The African fintech industry has the potential to surge to $30 billion by 2025, according to a McKinsey report recently released. However, achieving this growth would depend on how they overcome four critical challenges they are currently facing.
Data obtained from the report showed the industry, currently valued at $4 billion to $6 billion, has grown significantly as a result of increased investments in fintech startups.
“If fintechs can proffer solutions in wallets, accounts, payments, remittances, wealth management, insurance, and lending, and momentum is maintained, the fintech revenues could reach eight times their current value by 2025,” the report stated.
The ‘Fintech in Africa: The End of the Beginning’ report notes that Africa’s inclusion in traditional finance has been limited, with many countries suffering from a lack of access to banking, insurance, and credit services. As a result, cash is still king on the continent, with only about 10 percent of transactions made digitally.
The COVID-19 pandemic also accelerated existing trends toward digitalisation and created a fertile environment for new technology players, even as it caused significant hardship and disrupted lives and livelihoods across the continent.
However, unprecedented growth in the fintech sector—boosted by technology advances, lower data costs, and improved regulatory frameworks—is changing the way people bank, shop, do business, and live on the continent.
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Nonetheless, African fintech companies are facing some challenges in their ability to scale and grow, with some having to re-imagine their target audiences or adapt and change to alternative revenue streams as their new primary source of income. Many fintechs are also struggling to monetise their customer base as having used low pricing or free services to attract customers, they are discovering that their revenue repeatability is limited.
Government regulations, user experience, clear monetisation strategies, and an expensive internet connection are the four hurdles that players in the industry must solve to meet forecast growth, the report said.
In line with the Central Bank of Nigeria (CBN) draft on its requirement for a fintech and payment solution license in Nigeria 2021. The apex bank is saddled with the responsibility of new regulations and licensing fintech licenses.
There are generally six categories of licenses, one or more of which a Fintech company can obtain depending on the services such a company intends to undertake. These licenses include a switching and processing license, mobile money operator license, payment solution service, payment terminal service provider license, payment solution service provider license, and super agent license.
“Acquiring this licence can involve rigorous process and are of high value and demand, therefore a lot of fintech startups are limited to the level of business they intend to operate on,” said Oyindolapo Olusesi, a fintech expert and lawyer.
However, many fintechs are in the business to make a profit but in other to expand their customer base, “Such strategies have one of two things in common: they either have a repeatable and healthy revenue source coming from core activities, such as card switching for Interswitch or serving merchants with point-of-sale (POS),” Olusesi said. “Or have multiple monetisation strategies, such as having a B2C arm for a B2B company or vice versa. For example, M-Pesa and MTN both have a strong lending component in addition to their wallets while Paga has leveraged its strong position in wallets to expand into merchant acquiring.”
The Mckinsey report stated that addressing user experience and an expensive internet connection, increased customer awareness, training, and cheaper smartphones can help curb the risk of low customer acquisition.
“Data cost fell by around 15 percent per annum, while fixed broadband subscribers per 100 people grew by 48.5 percent in February 2023, the National Telecommunication data reports.
Between 2010 and 2019, over 300 million people in Africa came online for the first time, with the continent showing the highest growth in internet use, mobile-cellular telephone subscriptions, international bandwidth, and 3G (or better) mobile coverage globally.
“The COVID-19 pandemic has accelerated these shifts, and by 2025, the International Telecommunication Union (ITU) anticipates that the number of smartphone connections in the region will more than double, the Mckinsey report stated.
As the fastest-growing startup segment in Africa, the success of fintech companies is being fueled by several trends, including increasing smartphone ownership, declining internet costs, and expanded network coverage, as well as a young, fast-growing, and rapidly urbanising population.
Further analysis shows that fintechs have become major players in the African financial services sector (in some instances rivaling traditional banks in terms of size and value), and has the potential of unlocking new opportunities in the sector.
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