The development of financial technology (fintech) start-ups is a global phenomenon taking place across major cities around the globe, with the African continent not lagging too far behind. As the African population and wealth grows, the emergence of a new middle class with varying financial needs has appeared across the continent. In other to cater for their needs, fintech entrepreneurs and investors are beginning to seek value creation in filling demand gaps. For this reason, fintech has become a major topic of discussion in recent years. The sector plays an essential role in providing services which otherwise the majority of traditional financial institutions have failed to deliver.
In the light of growth returning to the African continent after challenging periods, originating from the slump of commodity prices, has brought about the return of fintech innovation and activity across the region. Africa is rapidly becoming home to a swelling fintech scene, benefiting from the adverse conditions traditional banks have faced.
Traditional Finance in Africa
As a market, Africa has all the foundations for growth and development. The majority of the African financial system can be characterised by a combination of predominantly traditional banks and some non-banks providing payment services to customers. However other opportunities have begun to arise; financial technology start-ups have started emerging to provide key financial services across various segments. This growth of financial technology start-ups has resulted in the transformation of the financial economy and has allowed the public to access financial services. But does this growth be viewed as a threat to the more established institutions of African nations?
Evidence proves otherwise. The growth of the fintech sector is a testament to the many opportunities that it has provided to the continent. The growth of fintech has given opportunities for co-operation between traditional banks and new innovative financial technology companies. As African customers financial needs evolve, banks are now equipped to meet these needs by leveraging new technologies provided by fintech start-ups. Banks can improve the customer experience since more and more financial transactions are conducted via digital channels.
In countries, such as Nigeria, there has been steady progress in improving financial inclusion. However, up to 40% of Nigerians are still excluded from access to financial services. The Central Bank of Nigeria (CBN) aims to reduce this number to 20% by the end of the decade. Fintech companies, who can create innovative products, can help reach the high number of unbanked in Nigeria. Competing with traditional firms will drive prices down and raise access for all Nigerians.
With all this, fintech is expected to experience broad growth throughout the continent.
Opportunities in Africa For Fintech
According to research from PWC Africa, 2018 is a pivotal year for fintech innovation. Tech-savvy young Africans and more extensive access to the internet will help drive this growth. Countries such as Nigeria, Kenya, South Africa and Ghana are considered to be at the forefront of this fintech revolution, owing to their well-nurtured tech hubs.
Reports by Disrupt Africa suggest that the fintech industry continues to be one of the most popular sectors of funding. Up to 2017, over $100m has been pumped into the industry. The increase of mobile phone adoption by Africans, as well as greater internet access, has made in a lucrative sector.
In Nigeria, the percentage of adults owning a smartphone is estimated at 28%, with 76% of internet traffic routed through mobile phones. Mobile phones usage has provided the opportunities to many as an alternative payment, saving and lending services. In Kenya, for example, mobile-money services, such as M-Pesa, are a response to the absence and unavailability of banks. M-Pesa is a mobile-money service that gives millions of Africans access to digital finance. Transfers can be made with the use of texting. The service has brought financial services to large numbers of unbanked.
In most of the continent, up to 90% of retail payments are made using cash. There is a lack electronic transaction infrastructure, and this is an opening that fintech firms can exploit, and give customers a more convenient way to store and transfer money. Ghana, with a predominantly cash-based economy, has been responding well to the fintech opportunity. There has been an exponential growth in mobile money operations, from an average monthly transaction value of $5m in 2011 to $142.8m in 2016.
Within the next decade, the investment in internet infrastructure by African countries will be rewarded by an increase in GDP growth of over $300bn, according to McKinsey. An expanding digital economy facilitates the transformations and growth of other sectors, with retail set to be an early beneficiary of the fintech boom.
Despite millions of people getting bigger salaries, there has not been a relative increase in retail opportunities. There is an opportunity for e-commerce sites to take advantage of this. Fintech offerings will bridge the gap between online retailer and customer.
According to McKinsey, the fintech sector could handle 10% of retail sales within the largest economies on the continent, roughly equivalent to $75bn. Thus a majority of African governments have acknowledged the importance of fintech in improving social development and expanding domestic economies.
The Road Ahead
Africa has a pipeline of cheap but talented tech workers, and this is one of the driving forces behind the emergence of fintech start-ups on the continent. Fintech sector development across the continent is expected to continue to increase, with investment increasing significantly from $198m in 2014 to $800m in 2016. Investors are increasingly attracted to the industry’s potential to tap into Africa’s huge unserved population. It is a growing sector that continues to play a pivotal role in nations’ economies. With the continuing shifts of the new generation of Africans, it is expected to become a dominant industry across the continent in the near future.
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