It is a challenging time for Africa’s fintechs and its banks. Economic volatility has finally caught up with Africa’s venture capital market.
Last year the volume of investment into tech startups was just $3.5 billion, a little over half the previous year’s total, according to investment firm Partech total.
Fintech firms accounted for $825 million of that figure – down 56% on the previous year. And a significant chunk of fintech funding, just over $300 million, went to one country – Egypt. That left the other three markets making up the African fintech big four – South Africa, Nigeria and Kenya – with just over $500 million between them.
Traditional lenders, meanwhile, have enjoyed robust profits buoyed by high interest rates. But this masks a seismic shift underway across the entire financial sector. New generations of neo-banks are rising, with all of the tech and none of the overheads that weigh down legacy firms.
The fintech sector may have had a tough 2023 in terms of funding. But established fintech players are increasingly coming of age, connecting the millions of unbanked and under-served customers that existing banks struggle to reach. For all the diversity across Africa’s different markets, this theme of old versus new is one that runs through the continent.
Ethical evolution
South Africa is often treated separately when it comes to African fintech analysis. It cannot match Nigeria for market potential or Ghana for rapid growth, but it is by far the largest and most developed financial market, accounting for around 40% of African financial services revenue.
When you look at South Africa and the rest of Africa, a lot of the big players are coming under threat
It is also the hub where firms and organisations with continental reach base themselves. It has set standards that other countries have followed, and crucially it has the infrastructure, both digital and physical, that other countries lack.
In March this year, PayShap, a central bank-driven real-time rapid payment platform, celebrated its first birthday. Aimed at providing customers with a system that is faster, safer and far more accessible, PayShap payments passed R19.5 billion in May this year. There are more than six million ShapIDs registered customers and 10 participating lenders. South African bank executives say there has been a massive reduction in the cost customers face for a real-time clearing payment.
But just because South Africa’s banking market is more mature does not mean it is not under pressure to evolve. Quite the opposite. “When you look at South Africa and the rest of Africa, a lot of the big players are coming under threat,” says Chantal Maritz, a partner and payments transformation leader at PwC in South Africa. “Banks and non-traditional financial services players are transforming their businesses and their operating models.”
This transformation is fuelled by a mixture of global economic volatility, changing customer expectations of what banking can provide and disruption in the form of new digital technologies.
But, reflecting the South African market’s maturity, the transformation there is at a more advanced stage. Across many African markets, fintechs are fighting to solve the issue of financial inclusion.
In South Africa, the traditional measure of financial inclusion – whether one has a bank account or access to payment systems – covers almost 90% of the population. As Rolf Eichweber, CEO of bank build at Old Mutual, puts it “that definition is not good enough anymore”.
Even measuring financial inclusion as fair access to credit fails to address what many banking executives see as one of the key promises of the tech revolution – ethical engagement and education. World Bank data indicates that only around 10% of the South African population are unbanked, but studies put financial literacy at 50% or higher.
“The implications of this mismatch are profound,” says Eichweber. “The data would suggest that a significant portion of South Africans are active in the financial system, but not supported by the levels of [financial] literacy to make it work for them.”
Most banks in South Africa can claim some form of financial coaching capability, whether that is an internal chatbot or connecting to an outside financial education app. But it is one thing to direct a customer to an outside app that provides resources to be read and studied. It is quite another to provide that customer with direct real time context about their finances. This, says Eichweber, is the promise of generative AI. Hyper-personalised, contextual conversations with customers based on real-time data and provided through mobile devices.
“Everyone is talking about, thinking about and trying to understand the implications,” says Eichweber. “If you've got real time technology that can see minute by minute, hour by hour, day by day, which way the customer is going [you can] step in early to prevent the customer from defaulting or help them pick a product that doesn't drive them into the default space.”
Lean versus legacy
South Africa’s legacy players desperately want to take advantage of the new opportunities inherent in AI and digital finance. The problem they face is digital upstarts.
“Neo banks like Tyme Bank and Discovery Bank have got the platform and the capability to roll this out faster,” says Eichweber, who was a co-founder of Tyme Bank, which launched as an entirely digital lender in 2019.
In January this year, Tyme announced that it had become profitable in December 2023, which would make it the first African digital bank ever to break even. The bank’s lending portfolio is growing 30% year-on year, driven in large part by the Merchant Cash Advance service that provides financing to SMEs. The bank boasts the ability to onboard customers in under five minutes and the lowest fees of any major lender.
The financial releases of all the major banks in South Africa show they are spending vast amounts of money on getting to this point. The challenging question for the executives of all of these organisations is: how fast can they get there?
An annual Solidarity Research Institute report on South African bank fees showed that in 2024 only one other firm is anywhere close to Tyme; rival digital lender Bank Zero.
It is not hard to see why these digital upstarts are enjoying rapid SME-driven portfolio growth and attracting retail customers with low fees. The average retail bank with its network of branches and legacy infrastructure has a cost-to-income ratio of perhaps 50%-55%, says Eichweber. The new generation of cloud-native software-as-a-service lenders have a huge cost advantage in putting a new platform together.
“The financial releases of all the major banks in South Africa show they are spending vast amounts of money on getting to this point,” says Eichweber. “The challenging question for the executives of all of these organisations is: how fast can they get there?”
The same story is playing out in Nigeria despite the huge differences between the two countries. Nigeria, with the largest population and economy on the continent, dwarfs South Africa in terms of potential market. But despite the Nigerian government’s target of having 95% inclusion by 2024, the figure at the end of 2023 was just 64%, according Enhancing Financial Innovation & Access, a financial sector development organisation.
Nigeria’s legacy banks have done a solid job of banking large firms and high-end retail customers. But small businesses and low and middle-income customers all too frequently find themselves struggling. “Commercial banks or big banks do not have the capability to serve middle income or small business,” says Uzoma Dozie, who left the Nigerian banking sector to become founder and CEO of fintech, Sparkle.
A few decades ago when Nigeria’s big banks came onto the scene, “they were the new generation, they had the new system,” he says. But now those same systems are not geared towards the clients most in need of banking services. Instead, legacy bankers are buying new banking platforms from India or the US and trying to customise them.
Commercial banks or big banks do not have the capability to serve middle income or small business
Seyi Ebenezer, CEO of Payaza, a payment gateway solution provider operating across 13 African countries and North America, agrees that small businesses are “the bedrock” of all of the conversation around digitalisation.
“Multinationals and big domestic corporations have their banking sorted out,” he says, but the 40 million SMEs in Nigeria do not.
Over 90% of micro-entrepreneurs in Kenya and Ghana use a mobile money account, according to surveys by GSMA, a mobile industry organisation. In Nigeria, that figure is just over 20%. “Nigeria has huge potential for mobile money,” says Ebenezer
Fintechs are also stepping in to provide the kind of advisory support to SMEs that banks would provide to large corporations. Payaza is creating a marketplace for SMEs to help them register their business, create a website and utilise e-commerce.
“We tell them that [going online] is going to create an opportunity for someone in Korea or Hong Kong to access their businesses,” says Ebenezer adding that Payaza is also planning to help with things like branding and bookkeeping.
Like in South Africa, Ebezner also hopes to see AI help improve education and financial literacy in markets like Nigeria. Default rates in Nigeria have jumped in the face of slowing economic growth and surging inflation. Customers are not to blame for these headwinds, but greater efforts to improve digital and financial literacy would help emphasise the implications of taking on credit.
Fintech and banking executives say that in Nigeria there are too few consequences of simply defaulting on a loan, which could have detrimental effects on the burgeoning digital finance industry.
“Part of financial literacy [is understanding] that when you take out credit you can’t walk away from it,” says Ebenezer. “If three or six or seven financial institutions shut down that it is going to give a lack of credibility to the system, [we need] more education for the people who are taking [out credit].”
Reaching customers
For all the promise of digital innovation, the rapid evolution of technology still has to grapple with the hurdles of actually reaching customers in the first place. Even in South Africa where the population is highly banked, PwC’s Maritz says it remains very dependent on cashing out and so bank accounts function more like “post boxes”.
“That is the problem to solve in the greater ecosystem – it's about connectivity, it's about devices, about data being expensive, it's about electricity not always being available, it's about how to enable this in the hard to reach rural areas.”
Part of financial literacy [is understanding] that when you take out credit you can’t walk away from it. If three or six or seven financial institutions shut down that it is going to give a lack of credibility to the system, [we need] more education for the people who are taking [out credit].
These challenges are even more present in the faster growing African markets. Fintech M-KOPA operates across the big four African countries – excluding Egypt – aiming to provide affordable digital financial services to underbanked consumers using a digital micropayments model.
Its customers are people without regular income or a credit history; people very hard for legacy banks to reach cost-effectively. But existing banks are keen to provide financial support to promising fintechs trying to bridge the gap.
Last year, Standard Bank Group arranged a $202 million sustainability-linked, multi-currency syndicated facility for M-KOPA – the largest such facility for an African fintech.
As of late 2023, M-KOPA has provided over $1 billion in credit and helped four million users access smartphone financing, digital loans and health insurance. Technology is a key part of the firm’s success. M-KOPA’s in-house technology stack has been key to optimising customer experience, developing new products and reaching underserved markets.
“We use AI and machine learning to support our predictive loss rate models and to determine the optimal product and service for each customer based on their history with M-KOPA and repayment behaviour,” says Mayur Patel, president and managing director at M-KOPA.
But when it comes to the challenges of literacy, both digital and financial, and physical infrastructure, there is no substitute for boots on the ground. Patel says M-KOPA’s direct distribution model goes a long way to addressing these gaps. The firm uses direct sales representatives – over 20,000 of them across its markets – deployed across rural and urban areas to help onboard customers.
One of the first assets M-KOPA typically helps customers purchase is a smartphone. “These are embedded with life-enhancing digital financial services that they can pay for in small instalments,” says Patel. “One out of every two M-KOPA customers use their M-KOPA smartphone to generate an income.”
The growth of mobile money means that collaboration with telcos is just as important as working with banks. M-KOPA has formed strong partnerships with leading telcos across its key markets to provide financing for smartphones and data bundles for their use.
Mobile money use has also helped determine M-KOPA’s choice of market. After starting in Kenya more than a decade ago, the firm’s next market entry was Uganda. “It has a fast-growing mobile money ecosystem,” says Patel. “In 2015 over 20 million Ugandans were registered mobile money users. That has now grown to over 35 million, which makes it an attractive market for our affordable digital financing model.”
Uganda’s market is growing quickly, but Kenya remains a powerhouse with a well-deserved reputation for financial innovation. That reputation was built on the stunning growth of M-Pesa, which has long been Africa’s most successful mobile money system.
Connectivity in Kenya is significantly higher than in most other African countries. Smartphone penetration in Uganda is a little over 20%, data from the Communications Authority of Kenya suggests smartphone penetration has passed 60%.
The country also has a history of supporting digital development and Nairobi is one of the continent's tech hubs. A Disrupt Africa report found that Kenyan start-ups were more likely to undergo some form of incubation or acceleration than their peers in other African countries. Payaza’s Ebenezer says an advantage of Kenya is the straightforward regulatory landscape. The Central Bank of Kenya has set an example for what a pro-active regulator can do to fuel innovation while protecting customers.
With over 90% of the mobile money market, there is no sense in trying to compete directly with M-PESA. But Ebenezer says the opportunities come from partnering with M-PESA and then creating innovative solutions to specific problems. This is what Payaza has done with housing.
Unlike in Nigeria where rent is yearly, Kenyans pay monthly. Payaza partnered with M-PESA to offer a buy-now-pay-later type solution for customers to pay their first few months rent. Once again, the small and medium sized business also crops-up as a perennial fintech client beyond the reach of legacy banks. Ebenezer’s firm developed Payaza Boost, which provides SMEs with additional working capital equal to 25% of their average three-month turnover.
Regulatory reform needed
Digital finance faces a variety of challenges in Africa - economic instability, poor infrastructure and a competition for talent. But one theme in particular emerges from discussions with executives – fragmentation.
The diverse nature of African markets means firms have to tailor strategies for each country. This makes life difficult enough for fintechs, who have to adapt their products and services for each region. Layered on top of this is the additional headache of fragmented regulation.
Start-ups must navigate complex regulatory landscapes across different countries. This challenge is compounded by the lack of harmonised regulations, making it difficult for startups to scale regionally.
“Start-ups must navigate complex regulatory landscapes across different countries,” says Ameya Upadhyay, a partner at African start-up investor, Flourish. “This challenge is compounded by the lack of harmonised regulations, making it difficult for startups to scale regionally.”
Fintech executives point with envy to the Gulf Cooperation Council, where a firm with a licence to operate in the UAE can also do business in Kuwait or Saudi Arabia.
“It might take you nine months to get your licence in Nigeria, then you move into Ghana and you have another set of rules and you might be there for a year,” says Ebenezer. “All of these regions are completely different and you have separate issues to deal with. The process of obtaining a licence in Ghana is 100% different from the process of obtaining a licence in Kenya.”
The calls to remedy this problem are getting louder. At this year’s annual Africa CEO Forum held in Kigali, MTN Group president and CEO Ralph Mupita became the latest high-profile figure to call on governments to think about harmonising regulation. The faster this happens, the faster the half of Africa that lacks banking services gets support it desperately needs.