Why African fintech startups are so attractive to investors

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The recently-released African Tech Startups Funding Report released by Disrupt Africa found fintech was the most popular destination for funding in the tech sector after solar in 2015.

The report found fintech startups attracted 29.6 per cent of total investments over the course of the year, more than US$55 million, with notable rounds for the likes of WiGroup, Paga, Aella Credit, Nomanini and Kopo Kopo.

This trend replicates that seen globally. Research by KPMG and CB Insights found 2015 was a record year for investment in fintech startups, with US$19.1 billion invested globally. The financial services industry is one of the largest in the world at US$11 trillion in revenue, with Accenture estimating that 35 per cent of this is at risk due to disruption in the industry from fintech.

In Africa, the reasons for the increased funding are clear. Traditional banking has failed on the continent, with 330 million adults, around 80 per cent of the continent’s population, lacking access to formal financial services. That’s a huge gap that fintech startups can fill with innovative solutions.

What is more, Africans have already demonstrated they are more than willing to adopt new ways of transacting if they are made readily available. For all its limitations, M-Pesa has been a huge success, with transactions reaching US$656 million in 2014 and projected to double over the course of the next four years.

Akinola Jones is co-founder of Nigerian fintech startup Aella Credit, and says the appeal of fintech to investors is based on its huge potential to solve a massive problem and reach millions of people.

“There has been a growth in internet penetration and smartphone ownership across Sub-Saharan Africa in the last couple of years. Mobile phones will serve as a vital way to accessing the un-banked population of Africa,” he said.

“The current operating expenses of the large banks are way too high and fintech companies provide a more specialised approach to tackling financial inclusion. Africa is 100 years behind in terms of it’s citizens having access to credit. Data analytics, identity verification, payment systems and mobile phone access will change that and spur growth on a sector by sector basis.”

Fintech startups also benefit from the fact that the sector attracts a wide variety of investors, from impact investors looking at the socio-economic effect of the innovations to the more commercial types foreseeing large returns down the line.

“Impact investors are the leaders in investment but certain areas of fintech are attracting returns-focused VCs,” Jones said. “The margins in lending are very high and so this sector remains very attractive for venture capitalists.”

Andrea Böhmert, partner at South African VC firm Knife Capital said she believed financial and strategic investors are in fact more common in the space that impact investors.

“I think that it is the beauty of investments into the fintech space, that you can do purely commercial investments that have an enormous impact on other people’s life,” she said.

Vahid Monadjem, chief executive officer (CEO) of South African enterprise payments provider Nomanini, agrees.

“There are commercial-returns to be had in fintech,” he said. “At the same time, there is the potential for massive inclusive growth which attracts impact investors. While socially motivated, impact investors are likely to be the first into this space, and hopefully they’ll catalyse other types of investors too.”

There is room for improvement, however, with startups in the fintech space facing a number of challenges in order to effectively scale. Dominique Collett, senior investment executive of Rand Merchant Insurance (RMI), which recently launched its AlphaCode fintech hub in Johannesburg, says challenges include building effective teams and gaining access to the right networks.

“Hiring skilled resources is the number one constraint we hear from startups. In this new age, your people are everything. We have great financial and tech skills in the corporate sector in Africa, but they are very difficult to attract into the startup sector because they are expensive,” she said.

“This is the main challenge these startups face because to build a great fintech business that can compete in a highly sophisticated financial services sector like the one we have in South Africa; you need an experienced team, so you need to be able to hire good people. You also need to balance this out with people who are not too boxed in by industry experience and are creative and willing to try new things.”

Startups also tend to lack distribution capability, Collett said.  

“A lot of the businesses I see have a great product or great tech but have no clear strategy on how to get to customers. In financial services, distribution is everything and is where a lot of the innovation really lies,” she said.

Hubs like AlphaCode, as well as Sasware in Nigeria and accelerators run by the likes of Barclays, should help African fintech startups develop their capacities in order to scale.

Collett said this is vital as allowing more people to make use of financial services was the backbone of any thriving economy.

“For people to be able to be fully productive in the economy they need to be able to transact, borrow, save and insure against unforeseen events,” she said.

“Technology is lowering the barriers to entry to financial services and helping make them more relevant and transparent. This, in turn, empowers consumers and transforms how they manage their financial affairs, both personally and in their businesses.”

The growth is only set to continue.

“As with any sector, the hype will eventually fade. But I don’t think this is going to happen too soon,” says Böhmert.

“The market need is far too big and we haven’t yet scratched the surface.”

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Passionate about the vibrant tech startups scene in Africa, Tom can usually be found sniffing out the continent’s most exciting new companies and entrepreneurs, funding rounds and any other developments within the growing ecosystem.

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