African fintech is developing rapidly

Over the next three years, Africa’s fintech industry is projected to reach record revenues for financial sector startups and herald a new phase of growth characterized by more advanced financial services.

The latest McKinsey report shows that revenue generated by fintech startups is set to grow eightfold to $30 billion by 2025, as Africans find digital financial solutions more convenient – ​​and cheaper – when seeking credit, making purchases, settling bills and manages expenses, than traditional. financial services.

With a maximum average penetration rate of 5% in 2020 – excluding South Africa – the report estimated that some African fintechs would generate revenues of around $4-6 billion per year by 2025 – in line with global market leaders.

“As digital becomes a way of life in Africa, the stage is set for the next phase of fintech growth,” says the report, titled Fintech In Africa: The End of the Beginning.

Fintech markets in Ghana and French-speaking West African countries are predicted to grow even faster than two of the continent’s largest startup ecosystems, Nigeria and Egypt. Ghana’s annual fintech growth is the fastest, at 15%, followed by Cameroon, Ivory Coast and Senegal. Nigeria and Egypt are tied, with growth rates of 12%.

Growth opportunities are also expected in Kenya, Morocco, Tanzania, Uganda and South Africa. The latter accounts for 40% of all fintech revenues in Africa. These 11 markets account for 70% of Africa’s GDP and half of its population.

Mature fintech markets, such as South Africa and Nigeria, will begin to move from providing wallets, payments and distribution to providing advanced services to support liquidity and regulatory aspects of business-to-business transactions.

Compliance services for mature markets

The report lists anti-money laundering and know-your-customer compliance as among new services that will begin to dominate more mature markets with more complex financial systems and digital infrastructure. For growing ecosystems, there will be an increase in offerings such as buy-now-pay-later, SME services and insuretech offerings.

However, the path to sustainability in this sector is not easy. The report says, with varying degrees of maturity in these markets, startups will certainly face important challenges to growth.

Markets with weak mobile and internet penetration, lack of identification coverage, limited payment channels and low revenues will make it difficult for startups to reach scale and build profitable business models.

Businesses will also have to navigate an uncertain regulatory environment where different markets are at different stages of developing fintech regulation – presenting complexities that can make business continuity and compliance difficult.

An increase in competition for growth funds, the report shows, also brings in a tough operating matrix. There is a decline in funding for later-stage startups on the back of reduced levels of venture capital globally and as more early-stage startups begin to disrupt the market.

Currently, 70% of fintech startup deals are funded by foreign investors – mostly from North America – with locally funded deals concentrating on early-stage startups.

“This suggests that African fintechs will likely need to tighten their belts to adapt to a new venture funding reality,” the report said.

CB Insights State of Venture Report Q2 2022 shows that global venture funding fell 23% to $108.5 billion in the second quarter of this year. This is the biggest quarterly percentage drop in almost a decade. But in terms of value, it was still the sixth largest quarter of funding ever.

Key foreign investor regions such as the US (25%), Asia (25%) and Europe (13%) recorded falls in risk funding. However, growth prospects, combined with the fundraising boom recorded on the continent since last year, could be enough to deliver more African unicorns.

“Despite all the activity seen on the continent, Africa has only produced a handful of unicorns, and the profitability of many enterprises is uncertain … With the right incentives and support, the next wonder of African unicorns is just waiting to emerge,” McKinsey said report.

Africa’s decacorn

To date, only one unicorn – KuCoin, a Seychelles-based crypto exchange that raised billions of dollars from foreign investors, pushing its valuation to $10 billion (making it a “decacorn”) – has delivered on the continent this year .

In February, Wasoko came closer to becoming a unicorn after raising $125 million from international investors, pushing the company’s valuation to $625 million.

Fintech entrepreneurs have also been challenged to develop an ambitious strategy to attract, develop and retain the very best talent in the face of high competition in and out of the market.

In addition, to build a strong, positive organizational culture that provides stability, clarity and direction, fintech companies on the continent need to strengthen their foundation of corporate governance, according to the report.