Many in the global investment community are looking at Africa as the future of fintech. Liz Lumley reports.
Disruptive new entrants and emerging technology often make for fun headlines and interesting founder interviews. But the global investment community gets most excited by the blossoming tech hotspots where a steady stream of new entrants, fuelled by international capital, chase freshly crowned ‘unicorns’. These up-and-coming hotspots offer investors a vibrant environment with the promise of quick returns, contrasting with the often jaded and overcrowded hubs in more mature markets. Many in the global investment community are now looking at Africa as the future of fintech.
Several areas in Africa are making a name for themselves as fintech hubs. South Africa is significant because of the existence of an established banking environment, while Kenya continues to garner interest thanks to the M-Pesa mobile-based money transfer, payments and micro-financing service, launched in 2007 by Vodafone Group and Safaricom. Driven by new government rules easing the availability to apply for banking licences, Egypt has been surging ahead as a major source of fintech companies over the past year.
However, the country that gathers the most investment in and press coverage of emerging companies is Nigeria. The west African country is home to some of the best-known fintech unicorns, companies valued at more than $1bn, including Paystack, OPay and Flutterwave. The country has a growing population of over 200 million, with more than 40% under the age of 14. While only 45% of the population rely on a formal bank account, more than 81% own a mobile phone, according to data from the ‘Enhancing Financial Innovation and Access to Financial Services in Nigeria 2020’ survey.
According to Adesoji Solanke, director of frontier/sub-Saharan banks and fintech at Renaissance Capital, “Nigeria is the hottest market with 35% of the funds raised this year, followed by South Africa at 21%, then Egypt at 15%, Kenya at 9%, Ghana at 7% and then Senegal, surprisingly, at 6% — but that was because of one deal, which was Wave.”
The Senegalese mobile money start-up, Wave, had a $200m Series A funding round this year.
Nigerian dominance
Ireti Samuel-Ogbu, Citi country officer for Nigeria, makes three points about Nigerian fintechs that have played a part in digitising financial services and supporting the country during the Covid-19 pandemic.
“These fintechs have been able to create a shop front for millions of small businesses that otherwise could have failed and not survived the pandemic,” she says.
Nigeria has really been able to leapfrog with use cases that I don’t see anywhere else
Her second point is about interoperability between real-time payments and mobile accessibility, which Ms Samuel-Ogbu says is something that is not seen often, even in Europe. “Real-time payments and mobile seamlessly come together, such that Nigeria has really been able to leapfrog with use cases that I don’t see anywhere else — maybe in Asia, but certainly not in Europe,” she says.
She also highlighted that the reliability and interoperability of real-time payments in countries such as Nigeria or Kenya was something that she found “really surprising” after returning to the continent after six years as managing director of Europe, the Middle East and Africa payments and receivables, treasury and trade solutions, at Citi, based in London, “because you don’t expect real-time payments to be as efficient, or even more efficient, than they are in other parts of the world”.
It is the pace of change and digital transformation in Nigeria that has impressed Ms Samuel-Ogbu. “Nigeria is the first of three countries that has announced a digital currency, and it’s actually going live imminently,” she says. “It has been quite amazing.”
Entrepreneurial Nigeria
Some views on Nigeria’s dominance in African fintech are more subjective. “Nigerians are just better at raising cash,” says Vishal Agarwal, chairman and CEO at Full Circle Africa, a proprietary investment firm, based in Kenya.
Raj Kulasingam, senior counsel at Dentons and frequent investment partner with Mr Agarwal, says there is a “palpable air of excitement” in Nigeria. “In Lagos, everyone is hustling … from the guy on the street selling you stuff when you are in traffic, to the guy in the hotel, to the bankers and the investment bankers — it’s actually quite interesting,” he adds.
Mr Solanke adds that the fintech boom in Nigeria is no coincidence. “There are a couple of other things that have happened historically, which led up to where the country is today in terms of technology and fintech development,” he says. Culturally, because sufficient jobs are not being created by the private or public sector in Nigeria, “people are compelled to explore entrepreneurship — it’s sort of the only legitimate option,” he adds. “There’s typically a lot of entrepreneurship ideas … so a lot of entrepreneurs are in the country.”
In addition to the entrepreneurial culture, Mr Solanke also echoes Ms Samuel-Ogbu by pointing to the decade-old instant payments scheme as a bedrock for the fintech hub.
According to research from ACI Worldwide and GlobalData, Nigeria has the most developed real-time payments scheme. Launched in 2011, NIBSS Instant Payments has strong adoption, supporting 72.6% of all electronic payments in 2020. Nigeria also ranks sixth place globally on the list of countries by the number of real-time transactions in 2020, after more than 1.9 billion such transactions were processed in 2020.
“Nigerians could literally send money instantly,” he says. “[This] accelerated the velocity of money for digital transactions that were gaining traction, particularly as the central bank and [commercial] banks started to encourage people to do more transactions digitally. That was the beginning of the journey.”
US investment
The next part of Nigeria’s fintech journey happened in 2015 with the establishment of Paystack — which was recently acquired by global payments giant Stripe — and Flutterwave, which has been valued at $3bn. Both companies are alumni of the US-based Y Combinator (YC) start-up accelerator.
YC has been integral to several African fintech unicorns. Launched in March 2005, it has incubated more than 3000 companies around the world, including well-known names such as Stripe, Airbnb, Coinbase and Reddit.
“I think there are very few people who doubt that YC is the benchmark, top accelerator globally,” says Mr Agarwal. “And YC was one of the first accelerators of that kind that came to Africa and discovered companies like Paystack. They have been incredibly successful, and each cohort has had more and more African founders.”
One of the advantages of taking part in a global accelerator like YC, which typically takes a 7% equity stake in their companies, is the automatic uptick in valuation just by being a member of a cohort, he adds. In addition, the global currency for venture funding, especially for investors that understand the software business, is the US dollar, adds Mr Solanke. Accelerator programmes such as YC provide US-dollar capital to African companies.
Non-US investment
While early to the game, US investors are not the only firms taking an interest in African companies, say both Mr Kulasingam and Mr Agarwal. “The thing about YC [is that] just getting into YC doesn’t mean you are going to be successful,” says Mr Kulasingam. “Founders are now a bit more discerning and say, ‘Well, actually, I don’t have to give up as much equity. I believe I can build this myself,’ and there’s much more capital on the continent.”
Much of this new capital is coming from Asia. “For example, one of our companies, Credrails, is building infrastructure for open banking for African fintechs and finance,” says Mr Agarwal. “They did not go to YC, but they got into the Softbank accelerator. Softbank really loves women founders.”
Global investment levels the playing fields for many African founders, who in the past have been discounted due to a perceived African risk, says Mr Agarwal. “You love YC or hate YC, depending on which side of that investment you’re on,” he adds. “But they’re able to open up the markets … and develop interests from Silicon Valley to Perth on Demo Day.”
‘Born to do it’
Nigerian entrepreneur Tunde Kehinde is currently co-founder and co-CEO of small and medium-sized enterprise lender Lidya, and co-founder of African e-commerce giant Jumia Nigeria — the company with the largest initial public offering on the continent. He says, as the son of an entrepreneur, he feels he was born to it.
“If you think of Nigeria, just in terms of sectors, you naturally look at things like oil and gas, telecommunications and banking, but also I think there’s a genuine spirit of entrepreneurship,” he says. “Growing up, my parents were entrepreneurs, but it was not that much of an anomaly — literally, uncles, aunts, cousins, so many family members and friends who all had a small business. So there’s a culture of wanting to be your own kind of boss and control your destiny.”
Right now, because of the payments and e-commerce infrastructures available, many people in Africa who want to start their own businesses can now do so with a scale and ambition that historically had not been present, he adds. “Given social media,” says Mr Kehinde, “folks are able to sit in their dorm room or home and sell things on Instagram, with no need for a physical warehouse, and literally transport and sell items across the African continent.” The unifying theme of fintech companies in Africa is a focus on supporting businesses, enabling entrepreneurs, enabling creators, “whether it’s folks like us, or Flutterwave or Paystack”, he adds.
As a serial entrepreneur in the region, Mr Kehinde points to government policy as easing the paths for many start-up founders. “Central banks across the continent have done a pretty good job of laying the foundation for all the innovation we see today,” he says. “What I mean by that is they have had very ambitious goals on financial inclusion and they realised, 15–20 years ago, you can’t put all those goals on traditional commercial banks.”
According to Mr Kehinde, the first wave of innovation enabled microfinance institutions who can reach parts of the country that a commercial bank cannot reach. This led to innovation around mobile money and “enabling fintechs to complete this goal of getting to financial inclusion”.
“The second thing that comes to mind is lack of legacy — or rather, a blank slate,” he adds. “A lot of our banking infrastructure was built from scratch. Because of that, we’re able to do a lot of things that our counterparts in the West cannot do,” he says. He believes that African fintechs' ability to integrate into different systems, gather data, assess customers and make sound risk decisions is heads above the rest of the world.
North African fintech
Despite the dominance of Nigerian companies in the fintech space, there are other countries gaining attention. The market Mr Solanke is most excited about is Egypt because “the regulatory environment is opening up very quickly”.
Egypt, the Middle East and north Africa’s most populous country, has just begun attracting global investment dollars in the past few years. In late 2020, the Egyptian government passed a new law allowing the central bank to give banking licences to fintechs. In November 2021, Egypt’s central bank ushered in an instant payments scheme allowing residents to make real-time electronic payments between bank accounts using their mobile phones. A new open-banking network is also planned for the end of 2021, allowing people to manage their bank accounts and transfers with any bank via a single app.
“Egypt has also just seen a second fintech list with a valuation of over $1bn, [Egyptian state-controlled payments firm] E-finance,” says Mr Solanke. E-finance, founded in 2005, is the sole entity authorised to operate the government’s financial network, including processing and settling payment and collection transactions. “If you had to look at all the large African markets with this fintech activity, over the next couple of years, [Egypt] is worth paying more attention to,” he adds.
Blocking innovation
Surprisingly, Kenya, once dubbed the ‘Silicon Savannah’ and birthplace of the internationally famous M-Pesa network, stirs little excitement among people examining Africa as a fertile ground for fintech start-ups today.
“It’s not Kenyan companies riding the wave of M-Pesa, it’s actually Safaricom suffocating the market,” says Mr Agarwal. “Safaricom has just become so large and so monopolistic in many ways that if you come up with anything that they feel is some sort of innovation threat, they replicate your inspiration and do it themselves, or just frustrate [your efforts].”
[Blockchain] is interesting because that will start from a very different angle than what we see in UK and Europe
According to Mr Agarwal, if you are denied access to the M-Pesa application programming interface, your fintech is effectively worthless in east Africa. “That’s why you see innovation taking a backseat over the past five years,” he adds.
Michal Szymanski, board member of the African Fintech Network and CEO of the Mauritius Africa Fintech Hub, agrees with this assessment. “They’re still running on the coattails of M-Pesa, which yes, was super successful, but it’s 12 years later — where are the other innovations coming from?” he says.
New players
Payments and lending start-ups are also making way for new sectors emerging on the continent. According to Rita Martins, fintech partnerships lead, finance, risk and compliance at HSBC, who regularly scouts for potential investments or partnering opportunities for the bank, says identity-based start-ups have big potential in the region.
“There are other [start-ups] in Africa that are not part of the financial services industry — they don’t have bank accounts, but they could use other sets of data,” she says. For example, using the mobile phone as a set of data for creating identity. “In Africa, they will probably move into digital identity and most likely start using the key components of distributed ledger technology and blockchain for identity, which is interesting because that will start from a very different angle than what we see in countries like UK and Europe,” she adds.
In addition to access to capital, successful fintech hubs need a steady influx of talent to not only found start-ups but to help them scale and grow. Mr Szymanski says there is a lot of youth opportunities in Africa, but “we don’t have the right skills”.
“Even though we have a lot of educated accountants and finance students, we are probably still importing 90% of the skills from around the world,” he says. “Because of the massive skill shortage, there’s no technical knowledge, there is theoretical knowledge and book knowledge, but no practical application knowledge on the impact of technology on the various aspects of finance.”
To combat this, the African Fintech Network launched a student programme recruiting finance students, with little knowledge of technology and technology students with “zero knowledge of finance” from six African universities in order to address the skills shortage.
Mr Kehinde explains that in the next few years, a lot of African businesses will start to realise their global ambitions. “Those seeds are being planted now,” he says.
“You’re seeing a number of businesses saying ‘Look, I’m not just going to look at the rest of the African continent. I believe that my business can offer value to customers in Europe and Latin America and Asia and we have the smarts on the team and the product to deliver’,” he adds. “I think when you think of the narrative around Africa, you often hear about businesses coming into the continent; you very rarely hear about Africans exporting back out. I think that will be an interesting thing to watch.”
