Into Africa – The rise and success of FinTech Startups

Into Africa – The rise and success of FinTech Startups - Post image

FinTech is short for “Financial Technology” – the concept that has plugged our continent (Africa) of lately. It brings about structured change and digitization within the financial services industry and there are considerable implications for the African financial services industry.

The rise of FinTech is been understood within the framework of the Digital Market Outlook – a digital infrastructure allowing the establishment of new types agreements and procedures in the areas of banking (lending, investment strategies and payments). FinTech is a double sided coin representing finance (heads) and technology (tails). It refers to a couple of contextual ideas – 1) it refers to technical innovation being applied in a traditional financial services space or 2) it refers to innovative financial services offerings which disrupts the existing financial services market/landscape. It is one of the most exciting and dynamic segments of the financial services marketplace.

Global investment in FinTech ventures has tripled over the last five years and will double again to an estimated $6 Billion by 2018 – according to a recent report by Accenture and the Partnership Fund of New York City. FinTech is a new phenomenon which has caught glimpse of the nature of Africa’s existing potentials and opportunities. The continued expansion of digital connectivity is a primary driver – with more and more connected devices in the hands of businesses and consumers, added to that, greater internet connectivity. The economic downturn also plays a part here – whereby financial institutions have turned to technology as a way of improving the effectiveness of their processes while reducing costs. Recently, a range of new regulations introduced, have created demand for new and innovative ways to managing compliance and reducing risks.

The Fintech market is characterized by a rapidly growing number of start-ups and businesses not requiring a banking license to operate. What makes FinTech start-ups tick to embrace the digitization process of financial services are: a simplified access for end users via the internet or mobile apps; an increase in the processing speed of automated processes; reduction in costs; a stronger focus on customer services; more accelerated convenience; higher transparency and the exploitation of network effects. These are the halo foundation effects for any start-up with intent on FinTech.

FinTech Market Segments

Some of the most active/profitable areas in the FinTech market are in the following segments:

  • Data and Analytics: where exploitation of vast amount of data created by the financial services sector, takes precedence. Some use data in a way that is customer facing, while others are using data to help manage risks – however, confidentiality of sensitive personal data is a top priority for regulators and consumers – data protection concerns are therefore a critical consideration for FinTech companies working with personal data.
  • Artificial Intelligence: big data mean big returns. Companies in this space use data and analytics to automate decision making processes, technology that is valuable when the speed and/or volume of information means that real time human analysis is unfeasible. Amazon currently uses recommendations engines, as artificial intelligence to relay the purchase recommendations to customers.
  • Payments: innovative start-ups; retailers; established banks; card companies and other payment service providers are all seeking to offer new payment solutions to meet consumer demand for payment instruments that are more secure, efficient and convenient.
  • Digital Currencies: also known as virtual currencies, which have no central monetary authority. Virtual currencies are generated across peer-to-peer (P2P) computer networks.
  • Crowd funding: another area of interest for start-up wanting to tap into this space. However, players in this market must be aware of the regulatory framework in which they operate.

Africa FinTech Successes

Africa is a greenfield opportunity for FinTech. One opportunity is to fundamentally change how more than a billion people pay for goods and services across an active continent. South Africa and Kenya are among the fastest growing smartphones markets in the world. 88% of Africans didn’t have a bank account according to 2015 research statistics, let alone a credit card – but they have a phone. In 2015, 183 million people in Africa, already owned a mobile wallet. That was 3x the users of ewallets in the US and expanding at 3x the annual growth rate of the US. If this continues, every African will have a mobile wallet by 2020.

The following are the outcomes of the research (publications & report reviews, international liaison, Africa sources) conducted by Legato Consultancy on payment developments in Africa in relation to the FinTech industry:

  1. 297 Million – internet users;
  2. 104 Million – active social network users;
  3. 864 Million – mobile subscription active and mobile penetration at 74% in the continent;
  4. $60 Billion – the mobile telecoms market worth;
  5. $234 Billion – the mobile telecoms market worth by 2020;
  6. $53.222 Million – transaction value in the FinTech market space;
  7. Transaction value expectation of an annual growth rate (CAGR 2016-2020) of 23.12% resulting in total amount of $122.308 Million in 2020;
  8. The markets largest segment – Digital Payments with a total transaction value of $51.937 Million in 2016.

Africa has seen some fantastic FinTech successes of lately, they are worthy of this piece.

  • In Johannesburg, during December 2015, the Rand Merchant Investment Holdings FinTech Club Alphacode, hosted Blockchain/Afrikoin Conference and currently operates a FinTech accelerator, which has the likes of LiveStockWealth and Decorum in their midst. The AlphaCode aims to accelerate FinTech startup to greater heights. AlphaCode is a club for next generation financial services entrepreneurs, which is supported by a physical workspace and virtual platform. AlphaCode seeks to create a next generation financial services eco-system by bringing together entrepreneurs, intrapreneurs, industry experts and thought leaders to connect, share knowledge and shape the industry.
  • Whereas, Barclays Rise, a global start-up community pioneering financial services and unlocking Africa’s potential, hosted a FinTech Africa’s Blockchain Conference in February 2016 in Cape Town and received 454 FinTech applications from startups eager to join the incubator/accelerator.
  • Space Kenya Networks Limited – a Kenyan web development company set to launch its own blockchain incubator, BitHub – aiming to bring together a consortium of individuals, organisations and expertise to drive the development and adoption of blockchain technologies within the African continent.
  • Pantera Capital Management – provided BitPesa over $1 Million in new funding for their African bitcoin operations.
  • The Savannah Fund, invested in BitFinance, a Zimbabwean bitcoin startup to test Bitcoin as the interoperable system currency for converting between African currencies making crossborder trading easier.
  • M-Pesa, the mobile money transfer solution that has transformed societies in Africa and now conquering other continents. Started in 2007 by Vodafone in Kenya and Tanzania, M-Pesa has grown to 30 million users worldwide. M-Pesa is mostly present in its countries of origin: Kenya and Tanzania and is fast gaining traction in India, Afghanistan, Lesotho, Egypt, Romania, South Africa and Mozambique. Kenya, is called “The Silicon Valley of Financial Innovation in Africa”.
  • 22Seven – a mobile app that links to users bank accounts and allows them track their spending and create a personal budget and even make investments.
  • Nomanini – a wireless device that links to a cloud software services allowing informal vendors to perform and process small transactions. Informal markets are a major part of Africa’s economies – but they are poorly served by mainstream banks and mostly still operate on cash.
  • Zoona – operates a cellphone based money transfer service, similar to M-Pesa. Zoona, operates in Zambia and Malawi which both lack money transfer infrastructure and majority of people are unbanked. Zoona also plans to expand to other African countries.
  • Cellulant – Kenya based and already well-established player on the African continent, with operations in 10 countries, employs 300 people and have connected 40 million customers in Africa-wide. The company offer mobile payments, banking services and allows for businesses to interact with their customers via cellphones.
  • GetBucks – an online system that gives customers access to short term loans and other financial product without the need to visit a bank branch. The company provides its customers with a convenient, safe and reliable way to gaining access to these financial products.

In conclusion, FinTech – holds great potential for the future of African economies. Mobile payments have revolutionized the financial industry in Sub-Saharan Africa, where more than two thirds of people have a cellphone, but only around one-third have bank accounts. Cash is still king in the region, and the financial architecture of bank branches, payment cards and transfer services that are ubiquitous in the West are still lacking, with slow work in progress. The mobile banking revolution is unique in its nature among FinTech trends. Its uniqueness comes from the fact that it started before the financial crisis of 2008. M‐Pesa, the undoubted flagship of the mobile banking revolution was set up in 2007.

Over 50 percent of the African population lives in areas not reachable by branch‐banking: no roads, no electricity, no security, and no infrastructure. But, even most of these people own a cell‐phone (often not a smart‐phone, but a non‐smart mobile device). What if you can have a bank account on your phone? What if your account number is your phone number? What if you can send money to anyone else with a mobile device by sending a PIN secured SMS text message? What if you can – logically – buy and sell goods and services this way? Undoubtedly genius… this is exactly what M‐Pesa and other FinTech startups do, changing the current status quo of financial services industry in Africa! Now an increasing number of homegrown companies are trying to build on the opportunities that this mobile revolution has created.

Compiled & Written by: Mr Dipolelo Moime, Chief Executive of Legato Consultancy Pty Ltd

Legato Consultancy Pty Ltd – Risk Advisory | Forensics | Investigations | Consulting

Legato Consultancy Pty Ltd is a dynamic risk advisory and specialized management consulting firm. We assist private and public companies to understand and manage the risks and opportunities of operating in today’s complex and unstable market environments. We offer a holistic and integrated approach to managing risk that drives improved business performance.

Our meticulous approach is based on current international benchmarks and we assist clients to address all potential areas of risk including strategic, internal and external operational, financial and non-financial risks as well as compliance risk issues. Our approach is tailored to our client’s needs, levels of maturity, organisations complexity and culture. At all stages in our engagement with a client, we promote knowledge sharing to ensure value add. Legato Consultancy assist fintech companies with expansion plans into Africa and other emerging markets.

For further insight into this subject, please contact Legato Consultancy!

The image is from Andre Gunawan and Tech in Asia

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