The African Fintech Market Takes Off – BRINK – Conversations and Insights on Global Business

The fintech sector in Africa is the only VC market to post double-digit growth this year – at a time when the rest of the global VC market has slowed down.

According to Ashlin Perumall, partner at Baker McKenzie in Johannesburg, the strong influx of capital is due to Africa’s rapidly growing user base and better internet access across the continent.

PERUMALL: The African fintech community has reached an inflection point that was particularly noticeable in 2022. While the rest of the world experienced a decline in venture capital funding in the 1st and 2nd quarters, African fintech expanded and also held firm in terms of fairly serious valuations.

Part of this is due to the growth of supporting industries around fintech, and that includes the telecoms industry, the penetration of mobile devices across the continent, but also the appetite of African consumers as they move up the value chain. There is a greater appetite for wider financial resources and a much larger user base than in recent years.

Africa has reached the point where it is being taken seriously, not only by investors on the African continent, but also by offshore investors coming from the West Coast of the United States, the United Kingdom and some parts of the APAC region. That influx of capital has both had an environmental effect – many of the fintechs that have been successful have been regional players – and I think it has also increased the appetite for international investors to get on the scene.

BRINK: Where does the investment capital come from? Is it mostly the US? Is it European?

PERUMALL: It depends on which stage financing we are talking about. When it comes to fintechs that are relatively young, so pre-seed or seed-stage financing, it’s almost equal between onshore financing, that’s African financing, and offshore financing that comes from North America, and then in a lot to a lesser degree, the Middle East, the Mediterranean, and a smaller percentage of Europe and a very small portion of that coming out of the Asian regions.

When you get to the growth stage, i.e. Series C and D, that’s when we see funding from North America, especially the West Coast, taking over as more than half of the funding source. By and large, Series C and Series D funding comes from the US

Payments have the greatest growth

BRINK: What are the most promising areas in the sector?

PERUMALL: The biggest growth has been in payments. This includes, for example, mobile wallets, cross-border payments and remittances and third-party payment providers. I would say that more than a quarter of the fintech market is the payments area.

For example, Senegal recently had a massive funding round for one of its largest fintechs, which has now reached the unicorn stage, showing that payments still have room for growth in francophone Africa.

What I want to see going forward will be peer-to-peer lending, that is lending between intermediaries without necessarily a bank or other financial institution being part of the mix. You will provide platforms where individuals can seek loans from other individuals with capital and the creation of platforms to allow such lending opportunities. The lending space is one that has a lot more headroom to grow.

It has truly revolutionized what households are able to achieve with their financial wealth and the financial services they have access to

Another area that is untapped at this stage is digital banks, i.e. digital banks that are not physical or new banks. We have seen that growth in Southeast Asia and Singapore, but in Africa not so much. There are many opportunities, I believe, still on the table for new digital banks to start emerging on the African continent.

Insurtech is starting to take off

Another area that is also quite relevant, but definitely not that big yet, is insurtech. Until now, insurtech in Africa has been a case of current incumbent insurance providers digitizing the offering of insurance products, including aggregate insurance – so insurance products, not just for your vehicles, but also for your home and other assets are now being bundled under single providers.

Then there are the relatively new providers of point-of-sale insurance. These are insurance products that are offered, for example, on e-commerce sites and also short-term insurance at the point of sale. There is much more growth in some of these other pillars as well.

Social insurance is a new innovative business model emerging in Africa in the insurance industry. It involves being able, as a small institution or individual, to participate in the insurance industry by providing venture capital to these insurance products, and then providing it to users on the other end via social platforms that have been created.

The network effect increases the standard of living

BRINK: Presumably all this ecosystem that you describe can have a transformational effect on economic development in Africa?

PERUMALL: Kenya, for example, about 10 years ago, had a bank-to-adult penetration of about 26%. Thanks to the fintech that emerged in their country, which used the telecom infrastructure to provide banking and payment options, without even having a computer connection, bank-based financial inclusion has gone up to 83%.

Fintech’s ability to allow you to save money, raise money and keep money allows other financial factors to come into play. This could be financial products such as investments, better opportunities to increase savings and deposits, or more financial products outside of consumer-based use of these payment systems.

The network effect of that is that it allows individuals to grow economic wealth per capita, increase opportunity per household and gain access to more resources, gain access to more services that would previously have been possible. I was at a recent conference where it was commented that every single household should get a mobile phone as a means of service delivery because of the impact it has based on what the fintech economy has created on the African continent.

It has truly revolutionized what households are able to achieve with their financial wealth and the financial services they have access to that they would not have had access to had it not been for these innovations.

BRINK: Which countries have the greatest growth potential in fintech?

PERUMALL: I would say the geographic hotspots are the larger economies, so South Africa is high on the list. Almost twice the size in terms of venture capital rounds would be Nigeria. I think Kenya is close behind and then Egypt and they are the lion’s share of the fintech market.

The rest of Africa, I would say, contributes about as much as the four countries. But others will include Ghana, where Senegal is a francophone country coming online. Then, to a much lesser extent, countries like Ethiopia. I would say that a real shift at the moment is to non-Anglophone countries as new sources of investment.

And if you look at Africa on a regional basis, there are huge markets. The challenge is the lack of portability of your licenses and workforce. For example, if you have Kenyan fintech experts that you need in Angola, you need to move those experts between jurisdictions.

If that can be unlocked and we can get more harmonization between the different licensing and financial regimes that underpin some of the fintech players’ compliance obligations, you can unlock wider markets. It will immediately make fintech matters much more palatable in the long term. That’s where we’re going to see the biggest potential, like African Continental Free Trade Agreement begins to come into life.