African Fintech Solutions Succeed Due To Nonexistent Banking Infrastructure

By Tom Jackson AFKI Original Published: August 10, 2017, 6:13 am
M-Pesa is a fintech success story in Africa. Photo - QuartzM-Pesa is a fintech success story in Africa. Photo - Quartz

Global volumes into fintech solutions in developed markets fell last year, but the use case in emerging markets is rapidly becoming more apparent.

“In developed markets, quick wins are not as obvious as everyone thought. The time to profit is long,” says Dominique Collett, who sold her South African fintech startup TYME to the Commonwealth Bank of Australia (CBA) in 2015 and now heads up investments for RMI Holdings and runs its Alphacode club for fintech startups.

“But in emerging markets, where banking infrastructure is not there, the use case is extraordinary. That message is becoming more and more obvious. The level of bank penetration is extraordinarily low. There are five times more mobile phones in Africa than there are bank accounts.”

The amount of funding coming into the space is increasing as more and more investors heed this “obvious” message.

According to the recent “Finnovating for Africa” report on the continent’s fintech startup space released by Disrupt Africa, a total of 57 African fintech startups raised over $92 million in funding between the beginning of 2015 and end of May 2017.

These figures make the fintech sector the most attractive when it comes to tech investments in Africa, with almost 20 percent of the 301 fintech startups tracked raising money in the last 29 months.

The ability to build a whole new infrastructure, and deliver access to financial services directly to the end user for the first time, is proving attractive to investors, compared to developed markets where fintech is about providing services to banks or delivering something that already exists with a better customer experience.

“The prospect of fintech startups “owning” the customer is very attractive to any investor. The rise of mobile-first success stories such as M-Pesa have definitely given credibility to the African fintech space,” said Carl Wazen, co-founder of payments startup Yoco, which raised a Series A funding round earlier this year.

Fintech solutions a success in Africa

M-Pesa, the flagship success story of Africa’s tech space, has certainly set the scene for the development of the fintech arena. Around 40 percent of Africa’s fintech startups operate in the payments and remittances sector, testifying to the nascent nature of the space and the need to get the basics right before more sophisticated services can be built.

Payments startups are also the most attractive when it comes to investment, with major rounds for the likes of South Africa’s Zoona, Kenya’s BitPesa and Nigeria’s Flutterwave. Collett says that she expects this to remain the case for the foreseeable future.

“That is one area where you can very easily see money. We are seeing a lot of really interesting players coming into the space,” she said.

Such services will act as pickaxes for more sophisticated financial services down the line.

Until recently, mobile network operators – such as Safaricom – dominated this space, and they have been cleaning up as a result. Yet this has largely been feature phone-based, and with smartphones now achieving critical mass, there is an opportunity for independent players using smarter interfaces such as apps.

“There is no doubt about the potential in the long-term, so I’d say for long-term investors the opportunity is massive if they back the right companies. Those looking for short-term gains will more than likely be disappointed,” said Wazen.

African challenges feeding innovation

However, some African companies are raising funding and seeing uptake overseas as a result of excellence in certain niches. B2B solutions are a good example of this, and especially South Africa’s Entersekt, which raised a multi-million dollar funding round in June.

The company offers authentication systems for online and mobile banking services, with its flagship product Transakt enabling a one-touch user experience. Entersekt’s patented security products already protect close to 100 million transactions monthly.

Collett said Entersekt had profited from its experience with fraud in South Africa, which western banks are only now just starting to see. This is a view shared by the company’s chief information officer, Gerhard Oosthuizen, who said African startups see a different set of problems and work in a different environment than those in the developed world.

“It’s a melting-pot of different cultures. All of these together means we approach solving problems differently,” he said. “This unique approach of “finding a way to make it work” means we come up with innovative ways that can disrupt established patterns.”

Many of the problems tackled by African fintech startups, inevitably, speak to a mobile-first world.

“The solutions we have had to come up with are built for rugged environments and diverse populations and use cases,” Oosthuizen said.

This track record of innovation is resulting in increased funding for African fintech startups, while of all the sub-sectors within Africa’s tech space it has also proven the most likely in terms of exits.

Those working and investing in the space are confident that the acquisitions of the likes of Fundamo, SnapScan and 22seven will merely prove the tip of the iceberg as the space grows in the years to come.

Tom Jackson is the co-founder of tech news and research platform Disrupt Africa and a journalist covering innovation on the continent from the Cape to Cairo.

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