Fintech – reaching new heights in sub-Saharan Africa
Ashlin Perumall of Baker McKenzie Johannesburg explores the latest developments in the continent’s fintech hotbeds, including Nigeria, Kenya, South Africa and Senegal.
Despite the turbulence of the global pandemic, the African fintech ecosystem has remained on a steady rise. Ever-increasing access to mobile devices, internet connectivity and backbone network infrastructure has accelerated Africa to become the second fastest growing market for global banking and payments businesses. Seven of Africa’s nine notable tech unicorns are fintech companies, with companies such as OPay recently took the largest single investment round secured by an African-based startup at USD 570 million.
Why has African fintech been so robust, where other markets and industries have not? The African continent offers companies the opportunity to solve big problems with huge potential user bases, without major initial challenges from established or older competitors. This is because such a low proportion of Africa’s population today has adequate access to financial products, and the potential for digital distribution of solutions gained momentum together with the increase in mobile and internet access.
For example, due to a lack of interconnection in the cross-border banking infrastructure and a huge workforce of migrant workers, there was a clear need for ways to transfer money across regions safely. As a result, mobile money and third-party payment systems, in particular, have been segment leaders, with more than half of the world’s mobile money customers now based in Africa. The continent currently accounts for three quarters of the world’s mobile money and peer-to-peer transactions in volume.
Serving the underbanked and migrant workforce has also created unique pain points for innovative financial solutions in Africa. With such large pain points, the addressable user markets are huge, and with the right targeted solutions, the potential for rapid growth is significant.
As an investment segment, the fintech industry accounted for more than 25% of all venture capital rounds in the past two to three years, with South Africa joining other regional leaders, such as Egypt, Nigeria and Kenya.
During 2020 and 2021, the region also saw the majority of fintech investment capital coming from various offshore money markets, including the West Coast of the US, UK and China, as confidence in African financial innovation has increased. African fintech startups are also able to do more with dollar-based capital raisings if they have locally based operations.
The heated attention in the sector has led some to speculate whether the situation for African fintech is sustainable in the current global market, where current VC startup values have fallen. The South African payments sub-sector is already said to be saturated and ripe for consolidation. But the numbers tell a different story. In the first quarter of this year, Africa was the only region to record triple-digit growth, according to some databases that monitor venture funding, the bulk of which is flowing into fintech. The party is clearly not over yet, and it looks like there’s still plenty of room in the sky for new entrants.
All this has come at a time when the indicators globally are going in the other direction, and where venture funding is becoming more cautious. Africa’s fintech growth has therefore arguably reached a point where venture investors are looking for leaner and faster-growing opportunities, which can do more with their capital in a short period of time.
FINTECH HOT BEDS
Nigeria and Kenya have been two of the African fintech hotbeds that have received the most attention. Kenya’s fintech explosion is largely due to the overall African fintech wave following the penetration of mobile phone technology and infrastructure. Kenya’s current mobile penetration exceeds the entire country’s population by 12%. Kenya’s fintech industry was initially focused on mobile money transfer services and rode the wave of exponential market adoption between 2007 and today. By building on technology such as GSM text messaging, major players in the market were able to extend their offering to users who did not have an internet or data connection, but who had access to cell phone towers and basic mobile devices.
In the same period, financial inclusion went from 26% in 2006 to 83% of the total population today. That activity created a market within which many other fintech participants were able to diversify, and as a result, a large portion of GDP flowed through such services. This makes the regulators equally fintech-friendly and interested in being cooperative towards innovation.
Nigeria’s rise has been similar but perhaps faster in recent years. Three of the biggest African unicorns come from Nigeria, and the country dominates Africa in terms of fintech venture capital investments. This has followed some of the same drivers as Kenya in terms of mobile penetration, but has also benefited from a highly entrepreneurial tech sector and deep issues with financial inclusion. About 38 million adults in Nigeria are completely excluded financially, especially in terms of access to credit. This created the perfect conditions for dynamic fintechs to emerge with a massive potential market if successful.
South Africa, on the other hand, benefits from a robust financial and banking industry, but one that has been slow to adopt new technology and modernize older banking technology. This has led South Africa to see several trends in open banking fintechs that operate on top of current banking infrastructure, but provide more flexible payment channels.
Another country worth watching is Senegal, which produced Wave – which recently received a capital raising of USD 200 million. This is the first unicorn from the Francophone African region, with Serie A being the biggest to come out of that region to date. Examples like this show that there are still many more African regions to take off in the African fintech push.
The African fintech scene has shown incredible resilience against the pandemic and even after the turmoil in global markets in 2022. This shows that the momentum is driven not only by the availability of capital, but also by the value creation that comes with solving real problems within large user markets.
The biggest challenge fintech can face is global ‘stagflation’ and that investors are going to be more cautious in their investment choices and the risks they are willing to take. Nevertheless, while some sub-segments such as payments may be at the top (which is debatable), there is much more room in others, such as alternative lending, digital investments and new banking services. There are also many other African countries that are yet to reach the heights achieved by Nigeria, Kenya South Africa and others in their fintech development. All in all, the growth of fintech in Africa still has a lot of runway left.
Ashlin Perumall is a partner in Baker McKenzie’s Corporate and M&A Practice Group in Johannesburg.
