“From the 13th to the 15th of December, the United States will host the United States-Africa Leaders’ Summit. This is only the second time that the US has convened such a high-level, high-stakes Africa-centred event. Given Africa’s growing importance and the high expectations around the summit, CSIS Africa experts, (of which I am one), highlight pressing topic areas to be considered during these proceedings.” (See link to all our features, commentaries and events on this auspicious occasion viz. https://www.csis.org/analysis/african-fintech-booming-despite-challenges). My contribution viz. is on African fintech.
Financial technology startups in sub-Saharan Africa are growing phenomenally in spite of myriad challenges. Cash is still king in most African markets, as more than half of all Africans remain unbanked or underbanked, which is an opportunity for fintechs to digitalise payments.
The African electronic payments market will grow by 20 percent every year to $40 billion by 2025, according to Mastercard, whereas the industry is only expected to grow by 7 percent globally in the same period.
But progress is slow. The US should align its trade and foreign policy with the region’s continental frameworks, especially on the digital economy, to quicken the pace
Venture capital (VC) financing for SSA fintechs grew by 894 percent year-on-year to $1.6 billion in 2021, accounting for 61 percent of the $2.7 billion VC funding of African tech startups in the year. African fintechs could earn revenue of up to 8 times current levels of about $4 billion (2020) to $30.3 billion by 2025, according to McKinsey, as they are delivering better value than traditional financial services firms at lower costs.
VC financing for SSA fintechs
Active investors in African tech startups
Progress varies across countries in the region, with Kenya leading on most fronts. Factors underpinning African fintech growth are rising smartphone ownership, lower internet data costs, more internet bandwidth, urbanizing populations, and a bulging youth demographic.
Read also: Fintech makes strong showing in Nigeria with N576 trn transactions in 6 months
Blockchain and cryptocurrency technology, payments and wallets are expected to be the fastest growing segments of fintech in Africa, according to McKinsey, with expected compound annual growth rates of 50 percent, 20 percent and 20 percent in 2020-25, respectively. The most attractive fintech markets are Nigeria, Ghana, South Africa, and Egypt, owing largely to their relatively bigger economies, better tech infrastructure and concentration of talent. Francophone Africa also, as its regional monetary framework offers opportunties to scale efficiently.
Regulatory volatility and variability are huge concerns, which in tandem with the multiplicity of currencies across more than 50 markets, weigh on African fintechs’ ability to scale profitably across borders. Still, the regulatory environment has been improving, with more than 90% of the region’s markets having robust regulatory regimes for digital payments.
Know-Your-Customer (KYC) processes are problematic, as national identification systems are unreliable in all but a few African countries, as are physical address systems. Tech infrastructure is also still largely weak across the continent. Scarce talent is also a constraint, as more and more able hands increasingly prefer to work abroad, where remunerations are more attractive.
Profitability can take longer than expected as well, as customers acquired with costly scale marketing strategies are hard to monetize thereafter. These constraints do not appear to be discouraging international investors, especially American ones, which dominate later-stage VC financing of African fintechs.
Still, foreign VC financing is beginning to slow owing to tighter global markets in general, with VCs expected to increasingly seek efficiencies that African markets are not well-suited for. The African Continental Free Trade Agreement (AfCFTA) protocol on digital trade and Pan-African Payment and Settlement System (PAPSS) will ease some of the intra-African constraints on payments and talent mobility in due course. But progress is slow. The US should align its trade and foreign policy with the region’s continental frameworks, especially on the digital economy, to quicken the pace.
An edited version was first published by the Africa Programme of the Centre for Strategic & International Studies in Washington DC. See link viz: https://www.csis.org/analysis/african-fintech-booming-despite-challenges
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