September 2, 2022 - 5 minutes read

Fintech in Africa (Part 1): African tech boom is more than a buzz; future is bright

By Susan Njeri

The financial industry has benefited greatly from the buzz surrounding the African tech boom, with reports of African fintech businesses raising money becoming commonplace in tech media. It accurately reflects how much venture capitalists and investors have attracted financing to the fintech sector. 

Fintech has continued to take a sizable portion of investments in companies across Africa. Data from tech industry researchers, Disrupt Africa, show that 50% of the more than $2 billion raised by African digital startups in 2021 came from the fintech sector. In 2021, total investments in the industry exceeded $1 billion, matching the amount invested the year before in the larger African tech startup ecosystem. Fintech is expanding across the continent in spite of the political, economic, and epidemic difficulties it is facing. The number of tech startups in Africa increased between 2020 and 2021 to reach about 5,200 businesses. A little less than half of these are fintech companies that make it their business to undermine and improve established financial services.

African financial services are undergoing a structural shift. According to research carried out by McKinsey Global, it was observed that 10% of transactions in Africa are digital. Fintech revenues in 2020 accounted for at least $4-6 billion which is a 3-5% fintech penetration in line with global leaders and that fintech solutions were up to 80% cheaper and savings returns three times higher.

This definitely is not a disruption anymore but an eruption. With average deal sizes rising and the percentage of fintech funding in Africa increasing over the past year, African fintech is emerging as a hotbed for investment, delivering growth and jobs to African countries. The story has only begun, after all. Noteworthy, a number of African nations have a huge chance to take advantage of the momentum of recent years to unlock more potential in the sector as financial services on the continent reach an inflection point as fintech grows.

McKinsey takes the further view that bearing in mind around 90% of transactions in Africa still involve cash, there is enormous room for growth for fintech income. Additionally, they project that African fintech revenues might increase eight times by 2025 to reach $30 billion by the year 2025, if the industry as a whole can achieve penetration levels comparable to those found in Kenya, which is lauded as a nation with one of the highest levels of fintech penetration in the world.

The changing structures

A young, quickly expanding, and rapidly urbanising population, together with a number of trends like rising smartphone ownership, falling Internet costs, and expanded network coverage, are all contributing to the development of fintech enterprises. Even while the Covid-19 epidemic caused enormous misery and disrupted lives and livelihoods across the continent, it has expedited current tendencies toward digitization and produced a favorable climate for new technology players. If African fintech sectors follow the trend of more developed countries, they may be entering a phase of exponential expansion due to these characteristics, together with an injection of financing and more benevolent regulatory frameworks.

The future of fintech growth is determined, with digital becoming a way of life across Africa. The potential exists for African fintechs and other stakeholders, like governments and investors, to think about how the industry might become sustainable in the long run. However, despite the amount of activity observed on the continent, only a small number of unicorn startups—startups valued at $1 billion—have emerged from Africa, and the financial viability of many businesses is shaky. This indicates that much work needs to be done in order to create the conditions needed to realize the sector’s potential.

The eruption

Although the African fintech market is expanding rapidly, the ecosystem’s growth is still in its infancy. Fintechs have significantly increased their presence in Africa, but there is still a lot of space for growth. On the path to sustainability, fintech businesses in Africa must overcome four major obstacles: achieving scale and profitability, navigating an unpredictably regulatory environment, managing shortages, and establishing strong corporate governance foundations.

Thus, McKinsey opines that while matching a fintech’s value proposition to the right market may be a critical first step in building a successful startup, to maintain momentum it is necessary to define routines, norms, and processes that are shared and understood by everyone in the organization. The most successful African tech startups have six traits in common with those of globally successful businesses. They have also tailored their business models to the particular economic conditions and consumer demands of Africa.

All indications point to the first stage of African fintech’s development coming to an end. Fintechs are now significant actors in the African financial services industry, with increased funding and value creation. Access for consumers is also at an all-time high. A developing fintech sector has the potential to generate income, employment, skills, and opportunities across the continent. The fintech boom in Africa is creating an ecosystem that may have a positive impact on society as a whole by, among other things, expanding access to finance in important industries like agriculture and healthcare and facilitating more widespread access to insurance and healthcare. Additionally, the newcomers are helping to advance financial inclusion, particularly among women.

Stakeholders, including governments, investors, the traditional financial services sector, and fintechs, have a crucial role to play in fostering sustainable growth and fostering innovation in order to scale up these benefits. Regulators, for example, might think about taking action to formalize data systems, encourage predictable regulation, and keep up with changes in the fintech landscape. Investors, meanwhile, might look to expand local opportunities, inform African investors about potential opportunities on the continent, and concentrate on the real value startups add rather than just their sale valuation.

There is a need for the fintechs and incumbents to concentrate on developing future talent and training programmes as well as seeking to form collaborations with regulators and one another to create the ecosystems required to sustain the expansion of the fintech industry alongside other national development priorities. The future of African fintech is bright, and the next African unicorn is poised to emerge if stakeholders can collaborate to build on the momentum gained in recent years.

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