Our last post discussed the effect of the pandemic on Africa’s banks. We concluded that the accelerated adoption of remote services by customers means that banks must upscale their digital capabilities. They can achieve this by adopting the right operating model to support tech-enabled innovation. Ultimately, banks that fail to embrace and integrate mobile finance face the threat of losing market share to non banking competitors. These competitors include telcos, technology players and fintechs. 

Today, we will discuss Africa’s fintech revolution.

According to Techpoint Africa’s West African Startup Decade Report, financial technology companies had the most Millionaire West African Startups over the last decade. Financial technology made up 35% and closed the most deals (24). Beyond Africa, there is a global focus on fintech companies. In 2019, they raised $36 billion worldwide, with Africa accounting for $460 million. In Africa, fintechs remain the most attractive destination for investors. In 2017, they saw a 287% increase in funding.

Drivers 

The vast majority of Africa’s people are underserved. Mickensey notes while banking remains an attractive sector (in countries like Nigeria), lack of access to services, especially in rural areas, issues of affordability, and poor user experience all contribute to the frustration consumers experience right across the customer spectrum. Fintechs are taking advantage of this opening by addressing pain points – affordable payments, quick loans, and flexible savings and investments, among others.

Challenges

Historically, new fintech entrants have struggled with breaking into financial services since incumbents enjoyed significant advantages in terms of financial resources, branch and agent networks, branding, compliance systems and client base. However, Tellimer Research notes that recent years have seen the rapid rise of non-traditional competitors.

Importantly, traditional financial industry players are responding to the rapid rise of fintechs by 1) developing fintech or technology-led products in-house (eg WEMA Bank’s ALAT, Nigeria); 2) spinning out their own fintech businesses (eg Equity Bank’s Finserve, Kenya); and 3) partnering with fintechs (eg Compass Insure and Pineapple in South Africa).

Regulatory oversight is still adapting to the existence of fintechs. However, it will likely increase as fintech businesses become more mainstream. Regulations pose a threat to fintech. Rather than new regulations monitoring the rise of platforms, old regulations may fail to keep up with innovations in technology and so stunt the growth of the sector. According to the World Economic Forum, Africa needs to balance the perennial demands of fast-moving innovation against the slower pace of regulation. Good regulation is needed but stifling innovation would be costly.

Potential  

Despite the big numbers, in investors, funding and clientele, fintech companies have barely scratched the surface of financial inclusion in Africa. Mickensey notes that the services of fintechs have been mostly targeted at those already within the banking system, and regulatory and financial hurdles have largely prevented them from creating innovative solutions to serve the mass market. 

Meanwhile, a youthful penetration, increasing smartphone penetration, and a focused regulatory drive to increase financial inclusion and cashless payments, are combining to create the perfect recipe for a thriving fintech sector.

Best Practice: Nigeria 

According to Weetracker, while Kenya still holds first place when it comes to fintech in Africa (according to global indices), it is undeniable that the fintech market in Nigeria has, by far, been the most active in recent times. Between 2014 and 2019, it raised more than $600 million in funding, attracting 25 percent ($122 million) of the $491.6 million raised by African tech startups in 2019 alone. Nigeria is home to over 200 fintech standalone companies. Traditional banks and mobile network operators are offering a number of fintech solutions as part of their product portfolio. 

Yet, Nigeria’s fintech sector is still relatively young. 40% of its 200 million are still financially excluded. Africa’s largest economy offers significant opportunities for fintechs across the consumer spectrum, especially within the small and medium-sized enterprise (SME) and increasingly, in the mass-market segment.

Payments 

Predictably, payments are dominating African fintech. The continent’s large unbanked population is driving demand for services that boost financial inclusion. According to Tellimer, by product, 30% of fintechs are targeting payments, 25% lending, 11% insurance and 10% investments. Particularly, the use of mobile money has grown exponentially in the last decade. The availability of mobile phones has afforded millions of Africans access to mobile money services. 

According to the World Economic Forum, Sub-saharan Africa is the only region in the world where close to 10 percent of GDP in transactions occur through mobile money. According to GSMA, more than half of the 282 mobile money services operating around the world are located in Sub-Saharan Africa. Today, there are around an estimated 100 million mobile money accounts in the region. Remarkably, mobile money accounts surpass bank accounts. African users rely on them to send and receive money domestically, as well as internationally. They use mobile money to pay their bills, receive their wages and pay for goods and services. 

Granted, the emergence of financial technology is driving financial inclusion in Africa. What other good are fintechs doing? We will address this in our next post!