Written by Ishani Patel and Eugene Mutiso
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.
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.
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.
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%.
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).
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.
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.
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.
I broke down a list of fintech startups in Africa, into four categories. Each category includes the description, top companies, and key considerations.
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.
- 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?
Lending (B2B / B2C)
Definition: Solutions focused on streamlining the traditionally old and non-transparent lending processes.
Companies: Lidya, Lendable, Tala
- 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?
Wealth Management / Wealth creation
Definition: Solutions concentrated on handling people’s money, whether it is for creating wealth (Abacus) or managing wealth (22seven).
- 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?
- 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?
Definition: Solutions focused on increasing accessibility and efficiency of insurance services and operations.
- 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?
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.
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.
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.
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.