Structural Shifts in African Financial Services

Africa’s fintech industry is progressing rapidly, especially in the face of political and economic challenges, and with the global pandemic, fintech in Africa is booming.

FREMONT, CA: The last two years witnessed a tremendous increase in tech start-ups in Africa, with around 5,200 companies. Half of these are fintech, making it their business to interrupt and augment traditional financial services. African fintech has already made crucial inroads into the market, with estimated revenues of around four to six billion USD in the previous years.

Experts opine that rather than a fintech disruption, Africa is experiencing a fintech eruption, and local and international investors are observing this. African fintech is emerging as a key investment destination, with average deal sizes increasing and the proportion of fintech funding in Africa increasing over the last year, bringing jobs and growth to African economies. This is just the beginning, and as fintech progresses, financial services on the continent are at an inflection point, and several African countries have a significant opportunity to capitalize on the recent momentum to unlock further potential in the domain.

Although there is a slowdown in funding aligning with global trends, significant growth and value creation is expected to lie ahead for the fintech industry in Africa. Cash usage in around 90 percent of transactions in Africa indicates that fintech revenues have huge potential to grow. If the sector reaches similar penetration levels to those observed in Kenya, a country with one of the highest levels of fintech penetration in the world, African fintech revenues will reach eight times their current value in the near future.

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An analysis estimates that Africa’s financial-services market could rise by 10 percent per annum, reaching about 230 billion USD in revenues shortly. Nimble fintech players have wasted no time in securing a share of this expanding market. As the fastest-growing start-up industry in Africa, the success of fintech companies is powered by various trends such as smartphone ownership, decreasing internet costs, expanded network coverage, and a young, fast-growing, and rapidly urbanizing population. The pandemic has accelerated existing trends toward digitization and created a fertile environment for new technology players, even as it caused critical hardship and disrupted lives and livelihoods across the continent.

Fintech players deliver significant value to their customers. Their transactional services can be up to 80% cheaper, and their savings interest rates are up to three times higher than those provided by traditional fintech players. In addition, remittance costs will be six times cheaper. The influx of funding and elevating supportive regulatory frameworks highlight that African fintech markets are at the beginning of exponential growth.

Growth in financial services across all of Africa’s countries will not be uniform. The largest value share in the market is currently concentrated in South Africa, which has the most progressive banking system on the continent. With the varying digital maturity levels across the countries, the opportunities in each market will differ. Economies with more mature financial systems and digital infrastructure, like South Africa and Nigeria, will observe more innovation in advanced financial services, including business-to-business liquidity and regulatory technology such as anti-money laundering and know-your-customer (KYC) compliance.

As digital becomes a way of life in Africa, it will be the next phase of fintech growth. African fintech and other stakeholders, including governments and investors, have opportunities to consider how the sector can achieve sustainability over the long term. Irrespective of these activities, Africa has only developed a few start-ups with a one billion USD valuation, and many ventures’ profitability is precarious, suggesting that more effort is needed to create the necessary conditions to unlock the market’s potential.