Investors seeking outsized returns should bet on African fintechs

As venture capital flows recede globally, Africa remains an outlier – and for good reason. Its fintech ecosystem promises blue ocean markets with expansionary growth on a scale perhaps impossible elsewhere for the foreseeable future.

The continent’s start-ups saw their funding grow by 139% from January to June 2022, compared to the same period in 2021, attracting $3.14bn altogether. This is on top of the record $5bn raised last year – most of it going to fintechs in Egypt, Kenya, Nigeria and South Africa, which comprise the sector’s emergent regional hubs.

What distinguishes African fintechs’ long-term viability and social impact is how necessity is driving innovation in a region largely bereft of essential goods and services amid rapid urbanisation and for 600 million people living rurally. Many firms are also implicitly guided by the pan-African communal philosophy of ubuntu: “I am, because we are”.

Homegrown digital solutions thus often focus on innovating to remove common barriers to social mobility, rather than innovating to strictly capture market share. Indeed, most of the continent’s ‘unicorns’, firms valued at over $1bn, are fintechs working to promote financial inclusion by reinventing remittances, mobile money, consumer lending, personal savings accounts and customisable payment applications for businesses in a part of the world dominated by informal economies and where half the population is unbanked.

Africa also remains the only place left still experiencing robust population growth; the average age of its nearly 1.4 billion people is just 19 years old. At the vanguard of Africa’s fintech sector then – both as consumers and entrepreneurs – is a new, tech-savvy generation that is keen on disrupting the markets that aren’t serving them.

Mobile phone technology has been revolutionary, reaching 46% penetration across sub-Saharan Africa – a rate higher than in India. The relative lack of institutional constraints and legacy players similar to financial services industries elsewhere also enables higher tolerance for risk-taking, and creativity to flourish. The result: Africa is home to more than 50% of user accounts and 70% of the value exchanged within the global $1tn mobile money market.

The sector has already proved its durability, helping the continent defy dire economic forecasts related to the pandemic. In April 2020, the World Bank predicted remittances to sub-Saharan Africa would drop by over one-fifth. Instead, outside of Nigeria they collectively rose that year by 2.3%. As observers have noted, remittances are counter-cyclical and tend to increase during economic downturns.

But there are still challenges. Africa’s lack of digital infrastructure means lack of domestic legislation, and therefore regulatory uncertainty exists; new tax regimes and regulatory mandates could appear down the line. In Kenya, for example, the government took seven years to institute regulations around the mobile money service M-Pesa, after its launch in 2007. Policy harmonisation between countries and within regions is inadequate, too, although the new African Continental Free Trade Area, launched in January 2021, pledges to rectify this.

The continent also suffers from perceived risks around its political stability – true or otherwise. These concerns have been revived by some, especially in light of several recent coups in west Africa. However, it’s important to consider such events in their proper context.

Military takeovers in Mali and Burkina Faso both received public support amid an intensifying security crisis in the Sahel region that successive civilian governments have failed to resolve. In Chad, the son of long-time autocrat Idriss Déby was ushered into power after the sudden death of his father. And in Guinea, the army unseated an octogenarian leader after he defied popular will by changing the constitution to secure a third term.

Even in African countries where democratic backsliding may be occurring – something often exaggerated, according to analysis from the Pretoria-based Institute for Security Studies – fintech’s future may unfold similarly to the environmental movement in the US. In other words, the overwhelming need and utility means the sector will still grow and evolve despite some degree of political dysfunction.

One area ripe for disruption is insurance. Africa’s insurance penetration rate is less than 3% – about one-third of the global average. And even this figure is inflated by the maturity of the industry in South Africa. Likewise, innovations enabling remittance fees to drop from the current 8% to around 3% would create a true rival for cryptocurrencies, which average between 1% and 3% fees.

Overall, the most successful businesses will be those that tap into the sizeable African diaspora, including by incorporating firms abroad dedicated to servicing African markets, and whose business model is flexible enough to scale to different markets with different needs – typically through creating tech-first, asset-light solutions.

Tapfuma Musewe is a managing director at private equity firm Raygan Mills and founder of Afrifursa; Kyle Hiebert is an independent analyst and contributing writer for the Centre for International Governance Innovation.