Why African fintech startups are expanding their product suites rather than hitting new markets

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There are strong arguments backing the prevalent trend of African fintech startups expanding operations from a product perspective, adding new verticals rather than moving into new geographies.

That is according to Johan Bosini, partner at fintech-focused VC firm Quona Capital, who was speaking on the latest episode of Disrupt Podcast in the wake of his company leading a US$3 million pre-Series A round for Nigerian startup Cowrywise, a digital wealth management and financial planning solution.

Bosini explained to the podcast why Quona Capital had been attracted to the startup in the first place.

“It is a business we’ve known for a while and it’s a category we really like. We think making wealth management available for everyday people in Nigeria is really interesting. We’ve seen this theme across multiple markets,” he said. 

“The business is interesting because it democratises access to financial services to Nigeria’s financially underserved low and middle income populations, and really takes advantage of the huge increase in smartphone adoption.”

Quona liked the fact Cowrywise was working with regulated asset classes and pursuing a partnership model, as well as its focus on education. And all of this in a large addressable market. 

Cowrywise will use the funding to add to its product suite, as many fintechs are doing. Bosini sees a trend.

“A lot of lending businesses are looking at becoming challenger banks, with a lot of payments businesses it is the same,” he said.

This is somewhat of a change of direction, with African startups in a number of spaces having previously chosen to move into new markets rather than verticals. In fintech, and especially in Nigerian fintech, it is different.

“We think that Nigeria is a significant market opportunity, especially for Cowrywise, so going deeper rather than broader makes sense in terms of geographic expansion,” Bosini said.

“Expanding geographically is difficult – different regulation, languages, and very often it is small things you haven’t thought of, such as multi-currency systems. And then obviously there is the reality of founders having to spread their time and travel.”

According to the recently-released African Tech Startups Funding Report 2020, last year the African fintech space saw 99 startups raise investment, representing 24.9 per cent of the overall total. This was up 28.6 per cent on the 77 ventures that raised in 2019. Meanwhile, the combined amount raised by fintech companies over the course of the year jumped 49.3 per cent to US$160,319,065, again giving the fintech sector a larger share of the African total than the year before (22.9 per cent compared to 19.1 per cent in 2019). Indeed, fintech’s total raised funding was 55.6 per cent more than the second placed sector in this respect – e-health. 

But what is behind these levels of interest. Bosini says COVID-19 has fueled and accelerated interest in the category, but there are deeper appeals to investors.

“You’ve got some incredible technology coming out of Africa that is either becoming very applicable in other countries globally or is beginning to get some real traction. I do think the venture ecosystem is still pretty early compared to what we’ve seen in Latin America and Southeast Asia, however there is evidence it is accelerating quickly and will catch up really fast. You do have a few investors who are looking to pre-empt that. A few high profile deals have also fuelled that. Things are really beginning to accelerate,” he said.

Incumbents such as banks are also increasingly playing a part in the ecosystem.

“You should never underestimate the banks. They have a few things that startups wish they had – licenses is one, and balance sheets another. These are significant businesses run by smart people. They have some legacy systems, so tech is one challenge, and they are very regulated, so they can’t just try new things like agile, younger companies can,” said Bosini. 

“We’ve seen some activity from the banks, a lot more collaboration than ever before. They are trying to work with startups and technology companies – and potentially together they can be stronger and really enable each other.”

So what challenges remain for fintech companies to overcome in Africa? Funding, though increasing in availability, is still in shorter supply than is necessary.

“We still have quite a thin venture ecosystem across the continent.  There is a lot of interest in markets like South Africa, Nigeria, Kenya and Egypt, but other markets still have very thin funding ecosystems,” Bosini said.

There are also challenges around access to talent, especially when scaling quickly.

“I think there is an undersupply of specific qualifications and expertise – engineering is a key one, and the other is data science,” Bosini said, adding that given data crucial to fintechs, this can be very damaging. 

The latest episode of Disrupt Podcast is available now, featuring in-depth interviews with Bosini as well as Startupbootcamp AfriTech CEO Philip Kiracofe.

You can listen on Soundcloud, Spotify, Apple Podcasts, and all other podcasting platforms.

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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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