US-Africa summit: African fintech flourishes despite challenges
“From December 13 to 15, the United States will host the US-Africa Summit. This is only the second time the United States has convened such a high-level, high-stakes Africa-centric event. Given Africa’s growing importance and the high expectations surrounding the summit, CSIS Africa experts (of which I am one) are highlighting urgent thematic areas to be considered during these proceedings.” (See link to all our features, comments and events on this auspicious occasion viz. My contribution viz is on African fintech.
Fintech startups in sub-Saharan Africa are growing phenomenally despite countless challenges. Cash remains king in most African markets, as more than half of all Africans remain unbanked or underbanked, presenting an opportunity for fintechs to digitize payments.
The African electronic payments market will grow by 20 percent each year to $40 billion by 2025, according to Mastercard, while the industry is only expected to grow by 7 percent globally over the same period.
But progress is slow. The US should align its trade and foreign policy with the region’s continental framework, especially on the digital economy, to increase the pace
Venture capital (VC) funding for SSA fintechs grew 894 percent year-on-year to $1.6 billion in 2021, accounting for 61 percent of the $2.7 billion VC funding of African tech startups in the year. African fintechs could earn revenues of up to 8 times the current level of around $4 billion (2020) to $30.3 billion by 2025, according to McKinsey, as they deliver better value than traditional financial services at lower costs.
VC funding for SSA fintechs
Active investors in African technology startups
Progress varies between countries in the region, with Kenya leading on most fronts. Factors underpinning African fintech growth are increasing smartphone ownership, lower internet data costs, more internet bandwidth, urbanization of populations and a swelling youth demographic.
Also Read: Fintech Shows Strong In Nigeria With N576 trn Transactions In 6 Months
Blockchain and cryptocurrency technology, payments and wallets are expected to be the fastest growing segments of fintech in Africa, according to McKinsey, with expected compound annual growth rates of 50 per cent, 20 per cent and 20 per cent respectively in 2020-25. The most attractive fintech markets are Nigeria, Ghana, South Africa and Egypt, mainly due to their relatively larger economies, better technological infrastructure and concentration of talent. Francophone Africa too, as its regional monetary framework offers opportunities to scale efficiently.
Regulatory volatility and variation are major concerns, which together with the diversity of currencies across more than 50 markets, weigh on African fintechs’ ability to scale profitably across borders. Nevertheless, the regulatory environment has improved, with more than 90% of the region’s markets having robust regulatory regimes for digital payments.
Know-your-customer (KYC) processes are problematic, as national identification systems are unreliable in all but a few African countries, as are physical address systems. Technical infrastructure also remains largely weak across the continent. Scarce talent is also a constraint, as more and more skilled hands increasingly prefer to work abroad, where the wages are more attractive.
Profitability may also take longer than expected, as customers acquired with expensive marketing strategies are difficult to monetize thereafter. These restrictions do not seem to deter international investors, especially American ones, who dominate subsequent VC funding of African fintech.
Nevertheless, foreign VC funding is beginning to decline due to tighter global markets in general, with VCs expected to increasingly seek efficiencies for which African markets are not well suited. The African Continental Free Trade Agreement (AfCFTA) Protocol on Digital Trade and the Pan-African Payment and Settlement System (PAPSS) will eventually ease some of the intra-African restrictions on payments and talent mobility. But progress is slow. The US should align its trade and foreign policy with the region’s continental framework, especially on the digital economy, to increase the pace.
An edited version was first published by the Africa Program of the Center for Strategic & International Studies in Washington DC. See the link namely:
