With only 4% reaching series-C funding, African FinTech must learn to scale and not exist solely in siloed markets, by investing in understanding regulations, procuring licenses, developing teams on ground, adapting business models says Caio Anteghini at BCG.
Africa is one of the fastest growing fintech markets with revenue forecasted to grow 13-fold to $65-billion by 2030. In addition to the revenue opportunity, fintech plays an important role in developing the region’s economy and improving the lives of African people by revolutionising the financial sector.
Boston Consulting Group, BCG, in collaboration with Elevandi, highlights how to further advance financial inclusion on the continent and explore advancing the fintech industry and unlocking its full potential in the years to come.
The report, Driving Financial Inclusion in Africa, unpacks the growth of financial inclusion in Africa since M-Pesa was founded in Kenya in 2007. While some large economies, South Africa, Kenya, Uganda and Ghana have made significant progress in financial inclusion, there is still a long way to go and significant opportunity which supports the continuous high investment in African fintech.
“The first wave of fintech, driven by mobile money and payment solutions have already enabled a step change in financial inclusion and trust in digital solutions. A second wave of fintech with a wider product offering can now leverage the platforms created to access a broader population and further accelerate financial inclusion,” says Caio Anteghini, Partner at BCG, Johannesburg.
The report also explains the different business models that fintech can thrive in, in this context, and while many of them are disrupting the financial sector, there are several opportunities for collaboration between incumbent players and fintech. 40% of African fintech are focused on digitally enabling existing financial institutions instead of competing against them.
Lending next driver
The report suggests that payments and lending will be the drivers of further financial inclusion, and the key areas of investments in the coming years.
Payments fintech were the first movers representing 45% of companies pre-2013. This segment is yet to reach its full potential by continuing to solve for critical African pain points such as financial inclusion and the high cost of transactions.
Lending will join forces with growth centred around microfinance, a great enabler of financial inclusion. Local businesses need basic credit for day-to-day activities and capital investments but often do not have the tools or credentials to go through traditional channels.
For fintech, it makes sense to focus on this small to medium-sized enterprise, SME segment due to the sizes of loans, broader scale, and financial transparency. One example of successful microlending is JUMO World, which is building banking infrastructure with a focus on assessing the credit worthiness of SMEs.
The report finds that fintech enabling financial institutions, receive more funding on average, than those that adopt disruptive business models, indicating a shift in the ecosystem.
Competitive strategies
There are four winning strategies for fintech and the appropriate support governments could provide to enable them to flourish:
- Fintech providing specific services via existing platforms
- Distributing a full-fledged solution via existing platforms
- Creating a new platform starting in niche segments
- B2B solutions could lead to the next wave of growth for incumbents and new entrants
“Policymakers can be a huge catalyst to the fintech industry by developing the infrastructure and favourable regulatory environment,” says Pat Patel, Executive Director of Elevandi.
When it comes to specific applications for improving financial inclusion, they can further support advancements by acting in four areas:
- Awareness campaigns to increase literacy
- Institutional support and investment
- Launching data-sharing platforms
- Unlocking funding will also aid advancements
On top of the infrastructure created in the first wave, greater adoption of smartphones, better connectivity, and cloud adoption in front-running countries will be instrumental to the second wave of growth.
Fast growing local market
In another report, Unlocking the Fintech Potential in Africa, BCG and Elevandi examine the benefits that fintech has brought to Africa and the business models that fintech and investors need to create to scale up activities.
Almost half of the 1,000 fintech in Africa were founded in the past six years. Cumulatively, they have raised about $6-billion in equity financing since 2000, with investment growing at an incredible compound annual growth rate, CAGR of 57% versus 27% for the rest of the globe.
At the same time, the African fintech ecosystem is still nascent, with approximately 80% of rounds since 2018 at seed- or angel-level maturity. However, investors and fintech need to address three key challenges to attract funding:
- Identify an economically viable model that caters to African-specific challenges and is affordable
- It can scale beyond its home market given relatively small market sizes
- It mitigates risks inherent to the developing continent
Current fintech are heavily centred in Africa’s largest economies, with approximately 63% of all companies located in South Africa, Nigeria, Kenya, and Egypt and nearly 80% of funding flowing into these markets.
Scaling cross borders
“This shows that the African market is already an attractive ecosystem to new entrants capturing a share of the unserved or underserved segment. However, to continue attracting new entrants, fintech must be able to scale across Africa, and not solely exist in siloed markets,” adds Patel.
Few fintech have been able to do so in the continent, where just 4% have reached series C funding or beyond, versus 11% for the rest of the world.
To successfully move across borders, these companies will need to invest in understanding regulation, procure the appropriate licenses, likely adapt their business model, and develop a team on the ground to successfully execute their value proposition in the new market.
“Fintech have been playing an important role in driving financial inclusion and economic development in their home countries. With the development of digital infrastructure and policy clarity and harmonisation, they will be able to extend their impact both in their home country and cross-border, and benefit even more people across the continent,” says Anteghini.
This growth does depend on key changes as fintech and investors face several hurdles, including high costs and different regulations in each jurisdiction.
Five areas that require attention:
- Digital infrastructure
- Policy harmonisation
- Policy clarity
- Developing local capital markets
- Growing local talent pool
In recent years, the war for talent has intensified and Africa is struggling as some of its top talent has moved overseas tempted by higher salaries. At the same time, attracting foreign talent is difficult due to long, stringent visa procedures and lower liveability scores.
It is crucial to reverse these trends, however, as the African education system is likely to only produce 50% of the skilled workers it requires. Fintech have demonstrated their ability to succeed throughout the first stages of a company life cycle, but further scalability is unfeasible with current supply.
The high unbanked and underbanked population, accelerating mobile and Internet penetration, and an increasing need for financial inclusion across the region present a great opportunity for fintech companies.
If policymakers can foster the right environment for fintech to grow and financial inclusion to expand, it will ultimately foster long-term financial inclusion, efficiency, and quality of life, which will turn into taxes, economic growth, and capacity to reinvest.
Key takeaways
African fintech and cross border scaling
- Almost half of 1,000 fintech in Africa were founded in past six years.
- African fintech have raised about $6-billion in equity financing since 2000.
- Investment in African fintech is growing at incredible CAGR of 57% versus 27% for rest of world.
- African fintech ecosystem is nascent, with 80% of rounds since 2018 at seed- or angel-level maturity.
- Fintech are centred in Africa’s largest economies, with 63% of all companies located in South Africa, Nigeria, Kenya, Egypt and 80% of funding flowing into these markets.
- To move across borders, companies will need to invest in understanding regulation, procure appropriate licenses, adapt business model, and develop team on the ground.
- Growth depends on key changes as fintech and investors face several hurdles, including high costs and different regulations in each jurisdiction.
African fintech and payments, lending
- Payments fintech were the first movers representing 45% of companies pre-2013.
- This segment is yet to reach full potential by solving pain points such as financial inclusion and high cost of transactions.
- Some large economies, South Africa, Kenya, Uganda, Ghana have made progress in financial inclusion, but there is still long way to go
- Lending will join forces with growth centred around microfinance, a great enabler of financial inclusion.
- 40% of African fintech are focused on digitally enabling existing financial institutions instead of competing against them.
- Fintech enabling financial institutions, receive more funding on average, than those that adopt disruptive business models.
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