Africa finds its own path for fintech development

Fintech in Africa remains the most financially supported area of tech start-up activity in the continent. 

The Disrupt Africa African Tech Startups Funding Report 2016 found that fintechs received a combined $31.4 million in investment during the year.

Eugene Danilkis, CEO of cloud banking platform Mambu, says there is potential for quick expansion in Africa as more consumers on the continent access modern technology.

“Africa is in the early but rapid phases of fintech development," he says. "Having started off on the payments side, it will move quickly and leapfrog to more complex financial services as smartphone penetration deepens. 

"There is a big opportunity for extensive growth with a population of 1.2 billion, which will double over the next 30 years.”

However, one banker at an African bank, who wished to remain anonymous, says there is a lack of fintech innovation and limited funding coming in to the continent to support a sustained level of growth. Without the development of such companies, banks are themselves looking to develop new technologies. 

The pattern is the opposite of what is being seen in Europe and the US, where banks are actively financing and buying out fintechs.

Danilkis agrees there is not the same level of outside funding flowing in to support start-up companies, adding: “There is less venture capital flowing into Africa than Europe and America since investors tend to focus close to home and regions they know.”

Alix Murphy, director of mobile partnerships at WorldRemit, argues that investment is coming from the continent itself, and not just coming in through traditional venture capital. This is particularly the case for mobile money.

“It is easy to think a lot of the financing will come from abroad, but when it comes to mobile money, the telcos are investing their own resources into building out this business," she says. "They are recognizing the need to differentiate themselves in the space, beyond voice and data, and create revenue streams that can prove lucrative in the long term.”

Murphy says the flow of investment will not replicate what has been seen overseas. Instead, the providers themselves will be financing the services, and it will be them, and not the banks, that ultimately end up using them. 

She says: “We’re seeing significant revenues coming from the mobile money providers: the revenues of the top providers passed a billion dollars in the last year, according to the GSMA. They are not seeking investment to come in internationally, it is coming from the providers themselves. They know it is an area they need to grow.”

Further, overseas investors might be reluctant to be step forward with financing due to the length of time it takes them to see returns on their investments. 

Murphy explains: “There is a lot of investment into mobile money as a product area, but it takes a long time to become profitable. From an upfront investment it can still be between five and eight years before the investor will see any profit. That’s why building an ecosystem of businesses and services around mobile money is so important.”

The way the fintechs emerge is also likely to look very different to what has come before. The infrastructure of the continent is vastly different to other markets, and this might slow down adoption rates. 

However, the continent has proven itself time and again to be highly receptive to technological developments when implemented. In many ways, it paved the way for mobile payments. It is 10 years since the launch of Kenyan mobile money service M-Pesa in March 2007, which has grown to 25 million active users in that period.

“We see more fintechs spinning off from established organizations than purely venture-backed start-ups in the area,” says Mambu's Danilkis. “These are the ones who will fund the company’s early days and see the potential for market opportunities and reach.”

As well as funding, these companies also do not have the same regulatory support, such as the fintech sandbox implemented by the FCA in the UK to give companies a place to operate within the safe boundaries of the regulator.

Although the process is different, the fintech start-ups are still looking to encroach into the space the banks occupy in Africa. Banks need to take a long-term approach to the emergence of fintechs to ensure they are providing services relevant to their customers. 

Says Danilkis: “With fintech, banks often upset something which may cannibalize their business. But it is necessary for their long-term strategy and for it to be really successful they have to buy into the long-term impact as opposed to just using a fintech or accelerators as a marketing messages.”