African fintech takes up the challenge
Vendors selling vegetables at the Kasoa market in Accra, Ghana. Photo by: Dominic Chavez/IFC
This article was produced by IFC.
When Nigeria went into lockdown to limit the spread of the coronavirus in 2020, Michael Terver managed to keep his small internet cafe afloat – and help friends and customers navigate new financial challenges – by partnering with a fintech company to offer online banking services.
Before the global pandemic, most of Terver’s cafe customers did not have bank accounts and preferred to buy and sell with cash. But in a world of social distancing where most transactions were impossible in person, his customers could go digital using an all-in-one online system at his cafe to pay bills, apply for microloans, transfer money and deposit earnings .
The system, Quickteller Paypoint, was launched by Nigerian fintech Interswitch in 2016 to help individuals, as well as micro and small businesses, convert to cashless transactions.
“Having Quickteller Paypoint in my cafe came to the rescue,” says Terver. “The lockdowns did not allow businesses to operate as usual, thus affecting cash (payments). Our Quickteller automatically became a replacement (for cash transactions) because keeping security was paramount.”
Terver is a small part of a large phenomenon. The confluence of finance and technology, known as fintech, is rapidly changing the way money moves among individuals and businesses around the world, especially in Africa. North Africa and the Middle East have recently seen the strongest growth in fintech transaction volumes globally, up 40% in 2020, while sub-Saharan Africa increased by 21%, on par with North America.
Over the past decade, fintech has helped 1.2 billion unbanked people access financial services, reducing the unbanked population worldwide by 35%. By expanding financial inclusion, more people and small businesses can save money, receive government payments, do business and secure their wages safely.
“Fintech investments are growing much faster in emerging markets compared to more developed markets because they are responding to an important market gap. We expect this growth to continue,” said Aliou Maiga, IFC’s Regional Industry Director for the Financial Institutions Group in Africa. “For the first time, micro-enterprises and individuals with very limited financial assets save money in a safe place, transfer funds without crippling fees, even take out small manageable loans that allow them to expand their income. This has been a game changer in our work to increase financial inclusion and eradicate extreme poverty.”
Room to grow
The African fintech market has room to expand further. Only around 20% of adults in sub-Saharan Africa have a debit or credit card compared to more than 80% in developed economies. Cash remains king in many rural and underserved urban communities, creating higher costs, difficulties in buying and selling goods, and a higher exposure to theft and fraud.
Traditional banks have been reluctant to offer services to individuals with small incomes and limited savings – but the millions of unbanked people are a major economic force that makes digital banking an attractive solution.
The continent’s diversity of small businesses can also benefit from fintech. The World Bank estimates that SMEs account for 90% of businesses supported by around one billion Africans and create seven out of 10 jobs.
The continent has a large informal business sector that was particularly hard hit by the pandemic. Fintech has helped micro, small and medium enterprises (MSMEs) stay afloat and continue to recover by offering online transactions for small amounts, as well as microloans and online platforms.
For example, in South Africa, Adumo, an IFC-backed company, is enabling small businesses to grow by accepting digital payments for the first time.
Growth in the sector continued in 2021 with reports that venture capital technology funding in Africa tripled to more than $5 billion, surpassing all other regions in the world. Most of the funding – 63% amounting to $3.3 billion – went to fintech.
IFC has been a key investor in Africa’s fintech space, having invested in Nigeria’s Interswitch, Egyptian e-payments platform Fawry, West Africa-based mobile money operator Wave, South Africa’s Adumo and Lulalend, and pan-African player TerraPay.
Pandemic pressure
Although fintech has been available since the early 1990s, the Covid-19 pandemic helped spur outreach to unbanked and vulnerable communities, especially when shutdowns limited the ability to conduct cash transactions. In a global survey co-authored by the World Bank, two-thirds of fintech companies reported that they changed their business models during the crisis by reducing fees, revising criteria for loans, easing payment requirements and offering additional information services.
For example, payments infrastructure company TerraPay expanded into North America to facilitate affordable same-day financial transfers from Africans working abroad. Also during the pandemic, fintech giant Tutuka, which has since merged with Paymentology, faced the rapidly growing demand for digital cards used by companies and governments to pay remote workers, provide welfare benefits and issue insurance payments. IFC supports these and other fintech services through direct and indirect investment in funds such as Helios, Partech and Apis Partners. Interswitch, for example, is supported by Helios and LeapFrog.
In the coming years, fintech is likely to become even more integrated into African economies as both businesses and customers recognize the long-term benefits of digital transactions.
Analysis in a McKinsey & Co report published in August found that fintech is providing more affordable services to customers with “transactional solutions [that] can be up to 80% cheaper, and interest on savings up to three times higher than those offered by traditional players, while the cost of transfers can be up to six times cheaper.”
Companies such as Lulalend, which enables small businesses to apply online for funding, believe fintech is central to the continent’s future growth.
“Fintech is transforming Africa by empowering business owners to manage cash flow better than ever before. It gives businesses every chance to succeed, and successful businesses improve the economy and help create jobs,” said Trevor Gosling, CEO of Lulalend.
