African banks and fintech companies create synergies to roll out innovative products and services.
Nothing can stop the growth of African fintech—or so it appears. Investment in African startups quadrupled from 2017 to 2018, to tally $725 million across more than 50 deals. Fintech companies accounted for 93 of those deals, including half of the top 10 deals, and 40% of the total funding generated last year.
South Africa, Nigeria and Kenya are luring the most dollars. The biggest deals for 2018 included the $70 million Series B funding for US-based Branch International, which operates in three African countries as well as India and Mexico; Nigeria-based Cellulant, which gathered $47.5 million for its payment platform and its blockchain-based digital payment tool for the agriculture sector, called Agrikore; and South African mobile-payment service Yoco Technologies, with $16 million.
Mergers and acquisitions also are starting to pick up, indicating that the market is maturing. In Nigeria, lending platform One Finance (OneFi) just bought Amplify Payments, a digital payment facility, for an undisclosed amount. Together, they plan to expand in several new markets and close another round of funding by the end of 2019.
In late 2018, Ghana-based Interpay Africa was acquired by US company Emergent Technology for an undisclosed amount. “This investment demonstrates EmTech’s total commitment to Africa and our unwavering belief in the region’s potential,” Tim Davis, Emergent Techology’s managing director, said in a statement. With this acquisition, the California-based financial services provider aims to roll out in 20 African countries by 2020.
“Fintech in Africa will continue to expand thanks to growing investments,” comments John Mitchell, CEO of payment software provider Episode Six. “New technology will leverage mobile services and will allow for financial services to become more readily available across the continent.” Unlike other parts of the world where fintech has disrupted well-established banking systems, the cash economy still largely dominates in sub-Saharan Africa. More than 80% of the continent’s population is either underbanked or has no access to banking services. African startups are essentially building from scratch, filling countless gaps in the financial system and providing new means of financial inclusion.
“We are building a new bank entirely within a virtually ignored space. The middle class in Africa haven’t been effectively banked to date and we look to change this dynamic on a permanent basis,” says Tim Nuy, CEO of MyBucks, a Luxembourg-based fintech operating in 12 African countries.
A decade ago, African mobile payments boomed with giants such as Vodafone’s M-Pesa, MTN Mobile Money and Orange Money. Today the market is much more diversified. Companies operate in a variety of fields, including payments, savings, credit and insurance. Innovative entrepreneurs and investors bet on cutting-edge technologies, such as real-time data analytics and blockchain. Instead of replicating global success stories, their strength rests with their capacity to offer tailor-made solutions that address local and specific customer circumstances, such as limited internet speeds or very low incomes. African fintechs typically aim to help users leapfrog from cash to digital transactions, and thus perceive banks as allies more than competitors. “Banks are our funding partners. Many of them focus on different segments of the financial marketplace,” says Nuy. “We can effectively coexist.”
According to the IMF, mobile money now surpasses bank accounts in sub-Saharan Africa. Banks know they must master new technologies to remain relevant. “Fintech, especially with the combination of blockchain, is most certainly a game-changer,” says James Formby, CEO of Rand Merchant Bank, which recently launched its own fintech innovation hub. “Customers will adopt services provided by new fintech providers if it serves them better.” The bank maintains a competitive edge through close attention to customer needs, Formby says, and will partner with fintechs to meet those needs.
Partnering with startups holds great appeal, and a growing number of African lenders provide funds and guidance from the very early stages. Pan-African lender Ecobank set up its own fintech fellowship, with applicants from all over the world. South Africa’s Nedbank Group created a program with Plug and Play Tech Center, a Silicon Valley startup, to foster entrepreneurship. In March, the Cape Town–based bank also launched the continent’s first application programming interface (API), to help third parties to create solutions and potentially partner with the bank.
Still, according to Crunchbase, only 43% of African-focused venture capital funds are locally run and headquartered, so the ecosystem relies on foreign backers. International investors include angels, banks, telecom operators and venture capital funds such as GreenHouse Capital, TLcom Capital Partners, DraperDarkFlow, Naspers and Orange Digital Ventures. Earlier this year, startup network Seedstars and France’s First Growth Ventures launched an Africa tech fund. The fund will invest in 30 to 40 companies each year, with an average ticket size between $250,000 and $5 million. “The strategy we have started working on is to have a fund per region of around $100 million, to be able to do deals in Series A and Series B,” says Charlie Graham-Brown, chief financial officer of Seedstars World.
Global corporates have also been taking more interest in sub-Saharan Africa. Visa and Stripe, for example, are buying shares in Nigerian payment platform Paystack. Others, like California-based Tala, a microlending mobile application, simply enter the local market. The service launched in 2014 in Kenya and today boasts $105 million in funding, including $65 million raised last year.
Although it offers tremendous opportunities, sub-Saharan Africa remains a very challenging business environment. In many countries, political and social instability makes investments risky. When there is stability, basic infrastructure like electricity or efficient networks to support internet connections are still a key challenge. Although it is making giant steps forward, Africa is still home to 21 of the 25 least-connected countries in the world, according to the World Bank, and only 22% of Africans have internet access.
“Africa is well positioned to meet its fintech and digital challenges, and with the right policies in place, it could reap a ‘digital dividend,’” writes Amadou N.R. Sy, an adviser in the IMF’s African Department, in a recent blog post. “First, policymakers need to address the existing large infrastructure gap in the region, starting with electricity and internet services. Secondly, Africa will need to balance the perennial demands of fast-moving innovation against the slower pace of regulation.”
Regulators are key actors. In South Africa, the central bank set up a special unit to monitor the emergence and impact of new financial technologies. In Nigeria, Africa’s second-largest fintech market, the central bank recently issued a policy proposal requiring fintech companies to have minimum shareholder funds between $275,000 and $14 million in order to obtain an operating license. In an industry where startups typically launch with little funds, this is a major entry barrier.
The African fintech sector still faces important obstacles, but is expected to develop exponentially. Africa is the world’s fastest-growing mobile phone market. By 2020, the continent is expected to have more than a billion mobile-phone subscriptions, offering even more opportunities for mobile-based financial services.