African Fintech is estimated to generate $65 billion with a CAGR of 32% by 2030, but certain issues need to be addressed
Although African Fintech is expected to have a CAGR of 32% by 2030, there are still some challenges to be tackled.
Fintech is steering Africa towards economic growth and financial inclusion, welcoming more people into a digital-first era. Although payments is the largest vertical, the ecosystem accommodates other segments such as insurtech and lendtech.
Where other sectors suffered thanks to the economic uncertainty induced by the pandemic, the African fintech industry thrived. In 2020, it recorded a turnover of 3.8 billion dollars, according to Statista.
Despite 2022 being an underwhelming year for fintech fundraising in Africa, a report titled “Global Fintech 2023: Reimagining the Future of Finance” estimates that the region will generate $65 billion, with a CAGR (Compound Annual Growth Rate) of 32% by 2030. It identifies South Africa, Egypt, Nigeria and Kenya as the most important markets.
For the uninitiated, the compound annual growth rate (CAGR) is the annual average revenue growth between two given years, assuming growth occurs at an exponentially compounded rate.
Although most African countries are still over-reliant on cash for payments, digital transactions are making inroads into the scene. This trend will play an important role in reducing the number of unbanked and underbanked citizens. That is why the legacy infrastructure offered by most traditional banking institutions needs to be overhauled to make room for innovative technologies such as artificial intelligence and blockchain.
Companies across various industries have used AI, improved service delivery and other areas. AI is becoming a major theme in fintech, with brands leveraging the technology to optimize fraud detection, properly understand customer behavior and many more.
Likewise, blockchain technology brings many potential benefits to the fintech space and can help nations build their respective digital economies. Nigeria recently signed a national blockchain policy into law, saying it will pave the way for secure transactions, data sharing and value exchange between individuals, businesses and the government.
Payments will continue to flourish by 2030, but…
The report acknowledges that payments have contributed greatly to the rise of fintech, with individuals and businesses seeking newer and better ways to send and receive money without borders. In Africa, payments have the lion’s share of the market. Even with a high presence of cash, electronic transactions are easy to perform, offer better security and are fast.
It explains how M-Pesa – a mobile money service launched in 2007 by Vodafone subsidiary Safaricom – excelled in Kenya and recently expanded to other countries, including Ethiopia. However, the fintech pie consists of several layers that present different growth and development opportunities.
Lending, for example, is dangerously untapped.
Consider the average SME, which, like many micro-enterprises, contributes to job creation, wealth growth and economic development. Although they promise great benefits, legacy challenges such as infrastructure deficits and limited access to credit make success difficult. Traditional banks are not always eager to finance SMEs, mainly due to strict lending policies that mostly favor corporate bodies.
This situation, although uncomfortable, is a chance for fintech-based lenders to provide flexible credit to SMEs and help strengthen their presence in Africa. This is risky, so being nimble should always do the trick.
Also read: AfDB approves $525,000 grant to create a digital hub for African fintech
Winding towards the growth of African fintech
Mckinsey’s “Fintech in Africa: The end of the beginning” predicts that revenue from this space could “reach $30 billion by 2025” with an 8X growth rate. The market promises a lot, but certain issues need to be addressed.
Africa lacks a unified regulatory framework, meaning that a fintech in one country may struggle to thrive in another market due to varying financial regulatory laws. While Nigeria and Kenya have established regulatory sandboxes to complement fintech efforts, other markets should follow suit and review licensing approval requirements.
Will Green – a strategic advisor to many high-growth tech entrepreneurs – identifies another potential roadblock to the growth of fintech in Africa. He believes that while fintechs can take advantage of the growing conversation around AI to integrate the technology into their services, he is doubtful that every fintech will seize this opportunity immediately.
“I think the approach that regulators and fintechs take in leveraging AI will determine whether that market will accelerate or be left behind,” he says. Regulations promoting the responsible use of artificial intelligence should also be introduced.
African fintechs will face infrastructure issues such as low internet penetration and problematic know-your-customer (KYC) systems. An obvious talent shortage and excessive reliance on cash can also stand in the way of growth.
Regulators need to step up
In order for the African fintech scene to experience monumental development, the nation’s government needs to be more proactive. Tosin Eniolorunda – CEO of Moniepoint – shares insight into what regulators can do.
“A great way to start is to create laws that support the adoption of financial technology in a way that benefits businesses. Alongside this, regulators on the continent must take a collaborative role when designing new guidelines and frameworks,” he explained.
Blockchain – a web3 offering – generated a lot of conversation last year. Although artificial intelligence may have drowned out the hype of distributed ledger technology, the latter has an important role in achieving financial inclusion for all.
“For startups looking to play in the commerce, cross-border transfer/payment space, blockchain can be a viable infrastructure to facilitate these types of transactions“, states Eniolorunda.
Nigeria approved a national blockchain policy early this month, demonstrating its intent to transform many industries. This, along with last year’s Startup Act, is among a growing list of policies to help the digital economy grow.
Although Green also sees the enormous opportunities in the use of blockchain, he is still skeptical of the government’s involvement. “Who controls the keys to power, and are there incentives for this power to be corrupted?” he asks.
