing the Transaction - PIN Verification

• The terminal verifies the entered PIN against the encrypted PIN stored on the card’s chip.

• If the PIN is correct, the transaction is finalized and the POS terminal confirms the purchase. A receipt is printed.

6.Settlement Process

• At the end of the business day, the merchant’s POS system batches all approved transactions and sends them to the acquiring bank.

• The acquiring bank processes the batch and forwards a settlement request to the card networks, which then request fund transfers from the respective issuing banks.

• The issuing banks transfer the funds to the acquiring bank, which then credits the merchant’s account.

7.Post-Transaction Steps

• Account Updating: Your bank updates your account to show the debit.

• Statement Generation: The transaction appears on your bank statement.

What is interesting to see is that: payment are not instant at all. It takes up to 24 hours before the transaction is actually settled 😳.

Each intermediary takes a piece of the pie. For instance for a 100euro payment, here is what you can expect:

• Merchant: €99.50

• Acquirer: €0.50 ( between 0.5% and 3% of total amount)

• Card Network: €0.20 (between 0.1% and 0.3%)

• Card Issuer: €0.20 (usually 0.2%)

A lot of developing countries use digital payments, which we will further explore in the coming episodes.

If you want to get a better understanding about payments, here is a great free Coursera course.