By 2030, Africa will be fintech’s fastest growing region
Africa is expected to be the fastest growing region for fintech between 2021 and 2030, although revenues are estimated to reach $60 billion. This is according to a report from the Boston Consulting Group and QED Investors. South Africa, Nigeria, Egypt and Kenya are expected to drive this growth, which will see revenues grow at a compound annual growth rate of 32%.
More than any other sector in the African technology space, fintech has witnessed significant growth. Startups in the area have raised more than $2 billion since 2018 and consistently top the list of most funded sectors annually. Some of the most valuable startups in the region are also fintech startups.
Despite a population of more than one billion, more than half of Africans do not have a bank account. Consequently, most transactions are carried out in cash, a phenomenon many countries are working to change. Even fewer have access to credit services. Less than five percent of Nigerians have access to credit, and many businesses report that they do not have access to it.
Money transfer remains a challenge and the cost of sending money to the region is the highest globally.
Fintechs are capitalizing on this opportunity by providing Africans with access to digital financial services by leveraging growing smartphone adoption. Others such as Safaricom’s M-Pesa provide access to financial services for customers using a feature phone, allowing them to make mobile transfers using a mobile number. As of 2022, there were more than 184 million mobile money wallets on the continent.
This paints a picture of progress, but the global downturn in venture capital has hit startups in the region hard, and they have increasingly raised less money since Q3 2022. Fintechs, which have accounted for most of the funding, have also been hit hard , which has prompted many to lay off employees or close products as they strive for profitability. Some have even closed shop entirely.
However, the report believes that the challenges facing fintech will be short-lived. An excerpt says: “We believe that the challenges fintechs have recently faced represent a short-term correction in an otherwise long-term growth story, as the fundamentals of the sector have not changed.”
That is certainly the case for African fintech, as mobile and Internet penetration is expected to grow, opening up new prospects. Regulatory improvement may also prove to be key.
Kenya appears to have relaxed its stance on cryptocurrencies after stating its intention to tax its use in amendments to the Finance Act 2023. Nigeria, on the other hand, recently unveiled guidelines for open banking, which experts believe will drive competition in the sector. Similarly, despite being viewed as cruel by many Nigerians, the Central Bank of Nigeria’s recent cashless policy accelerated fintech adoption for many who had previously shied away from patronizing fintechs.
Challenges for African fintechs seeking growth
Despite this development, there are some challenges that stand in the way of fintechs being able to keep their promises. The first would be the macroeconomic environment.
Countries such as Nigeria, Egypt and Kenya, where most of the fintech innovation is taking place, are expected to have single-digit growth figures in 2023, a fall out of the slow economic growth they are witnessing. If this continues, it may be impossible to unlock value beyond payments.
The business models fintech has adopted will also play a big role. In Nigeria, for example, many startups adopted a freemium model as they worked to increase the number of users. But as funding becomes more difficult to access, many are starting to charge for services they previously bore the cost of providing.
This now puts them in direct competition with traditional financial institutions that are launching products for competing fintechs. GTCO, the holding company that houses Guaranty Trust Bank, has been pushing Investment One to customers in addition to Squad, the payment gateway.
There is also the not-so-small matter of a sustainable business model. While many fintechs have seen a growth in user numbers over the past year due to the CBN’s tightening of foreign exchange access, a relaxation by the CBN could see startups built around this value proposition match. Of course, one could argue that nimble as they are, they would swing, but given the fact that most of their customers are already beaten, they could still struggle.
Access to capital is another challenge as most of Africa’s funding comes from foreign investors. This is crucial, as many startups will need significant capital for user acquisition
As venture capitalists tighten their purse strings globally, African startup funding will be affected. Although local investors are increasingly raising money, they raise significantly less than their Western counterparts, which affects how much access fintechs have.
Moreso, their priority may be to support portfolio companies through the downturn, further shrinking the pie for African fintech. McKinsey’s 2022 fintech report highlighted this growing challenge, even as it pointed out that stimulating participation from local investors could be key to survival.
There is plenty of room for growth in the African fintech space as the report suggests, but legitimate threats remain. The startups that take advantage of the growth opportunities will be the ones that build solutions that take opportunities and threats into account.