Africa is expected to be the fastest-growing region for fintech between 2021 and 2030, even as revenues are projected to reach $60 billion. This is according to a report by the Boston Consulting Group and QED Investors. 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%.
More than any other sector of the African tech space, fintech has witnessed significant growth. Startups in the space have raised more than $2 billion since 2018 and constantly top the list of most funded sectors annually. Some of the most valuable startups in the region are also fintech startups.
Despite having a population of more than one billion, more than half of Africans do not have a bank account. Consequently, most transactions are conducted using cash, a phenomenon many countries are working to change. Even fewer have access to credit services. Less than five per cent of Nigerians have access to credit and many businesses report being unable to access it.
Money transfer remains a challenge and the cost of sending money to the region is the highest globally.
Fintechs are cashing in on this opportunity by providing Africans with access to digital financial services by leveraging growing smartphone adoption. Others like Safaricom's M-Pesa are enabling access to financial services for customers who use a feature phone, allowing them to make mobile transfers using a mobile number. As of 2022, there were more than 184 million mobile money wallets on the continent.
This paints a picture of progress, but the global venture capital slowdown has hit startups in the region hard and they have increasingly raised less money since Q3 2022. Fintechs that have been responsible for most of the funding have also been hard hit, causing many to lay off employees or shut down products as they pursue profitability. Some have even closed shop completely.
The report, however, believes that the challenges faced by fintechs will be short-lived. An excerpt says, "We believe that the challenges fintechs have recently faced represent a short-term correction in an otherwise long-term growth story, as the fundamentals of the sector haven’t changed."
That is certainly the case for African fintechs as mobile and Internet penetration are expected to grow, opening up new vistas. Regulatory improvement could also prove to be key.
Kenya appears to have relaxed its stance on cryptocurrencies after stating its intention to tax its usage in amendments to the Finance Bill 2023. Nigeria, on the other hand, recently unveiled guidelines for open banking, which experts believe will drive competition in the sector. Similarly, despite being viewed as cruel by many Nigerians, the Central Bank of Nigeria's recent cashless policy drive accelerated fintech adoption for many who had previously stayed away from patronising fintechs.
Challenges for African fintechs seeking growth
Despite these developments, a few challenges stand in the way of fintechs delivering on their promise. The first would be the macroeconomic environment.
Countries like Nigeria, Egypt, and Kenya, where most of the fintech innovation takes place, are expected to do single-digit growth numbers in 2023, a fall out of the slow economic growth they're witnessing. Should this continue, unlocking value beyond payments may remain elusive.
The business models adopted by fintechs would also play a big role. In Nigeria, for example, many startups adopted a freemium model as they worked on growing the number of users. However, as funding becomes harder to access, many are beginning to charge for services they previously bore the cost of delivering.
That now puts them in direct competition with traditional financial institutions that are launching products to rival fintechs. GTCO, the holding company that houses Guaranty Trust Bank, has been pushing Investment One to customers in addition to Squad, its payment gateway.
There's also the not-so-little matter of business model sustainability. While many fintechs have seen a growth in user numbers over the past year due to the CBN's tightening of forex access, a relaxation by the CBN could see startups built around this value proposition struggle. Of course, one could argue that nimble as they are, they would pivot, but given the fact that most of their customers are already banked, they could still struggle.
Access to capital is another challenge as most of Africa's funding comes from foreign investors. This is crucial, as many startups will need significant capital for user acquisition
As venture capitalists tighten their purse strings globally, African startup funding will be affected. Though local investors are increasingly raising funds, they are raising significantly less than their Western counterparts, affecting how much fintechs can access.
Moreso, their priority may be supporting portfolio companies through the downturn, further shrinking the pie for African fintechs. McKinsey's 2022 fintech report highlighted this growing challenge even as it pointed out that stimulating participation from local investors could be key to survival.
There's plenty of room for growth in the African fintech space as the report suggests, but legitimate threats remain. The startups that capitalise on the growth opportunities will be those that build solutions that consider opportunities and threats.