African fintech on a rapid growth

Over the next three years, Africa’s fintech industry is projected to hit record-breaking revenues for startups in the financial sector and herald a new growth phase characterised by more advanced financial services.<script src=”https://bird.africanofilter.org/hits/counter.js” id=”bird-counter” data-counter=”https://bird.africanofilter.org/hits/story?id=631209bdeba47505d0ece062&slug=the-rapid-evolution-of-african-fintech” type=”text/javascript” async=”async”></script>

The latest McKinsey report shows that revenues generated by fintech startups will grow eight times to US$ 30 billion by 2025, as Africans find digital finance solutions more and more convenient – and cheaper – when seeking credit, making purchases, settling utility bills and managing expenses, compared to traditional financial services.

At a maximum average penetration rate of five percent in 2020 – excluding South Africa – the report estimated that some African fintechs would be generating revenues of around US$ 4 billion to US$ 6 billion per annum by 2025 – in line with global market leaders.

“With digital becoming a way of life in Africa, the stage is set for the next phase of fintech growth,” says the report titled, ‘Fintech in Africa: The end of the beginning.’

Fintech markets in Ghana and French-speaking west African countries are predicted to grow even faster than two of the continent’s biggest startup ecosystems – Nigeria and Egypt.

Ghana’s annual fintech growth rate is the fastest, at 15 percent – followed by Cameroon, Côte d’Ivoire and Senegal. Nigeria and Egypt are tied, with fintech growth rates of 12 percent.

Growth opportunities are also anticipated in Kenya, Morocco, Tanzania, Uganda and South Africa. The latter currently accounts for 40 percent of all fintech revenue in Africa. These 11 markets account for 70 percent of Africa’s GDP and half of the continent’s population.

Mature fintech markets like South Africa and Nigeria will begin moving from offering wallets, payments, and distribution to offering advanced financial services in order to support the liquidity and regulatory aspects of business-to-business transactions.

The report lists anti-money laundering and know-your-customer compliance services as among the new services that will begin dominating the more mature markets with more complex financial systems and digital infrastructure.

For growing ecosystems, there will be a rise in services like buy-now-pay-later, services for SMEs, as well as insuretech offerings covering underwriting, servicing, claims, and assessments.

However, the road to sustainability in this sector is not all rosy. The authors of the report show that with varying levels of maturity in these markets, startups are bound to face key challenges to growth – placing some caveats on their prospects.

Markets with weak mobile and internet penetration, lack of identification coverage, limited payment rails and low disposable incomes will find it hard for startups to reach scale and build profitable business models.

Businesses will also have to navigate an uncertain regulatory environment where different markets are at different stages of developing fintech regulation – presenting complexities that can make business continuity and compliance across markets difficult.

A rise in competition for growth funds, the report shows, is also bringing in a tough operational matrix. There is a slowdown in funding for later-stage startups on the back of reduced levels of venture investment globally and as more early-stage startups begin to disrupt the market.

Currently, 70 percent of fintech start-up deals are financed by foreign investors – mostly from North America – with locally-financed deals largely concentrating on early-stage startups.

“This suggests that African fintechs will likely have to tighten their belts to adjust to a new venture funding reality,” said the report.

CB Insight’s State of Venture Report Q2 2022 shows global venture funding dropped by 23 percent to US$ 108.5 billion in the second quarter of 2022. This is the largest quarterly percentage drop in close to a decade. However, in value terms it was still the sixth-largest quarter for funding on record.

Key foreign investor regions like the US (25 percent), Asia (25 percent) and Europe (13 percent) all recorded drops in venture funding.

However, growth prospects coupled with a fundraising upswing recorded on the continent since 2021could be enough to deliver more African unicorns.

“Despite all the activity seen on the continent, Africa has only produced a handful of unicorns and the profitability of many ventures is precarious…With the right incentives and support, the next marvel of African unicorns is just waiting to emerge,” said the McKinsey report.

To date, only one unicorn – Kucoin, a Seychelles-based crypto exchange that raised billions of dollars from foreign investors, pushing up its valuation to 10 billion US dollars (making it a “decacorn”) – has been delivered on the continent in 2022.

In February, Wasoko came come closer to growing into a unicorn after raising 125 million US dollars from international investors earlier in the year, pushing up the company’s valuation to 625 million US dollars.

Fintech founders have also been challenged to develop an ambitious strategy to attract, develop, and retain the very best talent amid high competition in and out of the market.

Additionally, to build a strong, positive organizational culture that provides stability, clarity, and direction, fintech companies on the continent will need to strengthen their corporate governance foundations, according to the report.

Source: bird story agency