May 20, 2021 | 6 minutes read

Roots, Trees and African Fintech

By: Saul Levin
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There’s something special going on in Africa. In the past 6 months alone, Airtel Africa sold its mobile money business stake to TPG’s Rise fund for $200M, Stripe purchased Paystack for over $200M, and our portfolio Company, Kuda Bank, raised the largest ever seed round in Africa — $10M, and shortly thereafter went on to raise an additional $25M in Series A funding from Valar.

There’s an old African proverb that says that a tree cannot stand on the ground without its roots.

We strongly believe that over the next decade, consumers in Africa will enjoy financial services on par with their counterparts in Europe and the US bringing financial inclusion to a hugely underserved market. We see an opportunity to invest in the roots (critical layers of financial infrastructure) across the continent today that will enable the trees (financial services) of tomorrow.

Why Africa?

Africa quite possibly represents the single largest opportunity today to build financial products that will meaningfully change people’s lives. This is because people living in Africa have the lowest access to financial services in the world. Some of the historical reasons include lack of internet coverage, lack of systems and solutions leading to high transaction costs, limited competition, democracy, and economically viable unit economics.

Sub-Saharan Africa, with about 350 million unbanked adults, accounts for 17% of the global number of people without a bank account. In Nigeria, there are 124 million people without a bank account — more than half of the bankable population and SMEs in the country- which is more than the number of unbanked individuals in Brazil and Argentina combined (around 97 million people). This was the thesis supporting our investment in Kuda Bank, which is now on track to becoming the largest bank in the entire country.

The opportunity is multi-dimensional. Even those who do have a bank account lack access to other basic financial services such as savings, lending, investment and insurance products. So the lifetime value of a customer could be substantial.

There are a large number of critical pieces of infrastructure that need to be built to enable these services across the continent. Core banking infrastructure, credit scoring & analytics, mobile wallets, low cost remittances, payment processing & networks, as well as regulatory & compliance solutions are just a few areas we’re paying attention to as Africa builds out its FinTech stack.

Companies like Mono, who are building out a modern way to access data from financial accounts across Africa, are vital to the creation of many of the services we envision Africans having access to over the next decade.

McKinsey’s report on Banking in Africa contextualizes the opportunity well: “Globally, the banking industry is facing disappointing returns and sluggish growth…Africa’s banking sector provides a refreshing contrast. It’s markets are fast growing and nearly twice as profitable as the global average.”

The revenue of the banking sector in Africa amounted to $86B in 2020, and is expected to increase to $129B by 2022. Egypt, Angola, Nigeria and South Africa command the lion’s share of the continent’s banking revenue, estimated at around 68%.

Notably, while profits for banking in Africa are amongst the highest globally, the combination of COVID-19 resulting in economic contractions across the continent as well as drops in commodity prices pose a threat to this. Similarly, the large profit margins of banks and high fees prove to be providing a tremendous opportunity for new entrants.

Indeed, those who invest in and dedicate time building out these solutions will bear the fruits of their labor. Africa is the global banking industry’s second-most profitable region — driven by largely non competitive environments and high interest rates, so it’s a market waiting to be disrupted.

Why Now?

First: data costs are plummeting, creating a low cost opportunity for the delivery of financial services via the internet.

*Gross national income (GNI), the sum of a country’s gross domestic product (GDP) plus net income from abroad. It represents the value produced by a country’s economy in a given year, regardless of whether the source of the value created is domestic production or receipts from overseas.

Second: Mobile internet penetration has skyrocketed. In Nigeria for example, by 2025 64.9% of the population is expected to be a mobile internet user (up from just 9.6% in 2015).

Third: regulators are beginning to put pen to paper across Africa to build out frameworks that make it easier to build financial services and infrastructure while protecting consumers.

  • In 2019 the Central Bank of Egypt established a fintech regulatory sandbox as well as a $57M fintech fund, while also launching an initiative to subsidise 100,000 card terminals.
  • In September 2020, the Angolan National Bank and Beta-i created a fintech regulatory sandbox.
  • The National Bank of Ethiopia issued a long awaited directive that will regulate payment instruments and digital financial services in 2020.
  • The Central Bank of Nigeria issued the Regulatory Framework for Open Banking in Nigeria in February 2021.

The regulatory changes detailed above can be translated rather simply: 445 million people now have a greater chance of receiving regulated financial services than they did just 2 years ago.

Challenges

Companies building out financial services in Africa today will encounter monetization challenges given low income levels in many countries and face largely cash and mobile money based economies — which makes traditional retail banking offerings challenging in certain regions.

Additionally, while certain African countries are making regulatory strides to encourage innovation in financial services, the environment remains complex to navigate. In Nigeria, for example, there was a large outcry in March after the Central Bank cracked down on transactions on cryptocurrencies in the banking sector — ultimately prohibiting financial services from dealing with local cryptocurrency exchanges.

Other areas which face tough regulatory regimes include Foreign Exchange, for example. Entrepreneurs wishing to build in this space need to obtain both an International Money Transfer Operator (IMTO) as well as a Bureau de Change (BDC) license — an expensive and timely procedure for any early stage startup.

Nigerian Fintech Landscape

Long Story Short

In short, if you want to build a financial services business, Africa is a great place to do it and the best time to do it is now.

We’re on the lookout for entrepreneurs that are building Africa’s fintech roots — the critical layers of financial infrastructure that enable the financial services of tomorrow.

Join our Fintech Family, which already includes Kuda Bank, and Mono in Africa as well as StashStripeRapyd and many more around the globe.