Fintech in Africa, as elsewhere in the world, is big business. Investment is flooding into startups providing innovative ways of offering financial services.
Startups in the fintech space took on almost 30 per cent of the total funding raised by African tech businesses in 2015. Globally, growth in the sector is huge, with US$19.1 billion invested globally last year, a 106 per cent jump from 2014.
But the fintech space in Africa is different to that in developed economies, with a whole raft of opportunities presented by unique factors that are not found elsewhere in the world.
1. African fintech is not disrupting anything
Whereas in developed economies fintech is disrupting traditional banks and financial institutions, in most of Africa it is disrupting nothing at all. There is nothing there for it to disrupt. In developed countries, the formal banking system is very widespread, with physical bank branches available in every city, town and village. This is not the case in most of Africa, where it has not been financially viable for banks to offer last-mile services. South Africa’s highly-developed financial services sector is the exception rather than the rule.
Fintech startups in Africa, then, are building a whole new infrastructure rather than disrupting an existing one. Mobile wallets are functioning as bank accounts; there will never be a need for most Africans to adopt traditional banking services. And these mobile wallets are then creating access to other financial services, such as insurance and loans. An example is MFS Africa which has connected 80 million mobile wallets in Africa, enabling cross-currency, cross-border, cross-network payments through entirely new infrastructure. This is the exciting thing about the fintech revolution in Africa. It is building an industry from scratch.
2. Africa leads the way in sector convergence
Africa is ahead of the rest of the world when it comes to convergence between different sectors. Because of the unserved demand for financial services, fintech is becoming relevant for players in other sectors. And the widespread use of mobile wallets is enabling companies that are already serving low and middle income segments to broaden their service offering to include other financial services.
Take the prepaid solar sector pioneered by M-KOPA Solar and others. They started out as prepaid solar businesses but they are now becoming consumer asset finance businesses. If you build up a loyal customer base in any sector, you will discover that you can offer financial services to them through your platform to create a more solid business model.
This is only set to increase over the next few years. Health companies will start launching health insurance, e-learning companies will start offering education loans. The barriers between sectors are eroding, and will continue to do so.
3. Big data is a bigger game changer in Africa
Big data has the potential to be an even bigger game changer in Africa than in developed economies. Because mobile payments and mobile usage are allowing for data to be collected about people we previously knew very little about, the opportunities that spring from this data are much bigger. We can identify particular needs and demands in certain markets, which gives us a unique advantage in shaping the way financial services are being delivered.
Good examples of this include two of Goodwell’s portfolio companies. Nomanini is aiming to have one million of its point-of-sale devices in the hands of informal market merchants by 2020, selling various virtual goods, such as airtime and electricity credit. This way, it will build up a huge amount of data, data which has until now been lacking in informal markets. The same can be said of Musoni Systems, which through its cloud based core banking solution is building up a tremendous amount of information, previously unavailable, on small scale financial service providers and low income end-users. This makes companies like these unique.
4. Innovation is boosted by integration of new technologies
The innovative power of fintech in Africa is boosted by the convergence of different technologies to resolve logistical and distribution challenges. In developed markets there are exciting innovations in big data, internet of things (IoT), cloud computing, software as a service (SaaS), on demand services and blockchains. In Africa we see the same innovations, but they are often even more effective because they are integrated in one application. It is the convergence of these technologies that creates an accelerated rate of innovation. Nomanini is again an example of this kind of integration: their devices are connected (IoT), delivering digital services on demand, managed through a cloud based service (SaaS) that captures the data and enables distributors to manage large networks of informal merchants or mobile money agents remotely.
5. The biggest market is unserved
Unlike elsewhere in the world, in Africa, the biggest market is an unserved market. Around 330 million adult Africans, approximately 80 per cent of the continent’s population, lack access to formal financial services. The vast majority of potential customers are as yet unclaimed, though they are getting switched on very rapidly.
There is a health warning here, however. Providing financial services to the poor is something you have to do carefully. People who are here to make a quick buck and don’t really care about the end-user will grab these opportunities. We expect to see a surge in payday lenders and other consumer finance providers that operate irresponsibly, thereby creating a new credit bubble. There is an urgent need for better regulation of mobile financial services in Africa, and some form of code of conduct to ensure that the end users are protected from harmful practices and served responsibly.
This also places an obligation on funders of fintech operations, such as ourselves at Goodwell Investments. There is excitement that the gap is being closed very rapidly, but concern also about the risk that vulnerable sectors of the population are being taken advantage of. The GSMA Mobile Money Code of Conduct, the SMART Campaign and the UN Principles for Responsible Investment are already providing a useful set of guidelines, but we all must do more to ensure the end-user of mobile financial services is protected.
*Wim van der Beek is founder and managing partner of Goodwell Investments, a pioneering impact investment firm focused on financial inclusion and inclusive growth in other sectors providing basic goods and services and income generation opportunities to the underserved.
Since 2006 Goodwell has raised 5 funds with over $100 mln in capita+l. Goodwell has invested in financial services and technology companies in India and Africa, ranging from classical microfinance to mobile payments, rural banking, affordable housing finance to merchant payment networks and public transport technology. Goodwell’s 22 portfolio companies have reached over 10 million households with more than USD 1.2 billion in financial products and services, and employ more than 20,000 employees.
The firm is realising top quartile investment returns and making a significant impact, demonstrating that it is possible to be commercially successful while having an impact at the same time. Goodwell manages its funds in partnerships with local partner firms that have become established names in the impact investment sector – in India (Aavishkaar), Nigeria (Alitheia) and Ghana (JCS).
Goodwell has a unique mix of investors: pioneering impact investors, foundations and family offices, as well as development finance institutions, funds-of-funds, banks, pension funds and other institutional investors.
Wim is a private equity investor with 25+ years of experience in financial structuring, investment funds, venture capital and private equity investments. He is currently based in South Africa to build Goodwell’s local member firm for Southern Africa. He is a former PWC partner and co-founder of an institutional investment fintech company.