From the advent of M-Pesa until the present day, African fintech has been about building accessibility to basic financial services, but now the rails are increasingly in place, there is room for serious innovation in all numbers of areas.
Disrupt Africa recently partnered AZA Finance, Revio, EMURGO Middle East & Africa, and MoneyHash to release a two-part podcast series looking at Africa’s fintech sector – the innovations that are being built, the challenges they are overcoming, and the support and funding ecosystem that is driving fintech’s growth on the continent.
Fintech is big business indeed in Africa, as it is globally, but its relevance in Africa is all the greater because of the fundamental issues surrounding access to financial services on the continent.
Last year, Disrupt Africa released the fourth edition of its fintech-focused research publication Finnovating for Africa, which placed the sector at the very heart of Africa’s tech innovation space. It tracked 678 active fintech ventures, far more than any other vertical, and a number that represented growth of 18 per cent from the previous edition of the report in 2021.
The fintech sector also leads the continent for funding. Since Disrupt Africa began tracking funding in the African tech startup space in 2015, 540 fintech startups from 25 countries have raised an extraordinary US$3.6 billion, three times more than any other sector. Total investment per year has been on a fairly steady upward trajectory since 2016, yet growth has been especially impressive in the last two years. The number of funded ventures has almost doubled since 2021, and more than US$2.7 billion has flooded into the ecosystem in the last 24 months.
Not only are African fintech startups more likely to raise funding than their peers, they are also more likely to be acquired, or accepted into accelerator programmes.
The high levels of activity – and investment – in the African fintech sector come as no surprise. Financial exclusion is high – over 350 million adults in Sub-Saharan Africa live cash-to-cash, with no bank account. Approximately 500 million people do not have proof of legal identity, something most banks require to open an account in the first place. Drill down into other, more developed forms of financial services, and the figures are even worse. Insurance penetration, for example, hovers around the two per cent mark.
Shogo Ishida is co-CEO of EMURGO Middle East & Africa, which invests and partners with Africa-focused enterprises, startups, and accelerators to foster the development of socially impactful solutions on the Cardano blockchain. He lays out the scale of Africa’s lack of financial inclusion.
“The current statistics presented by the World Bank say 35 per cent of individuals over the age of 14 in Sub-Saharan Africa possess a bank account – that means two-thirds of the population is without a bank account. A substantial percentage of the population still grapples with financial exclusion, which includes mobile money access,” he said.
“Unfortunately only 69 per cent of individuals in Sub-Saharan Africa have valid identification. Without the ability to provide a verifiable personal identity regarding basic KYC, this significantly restricts access to financial services.”
Fintechs, or so they believe, have the answer, and are springing up all over the continent, increasingly well-funded, in a bid to provide Africans with access to payments, lending, credit, and insurance services. As we shall hear – blockchain technology, and cryptocurrencies, are also increasingly embedded.
Nicole Dunn is co-founder and COO of South Africa’s Revio, an end-to-end payment orchestration platform that reduces complexity, cost and risk of payment operations in Africa via a single API. She says what is exciting about fintech in Africa is that innovators are not solving for convenience as they would be in other parts of the world, but rather solving for inclusion, access and infrastructure.
“It’s widely known that South Africa and other African countries are predominantly cash-based, and the majority of the population is still unbanked. They’re not able to access financial services such as credit, and even products like insurance and typical savings and wealth management solutions are really inaccessible. And so there’s been a huge push over the last 10 years to fill that gap through interesting fintech solutions,” she said.
The lack of access is hugely damaging from both social and economic outlooks, especially for lower-income individuals, or people working in the informal economy. The obvious ones are lack of access to the formal economy, such as inability to get a home loan or purchase an asset.
“But I think the more pervasive impact is that people who are not today part of the financial system are consistently penalised for it because the formal sector is not able to price their risk,”: she said.
“We don’t have any data on this customer today because they consistently transact in cash rather than digitally. We don’t give them a loan or offer them an insurance policy because I don’t have enough data to make that decision, or I price them at an extremely high premium because I’m not able to properly understand the risk profile of that customer. Which then creates this vicious cycle.”
There are also challenges faced by businesses, especially when it comes to making international payments, which is hugely challenging. Elizabeth Rossiello is co-founder and CEO of AZA Finance, an African fintech company offering secure and efficient financial infrastructure for payments, foreign exchange, and settlement. The company has been operating in Africa for over a decade, originally as BitPesa, and Rossiello knows how constraints on access to financial services have hurt businesses for years.
“I think for global companies who have to make payments from Africa to Asia or from Africa to Europe or from Africa to the United States, it’s so cumbersome, and it’s not because these companies are not compliant. It’s because the compliance documents start to go on the level of absurdity – we’re talking 10-to-15 compliance documents we collect for each one of our wholesale trades. Imagine a brick and mortar bank having to collect 10-to-15 documents for every transaction, store them and then share them with every bank and correspondent bank on that chain,” she said.
It’s a well-told story, but you can’t talk about “fintech in Africa” without mentioning M-Pesa, the advent of which essentially launched the industry on the continent. Rolled out in Kenya in 2007 by leading operator Safaricom, it allowed individuals to send money to each other using only their mobile number, essentially “banking” millions of people for the first time.
A revolutionary concept, it saw extraordinary uptake, with the most recent figures 2,600 transactions take place via M-PESA every second. The service was launched in a host of other African markets, while copycat services also arrived, with many mobile money services now interoperable.
EMURGO Middle East & Africa co-CEO Ahmed Amer says M-Pesa was a revelation as it provided, for the first time, infrastructure that much of the world takes for granted, but Africa at that point largely lacked.
“It was a revolution, and it still is a revolution to this day, because it basically enabled mobile money to create financial inclusion,” he said.
It was a gamechanger in other ways, too, says Rossiello.
“We never saw growth like that, that quickly, and we never saw that much data. It was so explosive. It was very easy to communicate that success,” she said. “This was just this beautiful dataset that everybody jumped on, and you know when you have that it just attracts a ton of attention and then that’s just kind of a waterfall effect,” she said.
Another immediate associated impact was an increase in investment from telecommunications companies, and banks. Mobile money in general is a great domestic retail solution.
“I always say that it’s comparable to a debit card. You use it for daily transactions. I lived in Kenya for seven years during the height of this I used it for my groceries. I used it for small payments. I used it to pay salaries. I even used it to buy airplane tickets or school fees up to about US$1,500 at a time,” said Rossiello.
It does have its limits, however.
“Anything out of the country, anything that you have to pay internationally, or on a website, or anything in a larger amount., you can’t use it,” Rossiello said.
Secondly, it was, and is, owned by a corporation.
“So your entire debit card system is a closed loop. You can’t pay from one to the other. So the two big obvious problems are transaction size, and secondly interoperability with other systems, including those internationally. That’s really where the limit is and once we had high-speed internet come onto the continent, and people started shopping online, we needed the fintechs to connect mobile money to that online ecosystem,” said Rossiello.
So BitPesa, as it was then called, and a host of other companies, started building on top of the M-Pesa network, or building alternative solutions. The fintech revolution had begun, inspired by the telecoms, but with a momentum all of its own, moving beyond the mobile wallets. Dunn said there have been a great variety of solutions built beyond mobile money solutions to increase access to finance.
“New payment solutions, remittances solutions, agency banking-type of solutions and alternative data-type of solutions, that start to bridge that gap so that more of the continent’s population can access financial services and really at least establish that basic capability of being able to transact and engage with the financial system,” she said.
“I think where we’re starting to see more and more focus. Development is around access, so access to markets, access to the economy, access to goods and services, whether that’s through solutions like “buy now pay later” or enabling pay as you go models.
There has been huge progress in the last few years in terms of simple access to finance, but access to additional services like credit is still lacking, especially for businesses, and that is damaging for the continent.
“There are a lot of people solving that access to credit, but at a business level it is still very much lacking. We work with companies who are doing remittances, who are making payments, who are providing NGO services, who are providing basic import export, and they can’t even get a credit line for the basic working capital needed. This is strangling the growth of the African economy,” Rossiello said.
Fundamentally, being able to simply make payments is a pivotal part of life, but the problems go beyond that.
“Payments is a part of all commerce. So Netflix is on the continent now, media distribution is on the continent now, in a way that we haven’t seen before. Amazon is on the continent now. Those guys need payments to grow,” she said. “But I do think that there’s something fundamentally African about some fintech because the risk assessment is different. We don’t have insurance models for the African continent that really work at scale. It’s still very expensive. Mortgages, insurance, lending. We still don’t have any sort of derivatives on the continent that you can really buy at a good price. We don’t have foreign exchange forwards. How wild is that you can’t buy an African currency forward. You can’t really find even a derivative or a hedge for an African currency.”
But as fintech in Africa develops, it is moving beyond simply access to payments, and bolting on other products and services, as Dunn said earlier. The rails laid by the likes of Paystack and Flutterwave, then, are allowing successor entrepreneurs to focus on building alternative solutions, rather than having to build the whole value chain themselves.
“There will be more and more companies building on top of some of the foundational infrastructure that players like Flutterwave and Paystack have built when it comes to payments in particular,” said Dunn.
“But we will also start to see more niche players that either focus on a certain industry use case, or start to decouple the value chain in an interesting way, like we’re seeing in payments. Looking at not only payment processing, but looking at checkout optimisation, or looking at reconciliation or revenue recognition. And I’m really excited to see how that plays out.”
