The banks of Africa are moving toward a tech-focused future.
There was a time when commercial banks in most African countries demanded that those seeking loans provide letters stamped by local chiefs and pastors. Despite producing this archaic paperwork as part of the know-your-customer regime and using title deeds as collateral, many would still be denied credit. For banks, trust was in short supply.
Today, thanks to technology developed largely by upstart fintechs, African banks are basing lending decisions on algorithms that predict the probable credit risk of customers, the majority of whom have limited or no credit history.
Luckily for commercial banks, these algorithms are often spot on, due to their use of the latest technologies like cloud-based application programming interfaces (APIs), artificial intelligence (AI), the Internet of Things and machine learning, among other technologies.
A good example is South Africa–based Jumo, which uses AI to enhance access to credit.
“Our ability to calculate risk is way better than average,” says Andrew Watkins-Ball, founder and CEO of Jumo. “This enables more people to access credit. With a cost of risk as low as 2%-4%, the firm has facilitated access to individual loans for more than 120 million people by observing behavioral patterns on large data sets.”
Fintechs have unleashed a pulsating revolution on the financial landscape in Africa. The days when fintechs were perceived as disruptors are long over. Today, they are enablers. For the continent’s nearly 1.4 billion people, about half of whom are financially excluded, fintechs have become the lifeline for financial inclusion.
Meet the Movers and Shakers
Over the past decade, Africa witnessed an unprecedented boom of fintechs, mainly fueled by foreign funding. Last year, almost two-thirds of funding for technology companies on the continent went to fintechs, according to the authors of research and intelligence company Briter Bridges’ Africa Investment Report 2021. The funding amounted to $3 billion of the more than $4.6 billion directed to the continent, a significant increase for the 576 active fintechs after attracting $1.3 billion in 2020.
South Africa, Nigeria, Kenya and Egypt are Africa’s fintech powerhouses. Other big hubs are Ghana and Uganda; while Rwanda, Seychelles, Mauritius and Tunisia are among those quickly burgeoning.
Nigeria, with over 200 active fintechs, boasts of Africa’s most unicorns, startups that have reached $1 billion in valuation. Among these rare beasts are Flutterwave, Interswitch and OPay.
“Between 2014 and 2019, Nigeria’s bustling fintech scene raised more than $600 million in funding,” says global consultancy McKinsey in a September 2020 report. In 2019, the country attracted $122 million, a quarter of the $491.6 million raised by African tech startups. The report adds that Nigeria was “second only to Kenya, which attracted $149 million.”
“Fintechs are uniting Africans in a push towards financial inclusion and putting Africa on the map,” says Clayton Hayward, CEO of Ukheshe Technologies, a fintech based in South Africa. He adds that the continent’s massive potential has made it attractive for investments.
This amount of investment in Africa’s fintechs is mind-boggling. For example, Nigeria’s OPay and Flutterwave were among the top funding recipients last year, raising $400 million and $170 million respectively. Others were South Africa’s Jumo and TymeBank, which attracted $120 million and $180 million respectively, while Kenya’s Tala received $145 million.
Jumo views the funding offers as the necessary muscle to continue innovation and expansion. Apart from growing its tech team, the company intends to broaden its product offerings, partner with global banks and enter at least two new markets in 2022. It also plans to introduce larger and longer-term lending options for merchants and bigger businesses. Notably, the fintech’s platform has been used to make 120 million loans, totaling $3.5 billion, to more than 18 million people and small companies in Côte d’Ivoire, Ghana, Kenya, Pakistan, Tanzania, Uganda and Zambia.
“The investment coming into this space is helping fintechs scale up, reach more people and have wider impacts,” notes Eliutherius Juma, CEO and co-founder of Kenyan startup Paylend. The fintech, which raised a $2 million seed investment at the end of 2021, expects the funds will let it expand its business geographically.
Fintechs’ game-changing effects in Africa are indisputable. The startups have not only opened the floodgates to credit access; they are also redefining every aspect of finance, such as payments, savings, e-wallets, remittances, mobile and online money services, wealth management, merchant services, card business, investments, insurance and digital assets, among other business lines.
The fintechs’ impact simplifies complex systems on processes. In South Africa, Ukheshe is deploying APIs to enable commercial institutions to become nimbler and more responsive to customer needs. Its platform lets banks and other institutions, including telecoms, plug in instead of investing significant amounts in internal systems.
“We offer solutions that can be integrated via a single integration point,” says Hayward. He adds that such a technology model allows financial institutions to stay ahead of digitalization while keeping the cost to the customers low and ramping up services in a fast, simple and secure way.
In Kenya, Paylend is providing micro, small and midsize enterprises (MSMEs) with the digital tools to operate smoothly and profitably, according to the fintech. The tools enable MSMEs to access affordable credit easily and quickly, thus allowing them to have liquidity and guaranteeing business continuity.
In Egypt, Dayra is facilitating cost-effective payments for unbanked gig workers. According to the company’s internal estimates, the gig- and informal-worker market in Egypt is huge at between 40% and 50%. “By helping these people receive payments digitally, we are fostering a sense of financial security and improving their lives,” explains Omar Ekram, Dayra founder and CEO.
Shifting Into High Gear
For years, Africa’s fintech boom has been driven by a relentless, young and tech-savvy crop of entrepreneurs committed to innovation. Their zeal has gotten impetus from favorable regulations and foreign funding.
Covid-19 has added another dynamic in terms of urgency to digitalize operations. The effects have been particularly profound among commercial banks, which have been forced to accelerate their digital transformations, especially in payments. Africa remains a cash-centered continent, with an estimated 90% of retail transactions in sub-Saharan Africa cash based, according to data from McKinsey. However, the pandemic has instigated a significant shift from cash toward digital transactions.
The authors of the GSM Association’s State of the Industry Report on Mobile Money 2021 contend that the boom of mobile money in Africa has been phenomenal. The authors report that mobile money transactions in sub-Saharan Africa amounted to $490 billion in 2020, while the region accounted for 66% of the total 44.1 billion global transactions.
Although Africa continues to witness the mushrooming of new fintechs, the industry is entering a state of equilibrium. In fact, the coming years could usher a season of consolidation. Fintechs like Ukheshe have made it clear they want to scale up through acquisitions. The startup is seeking to raise $100 million to implement this strategy. “To fast-track our goal to scale across the continent, strategic acquisitions and consolidation make sense,” notes CEO Hayward.
While continental deals are expected to increase, global fintechs also use acquisitions to enter Africa. Some notable acquisitions include WorldRemit paying $500 million for Sendwave and US fintech Stripe paying $200 million for Nigeria’s Paystack in 2020. “These kinds of deals will increase in the next few years,” says Jumo’s Watkins-Ball.
No doubt, the fintech star in Africa is bound to continue shining. However, the industry is not without its fair share of challenges. Low digital literacy, for instance, has bred a lack of trust among a large swathe of the population. In fact, with rising fraud cases and data breaches, system security remains a significant concern. Also, low internet penetration continues to be a barrier, particularly in rural parts of the continent.