Fintech and its Evolution in Africa

The narrative of Fintech in Africa has largely been one of financial inclusion, poverty alleviation, and economic growth. But as with every tide of change, the secret sauce lies in balancing emergent benefits and risks.

Over the last few years, emerging markets have increasingly attracted foreign investors looking for the next opportunity. Africa is experiencing a fintech boom. Last month, Chipper Cash, which offers mobile-based, peer-to-peer payment services across seven African countries, raised $30M in a Series B round led by Ribbit Capital and Bezos Expeditions.

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In 2020, Paystack, an API-based payments platform often referred to as the “Stripe for Africa,” was acquired by Stripe for $200M+, while Turaco, a micro-insurtech startup aiming at changing healthcare financing in emerging markets to provide health and life insurance to low-income earners, secured $2M in a seed round led by Novastar Ventures. In early 2021, Pula, which helps smallholder farmers derisk against losses related to extreme climate fluctuations, raised $6M in a Series A round led by TLcom Capital.

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Fintech is defined as the integration of technology and finance. This unification creates an enabling environment and represents an opportunity to promote efficiency gains in the continent’s market economy. Fintech in Africa represents one of the greatest opportunities of all time. These digital technologies build upon existing mobile and telecommunications infrastructure, or sometimes even create the infrastructure needed on the continent.

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Economics and COVID Acceleration

In 2019, the World Bank approximated that comprehensive and affordable internet coverage will increase the African GDP by 2%. A report by McKinsey (2018) also states that the universal adoption of digital finance (mobile money) could increase the GDP by 6%.

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This is good news. Sub-Saharan Africa already leads the world in Mobile Money. The reason mobile money grew to become so popular is that there isn’t a need for a landline. Fintech in the future may even be telco-driven (agent networks) or branchless (neobanks).

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In 2020, the World Bank report indicates that the GDP per capita is said to have contracted by 6.5% in Sub-Saharan Africa due to the COVID pandemic.

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However, the adoption and success of fintech startups can mitigate this fall. The ‘opportunity’ from COVID established the importance of digital economies in times of crisis. To be more specific, digital payments will increase digital financial inclusion to the effect that it will: (1) allow for continued access to financial services; (2) equip governments to provide support more effectively; and (3) support innovation and productivity.

COVID accelerated opportunities for companies in the fintech space and led to increased rates of technology adoption.

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Mapping the Market

There are lots of cross-verticals between fintech, insurtech, agtech, and e-commerce. This chart from CB insights categorizes companies in different sectors.

Source

I broke down a list of fintech startups in Africa, into four categories. Each category includes the description, top companies, and key considerations.

1. Payments

Definition: solutions focused on transforming the payments space to make transactions easier and more secure. Current solutions include peer-to-peer payments, cross-border payments, and B2B payments.

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Companies: Interswitch, Flutterwave, Paystack, Paga, Cellulant, iPay, teamapt, Ziroo, ClickPesa

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Key Considerations:

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• Is the transaction data compatible with software packages like Quickbooks?
• Since the space is so saturated, what does the target audience, and market size look like?
• What verticals is the startup focusing on e.g. cross-border, peer-to-peer, B2B payments?

Other interesting companies that are building APIs and other infrastructure for the African Fintech industry: Stitch, Mono, Djamo, Indicina, Okra

2. Lending (B2B / B2C)

Definition: Solutions focused on streamlining the traditionally old and non-transparent lending processes.

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Companies: Lidya, Lendable, Tala

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Key Considerations:

• How flexible are loan payments, and how does that compare to the market?
• What do the loan sizes look like?
• Is the product geared more towards consumption or more towards investing in economic stability?
• How does the startup access risk?

3. Wealth Management / Wealth creation

Definition: Solutions concentrated on handling people’s money, whether it is for creating wealth (Abacus) or managing wealth (22seven).

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Companies: Bamboo, Piggyvest, 22seven, Abacus, CowryWise, Franc, Rise

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Key Considerations:

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Wealth creation:

• What do the fees for all assets under management look like?
• What are the differentiators for a company that is focused on creating wealth? For example, Robo-advising, low fees?
• Are there any competitive advantages from enabling investments with low minimums?
• Is the infrastructure surrounding the KYC/AML process in place?

Wealth management:

• What assumptions about the industry are being made, especially when using a foreign model in Africa?
• Are the integrations with external accounts plentiful and easy to set up?
• How does the software handle data misclassification?
• How effectively can they manoeuvre and adapt to foreign legal requirements and implement global KYC & AML standards?

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4. Insuretech

Definition: Solutions focused on increasing accessibility and efficiency of insurance services and operations.

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Companies: Pula, Turaco, Pineapple, Bluewave

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Key Considerations:

• What verticals of insurance are the focus of most innovation?
• How different and effective are the new models used to assess and mitigate risks?
• To what extent are policies redesigned, and what needs largely inform the redesign?
• At what rate are levels of insurance penetration on the rise?

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Fintech and the Trade Landscape

With the aim of accelerating intra-African trade and boosting Africa’s trading position in the global market, AFCTA(African Continental Free Trade Area) was introduced to create a single continent wide market for goods and services and promote the movement of capital and labour.

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For this push to liberalize trade and commerce across the continent to be successful, access to efficient payment systems and infrastructure is essential, eliminating the bureaucracy and delays that characterize prevailing money transfer systems.

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Including Fintech-driven financial accessibility as a key pillar in implementing AFCTA, increases the feasibility of increasing intra-Africa trade — which is at 12% of the continent’s imports. By leveraging payments systems and the increasing adoption of eCommerce across the continent, the desired growth of intra-African trade and resulting economic growth increasingly edges towards reality, especially as these solutions become accessible at the grassroots level of African economies.

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It will have the potential to lift 30 million Africans out of poverty and boost the incomes of another 60 million Africans, increase the continent’s GDP by $450 billion and increase its global exports by $560 billion.

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Impact on the African Economy

Financial innovation in Africa has led to the disruption of legacy financial systems and structures on the back of dematerialization of financial services: (1) distribution of banking and insurance services through the internet, telecommunications, and human agents, and (2) disintermediation leveraging peer-to-peer models with savers lending directly to borrowers.

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The increased accessibility to financial services has enabled deeper financial integration at a grassroots level in African economies that were mostly unbanked. An upside of financial inclusion has been the catalyzing trade on the back of digital mobile payment systems.

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These have given the vast pool of the previously unbanked the ability to transact with convenience and ease — reducing the costs incurred when exchanging goods and services — and develop credit scores in the process, getting access to previously unavailable credit.

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Another upside has been the deeper penetration of insurance services in African markets by leveraging digital technology to aid in the redesign and deployment of insurance products and services. The result is a gradual closing of the protection gap, spanning critical sectors such as healthcare and agriculture among others.

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However, the rise of financial inclusion has been a double-edged sword. Households and individuals at the bottom of the pyramid have been able to build credit scores and gain access to credit. This has been fueled by the emergence of multiple mobile-first lending applications and services, from overdraft facilities such as Fuliza to micro-loans services such as M-Shwari — with borrowing minimums as low as $1 — and lending applications such as Tala and Opay.

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With annualized interest rates — which some would term as usurious — reaching 500% being several multiples the interest charged on commercial loans and most of the digital borrowing being used to cover discretionary consumption, a high percentage of borrowers default on their loans and end up blacklisted by credit rating agencies.

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To mitigate these risks and ensure that digital credit serves the intended needs some level of responsibility needs to be instituted and enforced in the digital credit market. Some aspects to start with would be implementing measures on consumer protection such as increasing levels of transparency on loan terms, implementing stronger credit risk assessment policies and strengthening information sharing without harming borrowers.

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As much as the tides of innovation move faster than regulators’ ability to understand and adapt to market changes, increased cooperation and exchange of information between them and innovators would be a step in the right direction towards creating a market equilibrium that serves and protects everyone’s interests.

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The overall impact has largely been positive, with increased levels of trade, especially among smallholder farmers and informal and small traders, catalysing economic growth as millions at the bottom of the economic pyramid are pulled out of poverty, experiencing an increase in incomes and spending power.

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However, this should not blind us to some of the emergent risks that threaten the long term sustainability and value we can get from these new systems we’re building.

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What’s Next?

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With the increased adoption and interest in fintech, in Africa, some of which has been accelerated due to the COVID pandemic, the race is on to start and develop the next disruptive fintech company in Africa– or to find the next best company to invest in.

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A valuable piece of advice that I got from Mbwana Aliy, Managing Partner at Savannah Fund, was that the best companies he has worked within Africa think deeply to understand their market and environment before making any copy-cat leaps.

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For the aspiring entrepreneurs out there thinking of disrupting the fintech space, the International Monetary Fund (IMF) has highlighted the several opportunities to improve technological foundations of the continent’s emerging economy and finance industry.

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Other than the graph, a key opportunity lies within solving the issue of accessibility. This is because accessibility goes hand in hand with the cost of the internet. The affordability of the internet vis-a-vis the likes of India remains a challenge. In India companies like KaiOS are solving this problem by creating a handset with the capabilities of a smartphone.

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An alternative to internet-driven accessibility, especially in regions without the requisite infrastructure and among those at the bottom of the pyramid, is offline enabled access to mobile applications.

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In Africa, companies such as Hover are building services that enable the automation of USSD sessions in the background of Android applications. These solutions work across any mobile network enabling Android applications to run a multitude of USSD interactions, including payments, airtime purchases, and more, providing data without internet access.

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Asia, Africa, and the Middle East are frontier markets for venture capital due to large youth population, large economies, and markets. VCs and entrepreneurs are waking up to the opportunity that fintech presents in emerging markets. We are excited for the continued innovation and opportunities in this space. We welcome any feedback and questions. If you are a founder in the fintech industry, feel free to reach out — we would love to learn more!

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