According to a McKinsey report, the African financial market which includes both fintech and formal banking was valued at $150 billion as of 2020. The evolution of the market is projected to be centered on 11 important countries that provide a favorable environment for fintechs and investors, with higher mobile and internet usage and enhanced digital readiness. i.e Kenya, Cameroon, Côte d’Ivoire, Egypt, Ghana, Morocco, Nigeria, Senegal, South Africa, Tanzania, and Uganda.
Trends propelling Africa’s digital expansion
i. Financial inclusion
ii. Electronic payment
iii. Increased financing availability for innovation
iv. Growth in private consumption expenditure (PCE)
v. Young, fast growing and urbanizing population
vi. Increasing digital penetration
vii. Trends toward digitization have been positively boosted by Covid-19.
In the past three years, a number of African countries have implemented comprehensive data protection guidelines to provide clarity for new investors, reduce potential regulatory risk, and establish regulatory sandboxes as a strategy to promote risk-free innovation in the fintech industry. For instance, Nigeria, Ghana, and Uganda have established programmes to promote financial inclusion and decrease the use of physical cash, and other countries are working to accelerate the use of new technologies.
Positive regulatory policy agreements, such as the Pan-African Payment and Settlement System (PAPSS) rollout and the African Continental Free Trade Area (AfCFTA), which will create the largest free trade area in the world, may increase cross-border payments and trade, opening up new growth opportunities for fintechs. Fintechs are in a good position to offer digital solutions that address cross-border payment issues and set the stage for the continent’s transition away from cash and toward digital transaction platforms.
Obstacles that fintechs are likely to encounter in Africa
According to McKinsey, The fact that incumbents and telcos predominately generate fintech revenues in several areas presents difficulty for fintech entrepreneurs. In Kenya, Safaricom alone accounts for nearly all customer mobile money earnings. Due to the vastly greater prevalence of mobile phones than bank access, 38 telcos are already making large profits from their fintech businesses in Africa. Fintechs are more likely to succeed by providing creative solutions than traditional financial services in mobile money specialist markets like Kenya, Uganda, Tanzania, and Ghana, which are characterized by high penetration of mobile money services and enthusiastic adoption of products like payments and digital wallets.
The markets in Nigeria and Egypt, meantime, are prepared for disruption. For instance, a sizable portion of the population in Egypt does not have access to financial services, and the current banking procedures are typically cumbersome. Loan approvals frequently take days and many face-to-face interactions. Fintechs that provide faster onboarding and digital processes are ideally positioned to profit in such markets, disrupt the current state of financial services, and boost penetration and services.
In Côte d’Ivoire, Cameroon, and Senegal, where mobile money is still being developed and used, a large percentage of transactions are made in cash and typically involve an agent. As a result, they present a chance for fintechs to offer more affordable, quick, and simple financial service solutions. To understand how to promote client acceptance, however, investors who enter these sectors will need to have extensive local knowledge.
Another challenge fintechs are likely to suffer is navigating a challenging regulatory landscape. Uncertain regulatory framework raises a number of compliance issues for fintechs in Africa by suggesting an imbalance between how a business must function and the most effective way it can operate. The uncoordinated regulatory framework could increase the risk of exposure to exchange rate fluctuation and stringent foreign exchange controls.
Additionally, market restrictions and infrastructures such as internet penetration place a cap on the entire addressable market. In South Africa and Morocco mobile payment use is still quite low but they have comparatively developed traditional banking infrastructures. Countries like Kenya, Uganda, Tanzania, and Ghana have a strong mobile money service penetration and have adopted digital wallets making them more likely to succeed in providing creative solutions that traditional financial services.
McKinsey report notes that Egypt and Tanzania are developing open banking operations and infrastructure for enabling secure interoperability in the banking sector. This is either unregulated or limited in other nations including South Africa, Morocco, Nigeria, and Ghana. Only South Africa and Uganda define and allow cryptocurrency wealth management, however, the same is not permitted in Morocco, Kenya, Nigeria, or Tanzania. Bitcoin is not regulated in Ghana, but it is prohibited in Egypt. And while most nations permit digital authentication laws, these are still being created in Egypt and Morocco.
From the above, Fintechs that provide simplified onboarding and digital processes are ideally positioned to seize the opportunity and upend the status quo especially in the financial services industry, boosting penetration and services in Africa.