If you follow the right accounts for young African tech entrepreneurs on Twitter, it can feel like there’s a never ending debate about who gets funding or not in Africa. Like many Twitter debates the 140 characters and even the endless threads don’t capture all nuance of the issue, but while many of those debates have grown, founders from one sector of the startup space have been more positive than most: fintech.
Take Flutterwave, a payments company which builds infrastructure to ease processing payments across Africa, it’s just raised $10 million in its Series A round. It’s one of the largest Series A rounds by an African startup. Significantly, the round was led by leading Silicon Valley venture capital funds Greycroft and Green Visor Capital, with participation from Y Combinator and Glynn Capital. It helps that Flutterwave was co-founded by Iyin ‘E’ Aboyeji, who has a track record, and star power, as a co-founder of developer training company, Andela. But it’s also true that Flutterwave’s raise is the latest in a string of African fintech startups that have raised money over the past three years.
Fintech startups are the “most attractive,” for tech investors looking towards Africa, according to a recent report by Disrupt Africa. Nearly 20% of fintech startups tracked raised money in the last two years and in 2016, there was a 84% increase in the number of fintech startups secured investment compared to the previous year. In total, since 2015, fintech startups in Africa had raised $93 million in investment as of June 2017. Flutterwave’s raise takes that total past the $100 million mark.
Some of that activity is simply down to a larger pool of startups which investors can pick from. Following a recent surge in launches, over 300 fintech startups—more than half of which set up shop in 2015 or 2016—are currently operational in Africa. But it’s not just down to having more choices, investor interest in fintech startups is also linked to just how important they are for the future of business in Africa.
In more advanced economies, fintech startups are focused on disrupting the traditional banking industry by changing how people access financial services. But in most parts of sub Saharan Africa, that’s not the case. In fact, fintech startups are typically creating products and services to plug many of the gaps which currently exist. “Rather than disrupting an existing infrastructure as their counterparts in the developed world are, they are in fact building a whole new infrastructure of their own,” says Wim van der Beek, managing partner of Goodwell Investments.
Put another way, with large swathes of the population across many African countries unable to access financial services, there’s not much to disrupt. But it’s not just rural areas as some residents in major city centers also find certain financial services out of reach. For instance, many still can’t access affordable credit due to a lack of consumer data. Indeed, as of 2014, only 34% of adults in sub Saharan Africa had bank accounts. Given the sheer size of the market which remains under-served, fintech startups are presented with a huge opportunity. And for investors, all that represents a major upside.
Fintech is a fundamental piece to driving the real value of having a digital economy in Africa, says Iyin Aboyeji, chief executive of Flutterwave. Aboyeji says investors realize how crucial building payments infrastructure and bridging financial inclusion is and “are willing to back companies trying to solve that problem.”
The necessity of fintech startups’ services also offer investors a better guarantee of high growth, says Shola Akinlade, CEO of Paystack, a 20-month old Lagos-based payments company. A recent milestone marked by Paystack exemplifies that growth trajectory: it processed $3 million last month alone—as much as it did throughout 2016. Similarly, just a little over a year since setting up shop, Flutterwave has processed $1.2 billion in payments across 10 million transactions. The pace of growth of these companies can be held up as a measure of the pent-up demand in the market, Ameya Updhadyay, who leads fintech investment at Omidyar Network, says.
Akinlade believes investors realize fintech companies are “solving a real market need” across the continent and are encouraged by “the quick adoption and growth.” Last December, Paystack raised $1.3 million in a seed investment round led by Tencent, Comcast Ventures and Singularity Investments.
That overlap between the potentially massive returns from building a digital financial ecosystem from scratch and the social impact from enabling financial inclusion from millions of unbanked Africans is a rarely mentioned advantage for fintech companies. It means an African fintech startup is able to tap into two significant funding pools. There is traditional early stage venture capital from Silicon Valley to Lagos and there are also social impact investors, many of whom are concentrated in Nairobi.
Hilda Moraa, founder of Pezesha, a Kenya-based micro-lending marketplace that helps low income borrowers generate credit scores using data analytics, shares similar sentiments. “Financial services are the lifeblood of the economy,” Moraa tells Quartz. “In East Africa, we are seeing [how] financial services continue to be agents of change not just for the middle or upper-class but particularly to low-income earners.”
Much of this is linked to deepening mobile phone and internet penetration which allows financial services leverage that reach to help more Africans plug into digital financial services. But it’s not just about smartphones. The spike in fintech operations is also due to improvements made with identity verification infrastructure, says Ben Lyon, entrepreneur in residence, at DFS Labs, a Seattle-based early-stage incubator which has invested in African fintech startups, including Pezesha. For example, in 2015, Nigeria introduced bank verification numbers for account holders in a bid to curb fraud and eliminate duplicity of bank accounts. With lower chances of fraud, Lyon says fintech companies have a better chance of success.
Safaricom’s M-Pesa mobile money platform is widely held up as one of the continent’s biggest tech success stories and has become an anchor around which Kenya’s fintech community is built. For many fintech startups, it’s also validation of what’s possible as they build services to plug gaps in countries they operate in.
Investors are also wise to the reality of the size of the opportunity and are looking to ride the wave looking for the next big thing. “Because of the history of the impact seen with M-Pesa, investors are getting more confident that there’s something here,” Moraa tells Quartz. Previous knowledge and perception gaps which existed around the industry are “starting to close,” Lyon says.
The increased activity is also linked to the “mainstreaming” of African fintech following investment by venture capital firms and more attention coming from Silicon Valley-based accelerators like 500 Startups, says Updhadyay. “People are sitting up and taking notice,” he says.
But as that continues to happen, there also needs to be more diversity in investment destination. Updhadyay says a lot of capital has gone into “pilot” countries such as Nigeria, Kenya and South Africa leaving other parts of the continent much less funded. Data backs up that claim: in 2016, put together, Nigeria, Kenya and South Africa accounted for more deals, in terms of number and value, than the rest of the continent. ”A lot of capital also needs to flow into countries that are not ‘shiny’,” Updhadyay tells Quartz. To ensure that happens in the long-term, founders and investors need to have a more “regional agenda,” he says.
Even as interest is growing, to ensure true inclusion, the funding gap between various types of fintech startups have to be plugged with more money going to startups involved in other “engaging” spaces such as insurance, pensions and savings. ”Nobody eats mobile money accounts,” Updhadyay tells Quartz. “You can have a mobile money account but unless you’re protected from future risks, or you can avoid old-age poverty or you can build assets and save for the future, that’s not financial inclusion.”
In the coming years, more investors will likely look into African fintech but while that’s a boon for the startups, Moraa says it’s not yet time to rest on their laurels. “The opportunities are tremendous,” she tells Quartz. “We have not even scratched the surface yet.”