After exponential growth over the past decade, African fintech hits a slowdown in 2023.
In August, 46-year-old Bosun Tijani was appointed Nigeria’s minister of innovation and digital economy. The former head of pan-African Co-Creation Hub incubator is the first member of the startup community to reach a government position, highlighting how important the sector has become to Africa’s biggest economy.
Despite global slowdown in tech funding, African startups raised a record $5.4 billion in 2022 with more than a third of the money going to financial service companies. Between July 2021 and July 2023, African fintechs attracted $2.7 billion in venture capital, reports Nairobi-based research network Disrupt Africa in its latest publication.
In February, Egypt’s payment solution MNT Halan secured the biggest deal so far in 2023 and became the continent’s seventh unicorn with a $400 million round led by Chimera Abu Dhabi only a little over a year after it raised a prior $120 million. In 2022, the top deal was Nigeria’s payment service provider Flutterwave’s $250 million in Series D Funding, followed by Lagos-based electronic payment and infrastructure provider Interswitch with $110 million and South Africa’s MFS Africa with $100 million.
Already one of the world’s fastest growing fintech markets, Africa has bright days ahead. With 90% of transactions still taking place in cash but hundreds of millions of young tech savvy people seeking new ways to transact, the continent offers seemingly endless opportunities for entrepreneurs looking to help the continent leapfrog from coins and bills to digital. The African financial services market is expected to grow 10% a year to reach $230 billion in revenues by 2025 up from $150 billion in 2020 says international consulting firm McKinsey.
“The factors driving fintech investment in Africa should continue growing in the coming years,” comments Mike David, founding partner at Olive Tree Ridge, a New-York based private equity firm.
But when we talk about African fintech, we are actually mainly talking about four countries: Nigeria, South-Africa, Kenya and Egypt. Between 2021 and 2023, this quartet often called the “Big Four” was home to 77% of the continent’s fintech companies and swallowed over 90% of funding. Over the same period, Nigeria topped all the charts with a 32% market share, over $1 billion raised in venture capital and 217 established fintechs. South-Africa followed with 140 firms, Kenya with 102 and Egypt with 65.
Another group of about ten countries including Ivory Coast, Morocco, Senegal, Uganda, Burkina Faso, Cameroon, Rwanda or Ghana—where Google operates an AI research lab, show strong potential but the majority of the continent is left far behind.
In terms of industry verticals, payments, transfers and lending account for 81% of funding and are also the fastest growing sectors. The reasons behind such high concentration are straightforward: With the vast majority of the population underbanked or simply unbanked but in possession of a smartphone, fintechs are cheap and easy ways to transact, save, borrow or send money.
“Payments are the basis for development across the board, and technology will continue to be crucial in bridging the financial gap, enabling a faster, safer, and more inclusive system. Across various markets, unique integrations will make it possible for people to access digital financial services in different strata, opening the continent up to too much economic development,” says Tosin Eniolorunda, group CEO of Moniepoint a startup that processes the majority of POS transactions in Nigeria and has recently entered digital banking.
“It’s still day one for us, there is still a lot of untapped opportunity,” says Chijioke Dozie co-founder of Carbon a Lagos-based digital bank that started operating in 2012 and disbursed over $120 million worth of loans in Nigeria. The five million registered users company started off with retail customers and is now looking to target SMEs. After unsuccessful attempts in Kenya and Ghana, Dozie is also considering regional expansion through merger or acquisition in Egypt, Ivory Coast or the Democratic Republic of Congo but cross-border scaling is a major challenge.
Two decades after the likes of M-PESA, Interswitch or Fundamo pioneered the African first mobile payment revolution, harmonizing transactions across the continent is still a distant dream. Most payment systems are not interoperable and most central banks remain focused on domestic policies.
“Everybody says ‘go to different countries’ but it’s really difficult, especially if you’re trying to get regulated in each jurisdiction,” says Dozie.
“The regulatory environment for fintech in Africa is still evolving, and there is a risk that new regulations could stifle innovation or create headwinds for startups to operate” adds David.
Coming Of Age
Today digital transactions have become part of everyday life in most African countries. As of this summer, there were almost 700 fintech firms operating across the continent, up 17% from 2021. Yet the pace of new launches is slowing down indicating that the ecosystem has entered a new stage, that of consolidation.
Aside from a few landmark deals like Fundamo’s $110 million acquisition by Visa in 2011 or when US Internet payment giant Stripe bought Lagos-based Paystack for $200 million in 2020, mergers and acquisitions were fairly rare in the African fintech scene until now. Over the last two years, however, Disrupt Africa recorded 26 acquisitions, up from only 9 between 2019 and 2021.
“These numbers are obviously still relatively small compared to more developed ecosystems, but the tripling of fintech acquisitions within a two-year period is a significant statistic,” comments Disrupt Africa it its latest report. “All of this will serve to embolden both investors and entrepreneurs in the sector.”
In August, Lagos-based Moniepoint received regulatory approval to purchase Kopo Kopo, a Kenyan digital payments company and its “most significant acquisition to date” says Eniolorunda.
In June, pan-African digital payments MFS Africa bought US software firm Global Technology Partners for $34 million and in March, Nigerian Fairmoney took over merchant payment service Payforce for an estimated $15-$20 million. Several more deals are in the pipeline and should be announced in 2023.
While African fintech held strong in 2022, funding volumes were significantly lower in the first half of 2023 totaling just above $600 million (including the $400 million MNT-Halan mega-deal). The thing is, 70% of Fintech startups are backed by venture capital firms headquartered outside the continent. Most of last year’s funding was led by foreign investors who didn’t necessarily follow through in 2023 due to the global uncertainty, rising interest rates and massive tech sector lay-offs in the Western countries. At the same time, the “big four” also faced serious economic challenges at home with historic levels of inflation and soaring poverty.
It took a couple of months for the crisis to reach African tech, but it did. A turning point for many was in December 2022, when founders of Africa’s Amazon Jumia were forced to step down after the company’s shares fell 68% Y-o-Y on the NYC stock exchange. But even before that, several fintechs had had to downsize like Wave, Senegal’s first unicorn who laid-off 15% of its workforce—about 300 employees—in June 2022. The mobile money app backed by US Stripe pulled efforts out of new markets like Uganda, Mali or Burkina Faso to concentrate on its core markets: Senegal and Ivory Coast.
In light of this new reality, some African entrepreneurs are tempted to leave the continent for global hubs where talent is in high demand, making brain drain is a rising concern. Others contemplate turning to foreign aid organizations who support private sector growth for help. While this can open access to funding, it might push entrepreneurs to try and meet donor’s expectations rather than market needs.
“There is great opportunity for fintech, but I think we need the right investors,” comments Dozie. “A growing number of local investors can do $1 million but we need some who can also do series B/C because when African startups need $10 million, they need to go to foreign investors who for that amount will be probably find single markets like Vietnam, Brazil or Indonesia more attractive than Africa”
While Africa offers tremendous opportunities, the continent fragmented and hard to navigate.
“Assuming similar investment levels per customer it is almost four times harder to achieve profitability in Africa than it is in Latin America, and thirteen times harder than in the European Union,” points out McKinsey, citing World Bank data. The lack of available data to properly assess risks and difficulty to exit investments are also concerns for a number of investors.