Financial services incumbents and venture capitalists are playing leading roles in supporting Africa’s growing fintech sector, but startups still need more from a regulatory point of view to make scaling easier.
Disrupt Africa recently partnered AZA Finance, Revio, EMURGO Middle East & Africa, and MoneyHash to release a two-part podcast series looking at Africa’s fintech sector – the innovations that are being built, the challenges they are overcoming, and the support and funding ecosystem that is driving fintech’s growth on the continent.
From the advent of M-Pesa until the present day, African fintech has been about building accessibility to basic financial services, but now the rails are increasingly in place, there is room for serious innovation in all numbers of areas.
This innovation is hugely necessary. Financial exclusion is high – over 350 million adults in Sub-Saharan Africa live cash-to-cash, with no bank account, and the impacts of this are sizeable.
But why has this come to be the case? Do we blame the traditional banks? Did they fail when it came to financial inclusion on the continent? Nicole Dunn, co-founder and COO of South African payment orchestration platform Revio, says, in defence of the banks, that until not too long ago it would have been quite difficult to even imagine how such challenges could be overcome.
“The growth in mobile phone penetration has set a new foundation for what distribution and customer acquisition might look like, and makes it possible to profitably serve the base of the pyramid, if you want to call it that,” she said.
“At the same time I do think the banks have been very slow to change. They have excluded huge opportunities and focused on what they know and what they understand. And even today I think they are too slow to adopt new technologies or collaborate with fintechs who are able to help them access a wider part of the market.”
Elizabeth Rossiello, co-founder and CEO of AZA Finance, an African fintech company offering secure and efficient financial infrastructure for payments, foreign exchange, and settlement, does not believe that African banks failed, and indeed they have a key role to play.
“Many of the markets that we’re in right now, markets like South Africa, are dominated by the banks. There’s an oligopoly of the banks and the financial sector. So I don’t see them as failing, maybe they don’t have the features that you want them to have, or the UX, but they’ve got the power, they’ve got the control,” she said.
What do startups have that banks don’t when it comes to quickly rolling out new products to underserved segments?
“If you look, even globally, at the average net promoter score for large banks compared to fintechs, it is just astounding,” says Dunn. “Nubank I think has a 94 or 95 per cent net promoter score, and the average net promoter score of US banks is closer to 19 or 20 per cent. So I think what they’ve done really well is to obsess over customer problems and pain points and really build for those.”
Fintechs are also not encumbered by legacy technology.
“It’s very difficult to make things go fast in a bank because they have deeply complex legacy systems that have been contorted and distorted over time. And at the same time the role of a bank is very different. It’s really there to provide stability and security, and to manage risk. So perhaps it’s less appropriate that banks go after these interesting new greenfield, moonshot opportunities,” she said.
Now we are starting to see increasing collaboration between banks and startups, which follows a global trend. Ahmed Amer, co-CEO at Emurgo Middle East and Africa, says fintech has moved on from wanting to replace banks, to rather collaborating with them.
“It took a little time for this to happen, but after the dust settled folks started realising that there is actually a lot of value we can create together,” he said.
Rossiello agrees this is a global trend.
“Hopefully we’re entering the golden age of partnership. If you make room for us, everybody wins,” she said.
Challenges around working with incumbents are, then, starting to be overcome. But what other issues remain when it comes to scaling fintech on the continent? Dunn says the rollout of a huge variety of payment solutions on the continent has led to fragmentation.
“In Africa you’ve got more than 280 registered payment service providers. You’ve got 54 different markets, 42 different currencies, and very different regulatory regimes,” she said. “So as a merchant trying to do the most basic thing, which is collect revenue from my customers, I’m confronted with an enormous amount of complexity. At the same time I can’t pursue a digital-only payment strategy because consumers are still coming online, so there’s still a huge amount of cash-based or cash preference when it comes to transacting.”
It isn’t just the payments ecosystem on the continent that is fragmented, but also Africa’s regulatory regime, or rather regimes. The fact different African countries have different regulatory models, is holding the fintech space back, Rossiello says.
“It’s not that we don’t want regulation. It’s just not synchronised. Our regulatory strategy in Senegal is very different than what it is in Cameroon, or Ivory Coast. Similarly in Uganda and Kenya, two wildly different places to have a regulated product even though they’re in the same economic union. That’s really the struggle,” she said.
Fixing these problems is a long-term project, with multiple factors, and in the meantime fintechs have to adapt accordingly.
“It’s going to take a long time. Regulation takes time, politics takes time, governments take time. We’re not going to wait for everything to be perfect. But what we are going to do is have a different strategy in every country. And not every company is able to do that,” she said.
Fintech has become very popular for investors, leading the continent for funding. Since Disrupt Africa began tracking funding in the African tech startup space in 2015, 540 fintech startups from 25 countries have raised an extraordinary US$3.6 billion, three times more than any other sector.
“The last three years we’ve seen a huge influx of funding into Africa as a whole, and fintech and blockchain more specifically. This is the result of a knock-on domino effect of founders who’ve started companies and exited them at pretty amazing valuations,” said Amer.
Lots of funding, but Rossiello says – and this is true – that a couple of big outliers are inflating the overall numbers, think Flutterwave or MTN-Halan, and that investment is still insufficient.
“A small handful of companies have sucked up a gigantic portion of the investment. I think there’s also this bias towards looking for those younger companies, and so more experienced companies, Series B and Series C companies, really don’t get a lot of funding,” she said.
“I’m not complaining because when we started 10 years ago there were no seed funds, and now there are a lot of seed funds, but we still have no growth funds and we have no debt. So I think there’s so much need on the continent for more investment.”