The stage is set for the African continent to become a hive of financial innovation. There is an abundance of unbanked and underbanked people, many of whom have access to mobile devices but no formal banking services. In spite of this, large numbers of these financially underserved citizens still have the opportunity to leapfrog a number of technologies that are operative in more commercially mature nations, such as the United States. This is because numerous African nations are home to some of the world’s most highly anticipated mobile broadband networks and their populations are already early adopters of innovative digital services, particularly on their phones.
However, financial technologies (fintech) are also facing an array of unique challenges in Africa. These challenges are both social and technological but can be magnified by the fact that many African governments have yet to fully embrace fintech systems.
Technology Challenges Facing Fintech in Africa
Limited access to electricity, even in major cities, creates significant problems for potential fintech users. Many would not be able to afford or power their mobile devices.
Even though Africa is the fastest growing mobile phone market in the world, it remains challenging to provide mobile services in unserved and underserved regions where there are no traditional telecom networks at all.
Limited broadband access creates a bandwidth bottleneck for financial services, particularly in the area of money transfers. It is difficult to provide financial services on low-bandwidth platforms such as SMS or Unstructured Supplementary Service Data (USSD).
Regulatory Challenges Facing Fintech in Africa
In some African countries, particularly those that have been less exposed to the internet as a global technology platform, there is an existing mindset that online services are some sort of security risk. In this respect, governments say they would prefer to deploy a secure identity system on paper rather than on the web.
As more people become aware of the benefits of using their mobile phone for financial services, the incidence of fraud also rises. Some governments are concerned that they will not be able to monitor and control who transacts with whom at what time.
While most countries in Africa accept the need to regulate Fintech companies, many only have the capacity to apply regulations designed for traditional brick-and-mortar banks.
Fintech companies are seen as competitors to traditional banks and financial services, many of which have a strong influence in policy making.
Opportunities Facing Fintech in African Continent
Mobile penetration exceeds 100% in most African nations due to growth in both rural and urban regions. In addition to this, the use of mobile phones is widespread and continues to grow rapidly.
Despite the dominance of cash-based transactions, many Africans also have a strong appetite for digital solutions. This has been demonstrated in their heavy reliance on prepaid airtime and text message bundles as forms of payment and transfers.
More than 50% of transactional activity across Africa occurs through informal channels. This provides a ripe environment for alternative payment providers to step in and provide an effective way of making payments online.
African nations have the world’s fastest growing economy, which has been fuelled by abundant natural resources, its large labour force and foreign direct investments. Further growth is expected from the development of new infrastructure projects. In addition, many nations across the continent are working towards achieving middle-income status by 2030. All these developments are expected to create opportunities for investment, finance and commerce.
The development of new infrastructure projects in Africa can also stimulate further growth in digital transactions on mobile phones.
Fintech companies across the continent are investing in artificial intelligence (AI), data analytics, robotics, Internet of Things (IoT) and cloud computing to provide cost-effective services that can be accessed via mobile devices or computers. With Africa expected to invest $5 trillion into infrastructure by 2030, it is hoped that these investments in Fintech would be a catalyst for the continent’s digital growth.
There are several international organizations and companies across Africa that have been providing financial services to Africans since 1999, when Nigeria became the first country in the world to launch an SMS-based mobile banking service. In 2016 alone, 20 countries in Africa launched mobile money services, demonstrating the continent’s appetite for financial products and services via digital means.
Financial literacy among Africans is also growing, with many people seeing the need to embrace modern financial services in order to increase their income and wealth. An increasing number of people are now engaging in online transactions due to the higher level of security offered by most Fintech firms.
On a global level, consumers value the speed and convenience of online transactions over face-to-face or telephone interactions. This is expected to lead to significant growth in the use of smart devices for digital transactions over the next 5 years. In 2016 alone, mobile transaction volumes in Africa grew by more than 40%. One in four Africans now uses mobile devices to perform at least one financial transaction every month.
Africa is the world’s second largest mobile market, with more than 1 billion people owning mobile phones. While smartphones are still relatively expensive in Africa, this has not hindered the continent’s rapid growth in fintech.
Internet Penetration & The FinTech Ecosystem
Many African nations are home to some of the world’s most highly anticipated mobile broadband networks. The challenge is that not everyone has web access (due to high prices) and many Africans who do, still cannot use the internet in the same way as people in developed nations. This means that Fintech companies will need to find alternative ways of access in order to get their services to the widest possible audience.
Mobile phones are also enabling Africans living outside of urban areas to gain access to essential digital resources, including education and financial services. This is expected to improve greater inclusion in Africa’s rapidly advancing economy. As more people across Africa continue to adopt mobile apps, fintech companies will have a larger pool of data to let them understand consumers’ needs and behaviors better.
In addition, the majority of Fintech companies across Africa are said to be using blockchain technology or cryptocurrencies for remittances to/from Africa. With financial inclusion levels expected to rise in the next few years, digital currency startups would see increasing demand for their services. There are currently only a few banks and remittance companies that offer cross-border transfers to/from Africa, and this has created huge opportunities for Fintechs in the space.
Investment In the African Fintech Ecosystem
Africa’s fintech market is forecast to be worth $24 billion by 2025, up from $3 billion in 2016. According to estimates, Fintech investment accounts for 26% of all VC/PE investments into African tech firms so far this year, while the majority of deals are concentrated in Nigeria and Kenya.
The World Bank also predicts that 1 out of 3 Africans would own a smartphone by 2020. This means that there would be over 480 million smartphones on the continent by then. Smartphone penetration in sub-Saharan Africa is also expected to grow from 40% of the population in 2017, to 60% by 2020.
As more African nations focus on expanding digital infrastructure and improving internet services, expect Fintech companies across the continent to make huge gains and potentially become industry leaders in the next decade.
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