A new Digital Evolution Index from MasterCard shows that South Africa, Egypt, Kenya and Nigeria are quickly moving towards digital evolution.

However, South Africa’s digital economy is the most developed in Africa, and one of the fastest growing in the world, according to the new Digital Evolution Index developed by MasterCard and The Fletcher School at Tufts University that tracks a country’s movement toward digital evolution, gauges progress and assesses challenges in 50 countries comprising the Index.

South Africa ranks 33 out of the countries measured by the index in digital readiness, which is defined by the markets’ ability to support and encourage digital commerce and payments. In Africa, it ranks ahead of Egypt (48), Kenya (49), and Nigeria (50).

South Africa also emerged as the fourth fastest growing digital economy behind China, Malaysia and Thailand.

“South Africa’s speed of growth can be attributed to the rapidly increasing proportion of the population with Internet access, an 86 percent adult mobile phone penetration rate, and a highly developed telecommunications network. However, what is significant is that all four of the African countries measured share a common trait of moving at a high rate of speed toward digital evolution, demonstrating huge growth potential for e-commerce,” said Ted Iacobuzio, Vice president, Global Insights, MasterCard.

The Index analyses four key underlying drivers and barriers that govern a country’s evolution into a digital economy, Demand (consumer demographics, income and internet access); Supply (technology and infrastructure); Institutional Environment (governmental policy), and Innovation (environment for creating startups and the overall competitive landscape).

Each country is given an overall digital readiness score between 0 (low digital readiness) and 100 (digitally saturated), which is derived from an average score of these four interdependent drivers.

The index also provides an indication, by country, where the next billion Internet users will come from globally.

According to McKinsey, Africa’s Internet penetration stood at 16 percent (167 million people) in 2013, and is forecasted to reach 50 percent (600 million people) by 2025, indicating the online consumer market will quadruple over this time.

“There are currently 2.9 billion Internet users in the world, a feat that took over 20 years to achieve. The next billion users will enter the market much faster than this. A significant proportion of these will come from Africa, where the four countries studied – Egypt, Kenya, South Africa and Nigeria – all represent exceptional growth potential coupled with short-term opportunity,” said Iacobuzio.

The study analysed each market’s evolution from 2008 to 2013 and grouped each country into one of four trajectory zones:

‘Stand Out’ countries have historically moved at a high rate of digital readiness and maintain high levels of digital transactions;

‘Break Out’ countries are typically developing countries that currently have low readiness scores, but are rapidly evolving;

‘Watch Out’ countries face various challenges, but have significant opportunities for investment; and

‘Stall Out’ countries, while possessing a history of strong growth, are highly evolved and offer little potential for change.

The Index positions South Africa as a ‘Break Out’ country with an overall score of 30 out of 100 in 2013. Its score jumped from 24 to 34 between 2008 and 2012, a substantial increase compared to other countries.

While infrastructure investments in South Africa will drive e-commerce to achieve a likely 30 percent growth rate in 2014, the Index indicates that demand for e-commerce currently lags the global average.

“South Africa may have a relatively average Index score overall, but its digital landscape is evolving rapidly. If this evolution continues at its current rate, South Africa has the potential to grow into a strong digital economy. It is a prime candidate for becoming a ‘Stand Out’ nation in the future,” he says.

The three other African countries ranked in the index are classified as “Watch Out” countries. Egypt scored 17.3, Kenya scored 16.9 and Nigeria scored 13.7 out of 100. These countries are just starting out on their journeys towards digital readiness, each facing different challenges.

“Encouragingly, Egypt, Kenya and Nigeria fared well in their speed of digital growth. This points to their potential to develop into evolved digital economies that further encourage digital payments, and enable future e-commerce opportunities,” he said.

Key African Insights:

Egypt’s Innovation score of 29.5 and its Demand and Supply drivers both above 15 helped place it second in the African rankings.

According to the Index, Egypt has the potential to be one of the top 10 fastest evolving countries globally in the next five years.

Mobile payments are in place for an impressive run due to the the first ever interoperable Arabic mobile money implementation in Egypt. While the e-commerce penetration rate among Egyptians is still low at 3.4 percent, Egypt’s online purchases are expected to triple by 2016, according to Euromonitor.

Kenya’s Innovation score of 32.9 was its highest driver score followed by its Institution score of 14.

This is due to a combination of factors including the country’s mobile payment capabilities, led by the M-Pesa platform, which shows an evolved mobile market where 25 percent of Kenya’s GDP travels through M-Pesa.

In 2013, Kenya’s mobile penetration rate was 72.5 percent growing by 5.6 percent to 32.3 million subscribers during the second quarter of 2014. Kenya faces challenges with its Supply and Demand drivers, which if focussed on over time will lead to an improved overall Index score.

Nigeria’s Innovation and Institution drivers fared relatively well largely owing to the Central Bank of Nigeria’s Cashless Policy that is expected to drive growth in electronic payments and e-commerce, the country’s increasingly urban population that will have better access to the Internet over the coming years, and the fact that Nigeria has 94 percent mobile penetration.

Its Supply and Demand drivers have much potential for improvement, with scores of 6.8 and 7.3 respectively, pointing to a need for improved technology and infrastructure.

However, Nigeria showed the greatest potential for digital growth.

Globally, Singapore, Sweden and Hong Kong are the top three countries on the Index with the most active and advanced digital economies with scores of 56, 55 and 53.5 respectively.

The United Kingdom and Switzerland round out the top five, while the United States ranks sixth among the 50 countries measured.

The Digital Evolution Index is an output of the study conducted by researchers at The Fletcher School with the support of MasterCard.

Analyzing datasets from public sources, such as The World Bank, and private sources such as EMPEA and Dow Jones VentureSource, the research team created an analytical framework for recognizing patterns and making sense of the global digital landscape, discerning country trends and evaluating their relative strengths and weaknesses.

The methodology for the Digital Evolution Index measures the current ability of countries to deliver on consumer demand and business supply capabilities, in combination with governmental policy and climate for innovation – four drivers defining digital readiness that were identified in the research hypothesis.

In addition to the current state, the study measured each country’s trajectory across the four drivers from 2008 through 2013.

The index then layers a quadrant matrix to visualize the trajectory of a particular country.