Cloud Wallets; Cashless Pockets
- Investment Desk
- Dec 16, 2024
- 8 min read
Despite a slowdown in funding in line with global trends, we expect significant growth and value creation to lie ahead for the fintech industry in Africa. Cash is still used in around 90 percent of transactions in Africa, which means that fintech revenues have huge potential to grow. If the sector overall can reach similar levels of penetration to those seen in Kenya, a country with one of the highest levels of fintech penetration in the world, African fintech revenues could reach eight times their current value by 2026.
FinTech can manifest itself in very different ways, but the end is still the same, making work easier through automation of financial services. At the beginning fintech would be applied to the technology employed at the backend systems of established financial institutions, such as banks. But we've seen a rapid transition to include consumer-oriented services. In its most basic form, fintech unbundles financial services into individual offerings that are often easier to use. The combination of streamlined offerings with technology allows fintech companies to be more efficient and cut down on costs associated with each transaction.
Financial services are among the most heavily regulated sectors in the world. As such, regulation has emerged as the number one concern among governments as the fintech sector take off. This is because as much as fintech creates new opportunities and capabilities for companies and consumers, they are also creating new risks. Data privacy and regulatory arbitrage are the main concerns.
In Africa, fintech is emerging as a hotbed for investment, with average deal sizes growing and the proportion of fintech funding in Africa increasing over the past year, bringing jobs and growth to African economies. And the story is only just beginning. As fintech matures, financial services on the continent are at an inflection point, and several African countries have a significant opportunity to capitalize on the momentum of recent years to unlock further potential in the sector. Between 2020 and 2021 the number of tech start-ups in Africa tripled to around 5,200 companies. Just under half of these are fintech, which are making it their business to ‘disrupt’ traditional financial services. McKinsey analysis shows that African fintech have already made significant inroads into the market, with estimated revenues of around $4 billion to $6 billion in 2020 and average penetration levels of between 3 and 5 percent, this is excluding South Africa. These figures are in line with global market leaders.
Historically Africa has been a cash-based, off-grid and manual market when it comes to conducting business, this is very rapidly changing; and everyone from market traders to big companies are eager for and receptive to tech-forward options to give their business a competitive edge. Entrepreneurs are rushing to provide innovative tech-powered services to support this next phase of African business. Africa is expected to be the fastest-growing region for fintech between 2021 and 2030, even as revenues are projected to reach $60 billion. South Africa, Nigeria, Egypt, and Kenya are expected to drive this growth, which would see revenues grow at a compound annual growth rate of 32%.
In 2023, fintech startups were operating across 25 African countries. The number of ventures per country ranges from one, in places such as Algeria, Burkina Faso and Mali, to 217 in Nigeria. South Africa falls to second, with 140 ventures, followed by Kenya with 102 companies in operation. The top three countries contribute to a whopping 67.2% of the market, a percentage share that barely differs from a 67.9 per cent share in 2021 and 65.2% in 2019. There were three new fintech markets to emerge for the first time in the 2023, that is, Burkina Faso, Lesotho and Namibia. While clearly levels of activity hugely differ, with different ecosystems at vastly different points in their lifecycle, fintech has certainly infiltrated markets across the continent, and is changing financial markets and boosting access to financial services everywhere you look.
The vast majority of fintech funding in Africa goes to the “big four” startup ecosystems, with Nigeria, South Africa, Egypt and Kenya swallowing up 91.2 per cent of investment. This was, however, marginally down on 2021, when the same four countries shared 93 per cent of funding. Historically the two dominant sub-sectors of African fintech, the payments and remittances and lending and financing categories increased their combined share of African fintech funding to 81.2 per cent between 2021 and 2023, from 77 per cent two years previously. This pair have always also been the most attractive to investors, and there is little sign of that changing. That said, the dynamic between the two has changed somewhat, with payments’ share of total funding falling dramatically, from 62 per cent to 43.4 per cent, while lending’s share of investment has leapt, to 37.8 per cent from 15 per cent in 2021. This narrowing of the gap between the two leading segments suggests the fintech investment ecosystem is beginning to mature beyond a heavy focus on payments ventures. Various other sectors saw increased inflows of funding over the last two years, though most failed to keep up with payments and lending from a growth rate perspective. Invest-tech and personal finance had a particularly strong couple of years, approximately doubling their market shares to 2.4 per cent and 1.3 per cent respectively.
In the two years leading up to 2023, 115 startups – 20% of the 2021 total of 576 startups - closed their doors. Unsurprisingly, the majority of closures occurred in bigger markets, and leading sub-sectors. Once again, payments and remittances companies had the highest failure rate, with 37 (32.2%) shutting their doors in the last two years. This was up from 28.4 per cent in 2021. In comparison, 23 Invest-tech, 22 lending and financing, 16 business administration, and 15 Insure-tech startups ceased to operate in the same period.
Africans continue to face difficulties in accessing credit-based services. Typically, either locally relevant product offerings don’t exist; or the data required for the credit-scoring systems underpinning such services isn’t available for many African consumers and businesses. African entrepreneurs are now unlocking credit services through localized knowledge and tech-enabled solutions.
Now, in much the same way as mobile payments completely disrupted the status quo, AI has the potential to propel the fintech industry into a new era of financial inclusion. And perhaps most exciting of all is that Africa is not simply catching up with AI-powered developments, but surging ahead with innovative solutions that have considerable implications for the underbanked. As various institutions in finance endeavor mightily to bolster efficiency, and elevate customer experiences, alongside diminishing potential risks, AI surfaces as an invaluable companion. AI solutions for financial services across multiple domains in financial services show no signs of slowing down; banking, insurance, and investment portfolios all witness such transformations. By harnessing the potential of AI, these organizations have the opportunity to elevate decision-making strategies and trim down operational expenditures significantly, alongside enhancing the experience provided to their patrons.
AI can be very useful in financial technology. It can be applied in fraud detection and prevention, by turning to AI algorithm that scrutinize transaction behaviors and identify irregularities that may hint at fraudulent actions. AI can also be used in the realm of customer support, through AI-driven chatbots and virtual aides. AI also steps in to refine credit scoring precision by examining a wider array of data origins, including social media interactions and transaction histories. Companies like Zest Finance exploit machine learning algorithms to evaluate creditworthiness with greater efficacy. AI can also be used in investment management via algorithmic trading and robo-advisors. These AI-powered platforms dissect market patterns and execute trades at velocities far surpassing human abilities. Thanks to progress in machine learning algorithms, financial institutions now possess the capability to dispense highly personalized services that cater directly to individual client preferences.
The future of AI in fintech appears bright as technological advancements steadily progress. Several pivotal trends shaping this promising landscape, synergy with Blockchain Technology will enhance interaction between AI and blockchain, paving the way for more secure transactions and enhanced transparency in financial processes. As AI technologies grow more economically feasible and widely available, smaller financial institutions in developing regions are likely to embrace these innovations to amplify their services and effectively compete with larger entities.
Cloud technology has created a whole new realm of possibilities for fintech companies looking to accelerate financial inclusion, helping them scale their operations, create operational efficiencies and spin up new innovations overnight. With the cloud, fintech firms can swiftly adapt to changing market conditions, securely transfer sensitive data, and innovate using advanced technologies like artificial intelligence and blockchain. It's the technology backbone that empowers fintech to thrive in a rapidly evolving financial landscape. Moreover, the cloud's scalability, cost-efficiency, and global reach provide fintech companies with a competitive edge. It enables them to scale their operations, reduce capital expenses, and expand internationally with ease. In essence, the cloud is the lifeline that keeps fintech agile, secure, and poised for continuous growth, making it indispensable in the digital age of financial services.
African payment giant, Flutterwave, is a case in point, having recently shifted its legacy infrastructure to Microsoft Azure with a view to expanding its operations and processing high volume payments at scale. As one of the continent’s safest and most reliable payment companies, Flutterwave has been at the forefront of Africa’s payment revolution. Its multiple payment modes, including local and international cards, mobile wallets and bank transfers, continue to change the game for many African people and businesses on a daily basis.
Other companies like M-Pesa, a mobile money transfer service, has revolutionized financial inclusion in Kenya and beyond, especially in rural areas where traditional banking services are limited. M-Pesa had achieved over 50 million users by 2021 and continues to scale higher by the year. Chipper Cash, is a cross-border payment platform that allows users to send and receive money from different African countries with no fees, it also offers crypto-currency trading. Jumo is another company that builds digital financial services for emerging markets. It partners with banks and mobile network operators to provide services like, savings, loans and insurance to underserved populations.
Considering most of the African FinTech companies were started before the 2010s, the growth is fascinating. This leads me to believe greater achievements and scale is to be expected. Many African countries and still technologically deprived, presenting an opportunity for African FinTech startups to take advantage. With focus on financial literacy and education, people will be able to appreciate the technology and embrace the new culture. And this is our responsibility as a continent.
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