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Africa’s fintech landscape 10 Jan 2017

Over the past few years, there has been a frenzy around companies offering technology-driven, consumer-oriented financial products. Known widely as “fintechs” – short for financial technology companies – these companies attracted an estimated $19 billion in investments in 2015, according to Citigroup, up from just $1.8 billion five years earlier.

The buzz around fintech companies is based on the disruptive innovation they have introduced and the threat they pose to established business models of the multi-trillion-dollar financial services industry – comprising of banking, insurance, wealth management, payments, currency, etc. Fintechs have gained recognition by revolutionizing access to credit and other financial services.

In Africa, fintech companies are also attracting a lot of attention given that they are creating innovative ways to offer financial services to the continent’s 1.2 billion people. Disrupt Africa reports that African fintech start-ups were the second most popular destination for venture capital (VC) investment, after the solar sector, in 2015. These start-ups accounted for 30 percent of the $186 million in total VC funding received by all African tech start-ups, according to Disrupt Africa – an online portal providing news and information on Africa’s tech start-up landscape.

Origins of fintech in Africa

Although use of technology to provide financial services has been in existence in Africa for decades, the origins of the current fintech movement can be traced back to Kenya – East Africa’s largest economy. Between 2007 and 2010, Nairobi witnessed several major technological innovations that transformed the Kenyan capital city into Africa’s tech epicentre, earning the moniker: Silicon Savannah. Chief among those innovations was M-Pesa, a mobile money platform launched by Safaricom – Kenya’s largest telecoms company – in 2007. M-Pesa enabled millions of Kenyans to send and receive money easily via their mobile phones, garnering two million customers in just two years. The success of M-Pesa essentially birthed the fintech industry in Africa and pioneered the adoption of digital payments across the world. Today, M-Pesa has over 25 million customers across 10 markets in Africa, Asia, and Europe.

The value proposition of fintech in Africa

In Western countries, traditional banks are still the dominant forces in the financial industry given their widespread infrastructure of ATMs, branches, and offices. And fintech companies in these countries mostly operate as an alternative digital layer on top of this infrastructure. But this is not the case in African countries. With banks mainly clustered around major cities, formal financial services in Africa barely reach a large section of the continent’s predominantly rural population. The World Bank's Global Findex Data shows that only 34 percent of adults in Sub-Saharan Africa had a bank account in 2014, up from 24 percent in 2011.
    
For fintech start-ups in Africa, this situation represents a huge opportunity to provide financial products and services for the continent’s massive unbanked population. With the proliferation of mobile phones and increasing Internet usage, African fintech start-ups are betting that they can provide their services more cost-effectively than most traditional banks. In the long run, fintech companies expect to dominate Africa’s financial services industry as more people rely on mobile wallets, for instance, other than bank accounts to make payments, access loans, etc.

Major fintech brands in Africa

Although M-Pesa remains Africa’s premier fintech provider, there are over 200 other fintech companies spread across market segments such as remittances, biometrics and data analytics, artificial intelligence, digital currencies, crowdfunding, and payments. Some notable start-ups are: Nomanini, a South Africa-based enterprise payments provider that enables transactions in the cash-based informal retail sector; BitPesa, a Kenya-based foreign exchange company that converts bitcoins into local African currencies; Zeepay, a Ghanaian mobile payments company that targets the country’s unbanked and banked populations; Zoona, a money transfer service operating mainly in Malawi and Zambia; and Gust Pay, a mobile cashless events service that allows users to pay for goods at selected stores by connecting through WiFi in South Africa.

Fintech in Nigeria

Despite being Africa’s most populous country and the continent’s largest economy, Nigeria was rather slow in the adoption of fintech services unlike Kenya and South Africa. However, Nigeria has witnessed an unprecedented expansion in these services in the past three years such that local fintech start-ups have become favourite destinations for venture capital investment.

According to KPMG, Nigerian fintechs received over $200 million in VC funding over the last two years, making the country one of the top three recipients of fintech investments in Africa alongside Egypt and South Africa. Furthermore, Nigeria’s cash-driven economy has been receptive to fintech services as mobile money operations grew from an average monthly transaction value of $5 million in 2011 to over $140 million in 2016.

Just like other fintech startups across Africa, Nigerian fintechs are capitalizing on the opportunity presented by the country’s significant unbanked population – which stands at about 40 percent. In this regard, fintech startups have carved a niche for themselves in areas such as digital payments, microfinance, credit scoring, and remittances. Major fintech brands in Nigeria are Paga, Interswitch, Vanso, Flutterwave, Paystack, Aella Credit, and Venture Garden Nigeria.

Challenges of fintech in Africa

Notwithstanding the enormous opportunities available to the African fintech industry, the road to success will not be smooth. In more advanced tech environments like the United States, over 90 percent of all start-ups eventually fail. Common reasons for start-up failures are business model failure, funding shortfalls, poor management practices, failure to develop in-demand products, poor marketing, legal challenges, bad location, etc. This situation also applies to African fintech start-ups, which are operating in far less conducive environments.

For start-ups that eventually overcome these common barriers to success, they often face an even bigger challenge of expanding their operations across the continent. Given that Africa is a continent of 54 different markets with peculiar characteristics and challenges, fintech start-ups come to discover that products that succeed in one country may fail in another country. This is the story of M-Pesa, which has been a roaring success in mostly Kenya and Tanzania. When Vodafone – Safaricom’s parent company – launched the mobile payment service in South Africa through Vodacom, it turned out to be a massive failure. This is due to the fact that South Africa, unlike Kenya, has a technologically advanced, accessible banking system with over 75 percent of adults having bank accounts. M-Pesa simply added no value to South Africans and Vodacom eventually scrapped the service last year.

Future of fintech in Africa

Despite the challenges facing fintech start-ups in Africa, they still have bright prospects given the gargantuan opportunities present on the continent. But in order to leverage on these opportunities, African fintech companies must actively collaborate, rather than compete, with banks and telecoms companies. This should be a no-brainer, given two reasons that are immediately apparent. First, banks have access to cheap deposits which can be used to create loan instruments and make them available to fintech start-ups to run their operations. Second, telecoms firms still control the mobile phone ecosystem – the lifeblood of most fintech companies.
    
As people become increasingly reliant on fintech services, African governments must wake up to their responsibilities to develop the right regulatory framework for the fledgling industry. Currently, most African regulators – whether central banks or government bodies – merely issue licences to fintech companies and do nothing more. There is, therefore, a regulatory lacuna that creates avenues for some fintech companies to exploit unsuspecting consumers, especially poor and rural Africans. For instance, most African countries do not have regulations for payday lending by fintechs as well as online loan providers, who may exploit illiterate borrowers by luring them into expensive credit facilities just like loan sharks.
    
Therefore, if African regulators develop robust regulatory environments for fintechs, they would foster the expansion of the industry by attracting more investment and getting customers to recognize that their rights are protected. Given the vast unbanked population on the continent, fintech companies can boost revenues by providing digital financial services while expanding such basic services to the poor.