Fintech – reaching new heights in sub-Saharan Africa
Ashlin Perumall of Baker McKenzie Johannesburg explores the latest developments in the continent’s…
Ashlin Perumall of Baker McKenzie Johannesburg explores the latest developments in the continent’s fintech hotbeds, including Nigeria, Kenya, South Africa and Senegal.
Despite the turbulence of the global pandemic, the African fintech ecosystem has remained on a steady rise. Ever-increasing access to mobile devices, internet connectivity and backbone network infrastructure has accelerated Africa into the second fastest market for global banking and payments businesses. Seven out of Africa’s nine notable tech unicorns are fintech companies, with companies like OPay recently taking the single largest investment round secured by an African-based startup at USD 570 million.
Why has African fintech been so resilient, where other markets and industries have not? The African continent presents the opportunity for companies to solve big problems with vast potential user bases, without much initial challenge from incumbents or legacy competitors. This is because such a low proportion of Africa’s population currently have adequate access to financial products, and the potential for digital deployment of solutions took off alongside the rise in mobile and internet access.
For example, due to a lack of interconnectedness in the cross-border banking infrastructure and a huge migrant labour workforce, there was a clear need for ways to transmit money across regions safely. As a result, mobile money and third-party payment systems, in particular, have been segment leaders, with more than half of the world’s mobile money customers now based in Africa. The continent currently accounts for three quarters of the world’s mobile money and peer-to-peer transactions by volume.
Servicing the underbanked and migrant workforce has also created unique pain points for innovative financial solutions in Africa. With such vast pain points, the addressable user markets are huge and with the right targeted solutions, the potential for rapid growth is significant.
As an investment segment, the fintech industry made up more than 25% of all venture capital rounds in the last two to three years, with South Africa joining other regional leaders, such as Egypt, Nigeria and Kenya.
Across 2020 and 2021, the region also saw the majority of fintech investment capital coming from various offshore money markets, including west-coast United States, the United Kingdom and China, as confidence in African financial innovation has risen. African fintech startups are also able to do more with dollar-based capital raises if they have locally based operations.
The heated attention in the sector has led some to speculate whether the situation for African fintech is sustainable in the current global market, where current VC startup valuations have been falling. The South African payments sub-sector is already said to be saturated and ripe for consolidation. But the figures tell a different story. In the first quarter of this year, Africa was the only region to record triple digit growth, according to some databases monitoring venture funding, and the bulk of this is pouring into fintech. The party clearly isn’t over just yet and it looks like there is still plenty of room in the sky for new entrants.
This has all come at a time when globally the indicators are going in the other direction, and where venture funding is starting to become more cautious. Africa’s fintech rise has therefore arguably arrived at a point when venture investors are looking for leaner and faster growing opportunities, that can do more with their capital in a short period.
Nigeria and Kenya have been two of the African fintech hotbeds garnering the most attention. Kenya’s fintech explosion is largely because the general African fintech wave followed the penetration of mobile phone technology and infrastructure. Kenya’s current mobile penetration surpasses the country’s entire population by 12%. Kenya’s fintech industry was originally focused on mobile money transfer services and rode the wave of exponential market adoption between 2007 and today. Building on technology akin to GSM text messaging, major players in the market were able to expand its offering to users who did not have internet or data connection, but had access to cellular phone towers and basic mobile devices.
In that same period, financial inclusion went from 26% in 2006 to 83% of the total population today. That activity created a market that many other fintech entrants were able to diversify within and as a result, a large portion of GDP flowed through such services. This makes the regulators similarly fintech friendly and interested in being cooperative towards innovation.
Nigeria’s rise has been similar, although perhaps more rapid in the last few years. Three of the largest African unicorns come from Nigeria, and the country is dominant in Africa in respect of fintech venture capital investments. This has followed some of the same drivers as Kenya on mobile penetration, but has also benefitted from a highly entrepreneurial technology sector and deep issues in respect of financial inclusion. About 38 million adults in Nigeria are completely financially excluded, particularly when it comes to credit access. This created the perfect conditions for dynamic fintechs to emerge with a massive potential market if successful.
South Africa, on the other hand, benefits from a robust financial and banking industry, but one that has been slow in terms of adoption of new technologies and modernising of legacy banking tech. This has led to South Africa seeing additional trends in open banking fintechs that are operating on top of current bank infrastructure but providing more nimble payment channels.
Another country worth watching is Senegal, which produced Wave – which recently received a USD 200 million capital raise. This is the first unicorn from the Francophone African region, with its Series A being the largest to come out of that region to-date. Examples such as this demonstrate that there are still a lot more African regions yet to take off in the African fintech push.
The African fintech scene has shown incredible resilience to the pandemic and even after the turmoil in global markets in 2022. This goes to show that the momentum is not only driven by the availability of capital, but also by the creation of value that comes with solving real problems within large user markets.
The biggest challenge fintech may face is global ‘stagflation’ and that investors are going to be more careful in their investment choices and the risks they are willing to take. Nonetheless, while some sub-segments such as payments may be in their peak (which is debatable), there is a lot more room in others, such as alternative lending, digital investment and neo-banking. There are also many other African countries that have not yet reached the heights achieved by Nigeria, Kenya South Africa, and others that are in their fintech development. All in all, the growth of the fintech in Africa has a lot of runway still left.
Ashlin Perumall is a Partner in Baker McKenzie’s Corporate and M&A Practice Group in Johannesburg.