The pandemic has intensified the role of digitization, banks cutting costs, with customers handling transactions on their phones. Banks and fintech companies are competing for market share, sometimes collaborating, and competing to recruit top talents. Many African consumers are unbanked, underbanked, and underserved. Lack of access to financial services, especially in rural areas, affordability, expensive internet, and issues of poor user experience, contribute to the frustrating experience. The continent’s digitally savvy and young individuals are seeking a better consumer experience in financial services. Banks will likely not become technology companies, but technology companies can provide financial services. And to a large extent, this is what is driving the evolution in the fintech industry. FinTechs have swiftly taken advantage of the lapses in financial services, and are swiftly attracting young tech-savvy individuals, while also ramping up for global position faster than the banks.
Africa’s population is the youngest in the world and almost 60% of the continent’s 1.4 billion population is under the age of 25. Young people are aware of the user experience their counterparts enjoy in developed countries. The plethora of e-commerce services in the continents are recognizing that payments remain an experience worth simplifying for greater adoption and retention of users.
Non cryptocurrency fintech
Some countries in the continent have enjoyed rapid adoption of mobile money and other channels due to regulatory and other sociopolitical factors. Flutterwave, a payments company, raised $170 million in Series C round in March. The company’s CEO, Olugbenga Agboola, says the company is live in 20 African countries with an infrastructure reach in over 33 countries. The company says more than 290,000 businesses use its platform to carry out payments “in 150 currencies and multiple payment modes including local and international cards, mobile wallets, bank transfers, Barter by Flutterwave.” On the other hand, Wave recently raised $200M in Series A, which is going toward building financial infrastructure in Africa. A majority of Africa’s newly emerging “unicorns” – tech companies valued at over $1bn each – focus on payments.
There are fintech companies with an African focus including OPay, Wave, Paga, Paystack, Fawry, YellowCard etc.
Investors from China to Silicon Valley have caught a huge slice in the African fintech market. Lagos (Nigeria), attracting the lion’s share of investments, has taken Nairobi’s (Kenya) crown as leader of Africa’s tech revolution. Nigeria has pulled in over $1bn in venture capital investment in the last two years. In October 2020, payments giant Stripe acquired Nigerian payments company Paystack for a reported $200m in cash and stock.
However, 95% of transactions are still in cash and there are many inefficient processes to improve. There is still room for improvements in payments.
Cryptocurrency
Crypto makes many banking systems irrelevant.
Another payment sector seeing rapid transformation is cross-border remittance. According to a World Bank report on remittance cost, Africa is the most expensive region to send money to, where sending $200 costs an average 8.2% in the fourth quarter of 2020.” Some African entrepreneurs have proceeded toward billing international clients in cryptocurrency, avoiding local currencies and banking altogether. Nigeria, for instance, is the top peer-to-peer bitcoin trading nation in Africa with $99 million in trade volumes in the first quarter of 2021. The Bitcoin trading volume in Nigeria from 2020 soared to USD 400 million, and this is just 20 million behind Russia’s USD 420 million.
Read also Cross-border Payments: Forging a path to financial inclusion in Africa
Cryptocurrency though hard to understand and volatile, but many African currencies also put up unpredictable inflation, high transaction costs, unpredictable regulations, artificially high exchange rate, and sudden devaluation. The cryptocurrency space in Africa has attracted investors who are supporting entrepreneurs simplifying cross-border payments using cryptocurrency. Yellow Card, a Pan-African cryptocurrency exchange, with operations in 12 countries across Africa, raised $15 million Series A funding to begin expansion across Africa. We can also keep a close eye on Twitter’s Strike wallet.
Mobile money
“It took 115 years for banks to provide their customers with 43 licensed commercial banks, 1,045 bank branches and 1,500 ATMS; in roughly 5 years, Safaricom has provided its customers with more than 30,000 M-PESA agents, where people can transform cash into e-money or e-money into cash.” – Money, Real Quick: The Story of M-PESA (2012)
We have seen underdeveloped economies leapfrog developing technology and go straight to modern technology. For example, certain African countries skipped landlines and leapfrogged straight to smartphones. This opened a plethora of opportunities, especially in mobile money. Some regions in Africa skipped banking and went straight to mobile money.
Mobile money has transformed how millions of Sub-Saharan Africans access essential financial services. Financial inclusion in Kenya, largely driven by telcos, climbed from 27% to 83% over the decade to 2020. In 2011 Nigeria had a promising start when it launched an instant payments infrastructure. With the introduction of Bank Verification Number (BVN), a centralised biometric banking identification system, in 2014, Nigeria aims to simplify screening consumers and synchronize information for both banks and fintechs. However, the Central Bank of Nigeria (CBN) has kept telcos waiting for payment service banks (PSB) licences for three years, despite approving some licences to new PSBs. Unlocking the continent’s largest unbanked population in Nigeria may hinge on granting access to the telecom sector and swift implementation of a favourable regulatory framework.
What next?
Many fintech players in the continent promise financial inclusion. What is financial inclusion?
World Bank defines financial inclusion as “a means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.“
Wikipedia defines financial inclusion as “the availability and equality of opportunities to access financial services. It refers to a process by which individuals and businesses can access appropriate, affordable, and timely financial products and services. These include banking, loan, equity, and insurance products.“
Many financial service innovations across the continent actually touch base on payments, savings, credit and insurance.
In Nigeria for instance, payments make up for 38% of fintechs, lending 23%, savings and investment 15%, cryptocurrency 8% and insurance 3%. Credits take the lead after payments. The pandemic has put emphasis on liquidity, and we will continue to see a rise in lending and investments platforms across the continent. Of course, cross-border remittance still remains a strong sector.
Read also FinTech Development in Nigeria: A Brief
Agriculture Credits and Investments
In the investments fintech sub-sector, agriculture and real estate are worthy of investments. Let me explain why briefly. A McKinsey research reports that “more than 60% of the population of sub-Saharan Africa is smallholder farmers, and about 23% of sub-Saharan Africa’s GDP comes from agriculture.” There is still a huge gap in credits for farmers. There has been an increasing number of agriculture aggregators across the continent. Likewise, digital banks for businesses that issue access to credit. However, the majority of these platforms are not designed and simplified for the niche smallholder farmers.
Commodity Exchange and Derivatives
Derivatives markets can become a factor of development in capital markets, and thus an important contributor towards financial markets’ completeness – Kumari 2011 Ngugi, Amanja & Maana 2009
See Tokens: Next Generation Capital. Digital currencies unlock broader possibilities for the unbanked and many excluded from the traditional financial market. An area worth looking into is capital markets powered by digital currencies and cryptocurrencies.
A derivative is a financial instrument with a value that is derived from the price of other basic underlying variables or traded assets. Derivative products are used to hedge against price risk and weather risk arising from the fluctuation of prices of commodities, currencies, energy products and metals. Some examples of derivatives are; futures, options, swaps and forward agreements. Derivatives are useful for price discovery of currencies, commodities, energy products, metals, and a variety of other products including in real estate. With the proliferation of digital currencies and smart contracts, implementing derivatives for a greater mass is now possible. With proper regulation institutionalisation of derivatives trading in sub-Saharan Africa should be a norm. A forward agreements will go a long way in developing the agriculture sector in Africa.
A forward contract is an agreement between counterparties to deliver a specified commodity, currency, or metal or any other product at a specific date at a price agreed well in advance. The difference between a forward and futures contracts is that futures are standardized and are traded in regulated exchanges whilst the trading of a forward contracts does not necessarily require a physical marketplace but are rather traded over the counter (OTC). OTC deals can be conducted over a communication network.
Options is the right and not the obligation to buy or sell a specified quantity of commodities, currencies or energy products and metals at a pre-determined price known as the strike price. Swaps contracts are agreements between counterparties to exchange a series of cash flows at a specified rate at specified dates in the future.
A fast-moving consumer goods (FMCG) company can reduce price risk for farm produce while utilizing derivatives. Tech-savvy young investors could make capital gains from derivatives.
Challenges
Understandably, regulations, literacy level, affordable internet and payments will have to be managed appropriately to see a boost in development in this sub-sector. Apparently, it takes time to ochestrate such level of development. Intrestingly, entrepreanurs are working on this. With the government and investors having increased attention to this sub-sector we would see rapid transformation and sustainable financial inlusion.
It is important to note that access to affordable 4G internet remains a major concern across the continent. What happens when many Africans have access to cheaper internet? We believe Bezos and Musks satellite internet programmes can provide affordable high speed internet access across the continent.
A noteworthy factor in digital transformation is that what is adoptable is scalable.
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