Fintech is a path to democratized financial services

Thabiso Foto, CFO, Founders Factory Africa

Fintech has played a significant role in democratizing access to financial services across Africa over the past decade. Improved access includes the ease of use and quality of these services, with most fintech solutions targeting the underserved population, including youth, women, low-income earners, rural communities and SMMEs. These groups have faced many barriers to access banking, credit, savings and investment solutions from large banks and other financial institutions.

By solving some of Africa’s biggest challenges, we create not only impact, but also new business models, markets and sectors that will deliver positive commercial results.

According to the IFC, in 2011, only 23% of Africans had access to a formal bank account. In the decade since, this number has grown to 43%, much of which can be attributed to fintech and mobile money solutions developed since 2011. By bringing more people and businesses into the financial system, we not only improve household incomes and well-being. -be, but we are also creating a new group of consumers and producers who will contribute to GDP growth. For example, in 2021 Kenya is reported to have a financial inclusion rate of 83.7% in services and products, a jump from 26.7% in 2006, mainly driven by new financial technology and innovations, particularly in mobile money and mobile banking.

Founders Factory Africa has to date supported 57 startups since its inception in 2018. Of these, 27 are fintechs, including OkHi, a smart addressing and verification platform that identifies customers based on their mobile number and GPS. Zazuu, meanwhile, is building an end-to-end remittance marketplace that lowers the cost of remittances to sub-Saharan Africa.

EasyEquities is a great example of an investment platform that has democratized retail investing by lowering barriers for first-time investors. By fractionalizing shares, they made them more affordable, removed minimum limits on the initial investment amount, simplified the investment language and made the platform super easy to use for first-time investors.

Six years since its inception, EasyEquities now has more than 1.6 million users with platform assets of R37 billion, reported revenue of R214 million (up 24% from 2021) and profit before tax of R80 million. Purple Group, the parent company, reported a 92% increase in total earnings per share in a down market, and a significant portion of this can be attributed to common stocks. Financial inclusion is not just an ‘impact story’. It benefits everyone. EasyEquities is making great strides in enabling more South Africans to start building wealth through investment and ultimately reducing the wealth gap in South Africa.

The success of these fintech startups has been driven by their ability to address an underserved need in the market. They not only solve financial inclusion for individuals, but also for companies. To date, major banking institutions have partnered with or acquired fintechs to improve the distribution of their financial products to markets they have not been able to reach before, while increasing their share of revenue.

Large commercial banks are competitively trying to retain market share, with fintech companies challenging their previously entrenched positions. In response to these fintech pressures, large companies are engaging in M&A activity for a variety of reasons, including access to disruptive intellectual property and technology products, scarce technology talent, and increasing speed to market. In South Africa, Capitec, South Africa’s third largest bank by market capitalization and among the 20 largest banks in Africa and the Middle East in December 2022, added EasyEquities to its banking app in 2020.

For SMEs and startups, which are traditionally considered risky and are either excluded from traditional financial institutions or access these services at exorbitant costs, fintech has been at the forefront of developing innovative solutions to increase the access, quality and use of financial services.

In 2020, Founders Factory Africa invested in Asaak, a Ugandan fintech startup that partners with mobility and e-commerce platforms to make motorcycle ownership easier for bikers who make a living operating boda bodas (motorcycle taxis). In the same year, Asaak gave loans up to $419k; in 2021 this grew to $2.1 million, and in 2022 they reported loan disbursements of $6.9 million. Over the past 3 years, Asaak has disbursed more than 11,000 loans to micro-enterprises that traditional credit checks would otherwise have screened out. By leveraging technology and using responsible and innovative tools to assess creditworthiness, they have achieved this success while maintaining a collection rate of 95%, better than industry standards.

While we have seen progress in innovation and financial inclusion since 2010, there is more work to be done.

According to the Global Findex Database, the gender gap in mobile money ownership is slowly closing globally, but other markets are lagging behind, particularly in MENA. Sub-Saharan Africa reported a 12% gender gap in account ownership in 2021, while North Africa and the Middle East reported a 13% gap, double the developing economy average and three times the global average. Meanwhile, in East Asia and the Pacific, the gap is 3% and 7% in Latin America and the Caribbean. About 75% of African tech startups shut down before raising a Series A round due to lack of funding, and we still have a $330 billion MSME funding gap in Africa.

To address the above gaps, a systems thinking approach is required to challenge the status quo, change mindsets and explore transformative cross-stakeholder interventions that improve economic participation by all members of society.