Africa is still scratching the surface on fintech penetration and growth

Fintech startups in Africa face four main challenges to growth, McKinsey report said.
Where cash is king, fintech can grow wings
Where cash is king, fintech can grow wings
Photo: Reuters/Thomas Mukoya (Reuters)
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How large is the market for financial services in Africa in dollar terms?

It is one of the most asked questions when investors assess an African fintech startup’s potential. In 2020, the figure was around $150 billion fueled by insurance, retail and SME lending, says a report by McKinsey and Company published this week. “This market is likely to grow by 10 percent per year to reach approximately $230 billion by 2025,” the report says. Blockchain, payments and wallets are tipped as the financial services sectors that could grow fastest.

The context of the report and general fascination with fintech in Africa is that it is the most funded of the tech industries. Last year, fintech received over half of venture capital investments in African startups. The continent’s most valuable startups—Flutterwave, OPay, Chipper Cash—are increasingly multinational companies serving thousands of businesses and individuals.

These digital-native startups are gaining more customers among lower income people for everyday use cases like buying airtime, transferring funds, and paying bills, turning the tide on years of Africans being underserved by brick-and-mortar modes of service delivery.

Challenges to fintech growth in Africa

That said, cash still dominates 90% of transactions in Africa. While that suggests a large opportunity set for fintech to potentially generate $30 billion in revenues by 2025 (from between $4.5 billion and $6 billion in 2020), closing that gap will be no mean feat as there are challenges to overcome, McKinsey says.

One such challenge is the path to scale and profitability. Fintech startups are “struggling to monetize their customer base as, having used low pricing or free services to attract customers, they are discovering that their revenue repeatability is limited,” the report said, citing Africa’s internet penetration at around 50%. Only Egypt, Ghana, and Nigeria have the real-time payment infrastructure needed to scale-up of fintech services.

Managing different national regulations and establishing mature corporate governance practices are issues that have become more visible this year. The highlight so far being Flutterwave’s troubles in Kenya and Ghana, as well as its leadership having been under intense scrutiny for a raft of alleged abuses. Just yesterday, it was reported that the CEO of a Nigerian fintech, Risevest, has stepped down to allow for an investigation to allegations of sexual improriety levelled against him.

Where are growth opportunities for African fintech?

Managing scarcity, including of talent with Big Tech lurking around, is the other challenge. However, fintech startups that want to lead in their markets can follow an emerging playbook based on six actions, McKinsey says, the first two being an ability to match product to market needs and, consequently, amass a large base of active users quickly.

African fintech funding tends to focus on four countries — Nigeria, Kenya, South Africa, and Egypt. But seven other markets show strong growth opportunities for fintech, namely: Cameroon, Côte d’Ivoire, Ghana, Morocco, Senegal, Tanzania, and Uganda.

Ghana’s fintech growth is estimated at 15% per year though it is unclear how its current inflation problems will influence that expectation. In francophone west Africa where mobile money startup Wave became a unicorn last year, fintech could grow at 13%, while McKinsey’s estimate for Nigeria, and Egypt is 12%.