In the face of political and economic challenges and a global pandemic, fintech on the continent is booming. Here’s what comes next.
Between 2020 and 2021, the number of tech start-ups in Africa tripled to around 5,200 companies. Just under half of these are fintechs, which are making it their business to disrupt and augment traditional financial services.1 McKinsey analysis shows that African fintechs have already made significant inroads into the market, with estimated revenues of around $4 billion to $6 billion in 2020 and average penetration levels of between 3 and 5 percent (excluding South Africa).2 These figures are in line with global market leaders.3
One industry leader we spoke with said that rather than a “fintech disruption,” the continent is experiencing a “fintech eruption,” and local and international investors are taking notice. African fintech is emerging as a hotbed for investment, with average deal sizes growing and the proportion of fintech funding in Africa increasing over the past year, bringing jobs and growth to African economies. And the story is only just beginning. As fintech matures, financial services on the continent are at an inflection point, and several African countries have a significant opportunity to capitalize on the momentum of recent years to unlock further potential in the sector.
Despite a slow down in funding in line with global trends, we expect significant growth and value creation to lie ahead for the fintech industry in Africa. Cash is still used in around 90 percent of transactions in Africa, which means that fintech revenues have huge potential to grow. If the sector overall can reach similar levels of penetration to those seen in Kenya, a country with one of the highest levels of fintech penetration in the world, we estimate that African fintech revenues could reach eight times their current value by 2025 (Exhibit 1).
Exhibit 1
African financial services are undergoing a structural shift
McKinsey analysis estimates that Africa’s financial-services market could grow at about 10 percent per annum, reaching about $230 billion in revenues by 2025 ($150 billion excluding South Africa, which is the largest and most mature market on the continent) (Exhibit 2). Nimble fintech players have wasted no time carving out a share of this expanding market. As the fastest-growing start-up industry in Africa, the success of fintech companies is being fueled by several trends, including increasing smartphone ownership, declining internet costs, and expanded network coverage, as well as a young, fast-growing, and rapidly urbanizing population.4 The COVID-19 pandemic has accelerated existing trends toward digitalization and created a fertile environment for new technology players, even as it caused significant hardship and disrupted lives and livelihoods across the continent.
Exhibit 2
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Our analysis shows that fintech players are delivering significant value to their customers. Their transactional solutions can be up to 80 percent cheaper and interest on savings up to three times higher than those provided by traditional players, while the cost of remittances may be up to six times cheaper.
Taken together with an influx of funding and increasingly supportive regulatory frameworks, these factors could signify that African fintech markets are at the beginning of a period of exponential growth if, as expected, they follow the trajectory of more mature markets such as Vietnam, Indonesia, and India.
However, growth in financial services across Africa’s 54 countries will not be uniform. While the lion’s share of value in the market (approximately 40 percent of revenues) is currently concentrated in South Africa, which has the most mature banking system in the continent, Ghana and francophone West Africa are expected to show the fastest growth, at 15 percent and 13 percent per annum respectively, until 2025. Nigeria and Egypt follow, each with an expected growth rate of 12 percent per annum over the same period. Overall, we anticipate that the growth opportunity in fintech is likely to be concentrated in 11 key markets: Cameroon, Côte d’Ivoire, Egypt, Ghana, Kenya, Morocco, Nigeria, Senegal, South Africa, Tanzania, and Uganda, which together account for 70 percent of Africa’s GDP and half of its population.
Given the varying levels of digital maturity across these countries, the opportunities in each market will be different. Economies with more mature financial systems and digital infrastructure, such as South Africa and Nigeria, are likely to see more innovation in advanced financial services, including business-to-business (B2B) liquidity and regulatory technology such as anti–money laundering and know-your-customer (KYC) compliance. Markets where financial systems and infrastructure are still growing, such as Egypt, are likely to see advances in financial services such as underwriting, servicing, claims, and assessments in insurance; banking-as-service and embedded finance in operations and infrastructure; and buy now, pay later services in retail and small and medium-size enterprise (SME) lending.
With digital becoming a way of life in Africa, the stage is set for the next phase of fintech growth. African fintechs and other stakeholders, including governments and investors, have an opportunity to consider how the sector can achieve sustainability over the long term. Despite all the activity seen on the continent, Africa has only produced a handful of unicorns—start-ups with a $1 billion valuation—and the profitability of many ventures is precarious. This suggests that much work remains to create the necessary conditions to unlock the sector’s potential.
Growing African fintechs may face four challenges
The African fintech space is growing exponentially, but the development of the fintech ecosystem is still in the early stages. While fintechs have made significant inroads in Africa—notably in wallets, payments, and distribution—there is still plenty of room for expansion. As the market matures, unique white spaces are identifiable in almost all areas of financial services (Exhibit 3).
Exhibit 3
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However, fintech start-ups in Africa are facing four key challenges on the road to sustainability: reaching scale and profitability, navigating an uncertain regulatory environment, managing scarcity, and building robust corporate governance foundations.
Reaching scale and profitability
While the opportunity across the African continent for fintech growth is significant, in certain regions, the total addressable market (the relevant category of viable customers) is limited by infrastructure constraints. These typically include weak mobile and internet penetration in some markets, lack of identification coverage, and limited payment rails—the backbone of all digital transfers of money. Across Africa, just three countries have real-time payments and the necessary payment rail infrastructure in place.
Fintechs aiming to scale across the continent may need to take this geographic variability into account and tailor their approach to each country based on its inherent characteristics, infrastructure, regulatory frameworks, and varying customer needs and habits.
Achieving scale is also just one part of a successful growth journey. Lower disposable income and lower customer loyalty in Africa make it harder for fintechs to build viable and profitable business models through customer monetization, even with a large customer base; thus, finding ways to lower customer acquisition cost is vital. Assuming similar investment levels per customer, it is almost four times harder to achieve profitability in Africa than it is in Latin America, and 13 times harder than it is in the European Union.5
Navigating an uncertain regulatory environment
In addition to uneven infrastructure across markets, fintechs in Africa also have to contend with a fragmented financial regulatory framework. Different countries are evolving at different paces. While regulatory bodies in some countries are starting to support the development of an enabling environment—for example, by creating fintech sandboxes, updating licensing requirements, and implementing digital KYC regulations—in general, complex and variable regulations, including license approval processes, can make it difficult for fintechs to ensure business continuity and compliance across markets.
Fintechs may find that they can’t adapt fast enough in some markets to keep up with regulation, which, along with the degree of enforcement, can sometimes change quickly. In other markets, fintechs may find they are moving faster than the regulators, which creates a whole new set of challenges. Furthermore, entrepreneurs and investors can be exposed to fluctuating exchange rates and strict foreign-exchange control in some countries, which make it harder to maintain consistency.
Managing scarcity
Businesses don’t run on infinite resources. Time, money, and people need to be managed effectively to launch and sustain growth. After record-breaking fintech investment in 2021, funding is slowing down, especially for later-stage start-ups. But with incumbents starting to catch up with disruptors, fintechs can’t afford to slow down their progress. This suggests that African fintechs will likely have to tighten their belts to adjust to a new venture funding reality.6 Y Combinator (YC), a US-based technology start-up accelerator, has advised its community of over 7,000 founders to expect and plan for the worst, cut costs, and extend their runway because “during economic downturns even top-tier venture capital funds slow down their deployment of capital. This causes less competition between funds for deals that result in lower valuations, lower round sizes, and many fewer deals completed.”7 As a result, it may be necessary to find ways to boost local participation in venture financing. Currently, about 70 percent of fintech start-up deals are financed by investors headquartered outside of Africa, most of them in North America. Additionally, most locally financed deals are for early-stage start-ups.
Successful fintechs will likely need an ambitious strategy to attract, develop, and retain the very best talent. According to some estimates, about 50 percent of Africa’s software developers are based in just five countries (South Africa, Nigeria, Morocco, Kenya, and Egypt).8 What’s more, this concentrated pool of talent is in demand not just in Africa but globally. The World Bank estimates that there is a significant “brain drain” of information and communications technology professionals from low- and middle-income countries every year as they seek better employment opportunities and higher wages in countries where the digital sector is more developed.9 Successful fintechs will need to navigate these twin challenges of scarcer capital and increasing competition for talent to thrive going forward.
Building robust corporate governance foundations
Ensuring world-class corporate governance is likely to be a critical factor in enabling fintechs to navigate this uncertain and fragmented terrain, manage scarcity, and successfully reach scale and profitability. An effective governance structure can help to build a strong, positive organizational culture that provides stability, clarity, and direction—even in difficult times.
There are three broad characteristics of a healthy corporate governance model: strong culture building, productive stakeholder engagement, and a clear talent strategy to build the organization’s capabilities. While matching a fintech’s value proposition to the right market may be a critical first step in building a successful start-up, to maintain momentum, it is necessary to define routines, norms, and processes that are shared and understood by everyone in the organization. In today’s world of hybrid working, this is even more critical than before. And because fintechs can evolve rapidly, it is vital that they have a well-developed compliance foundation to actively manage regulatory change and avoid falling foul of regulators—a challenge many are starting to face.
Africa’s leading fintechs share a common set of winning characteristics
Fintechs operating in Africa will know that there are no quick wins on the continent. In overcoming the common obstacles in their path, our analysis shows that the most successful African tech start-ups share six common characteristics with features that mirror those of successful global companies, and have also adapted their business models to the unique economic realities and customer needs of Africa.
First, given the variability between African markets, it is important that fintechs match their value proposition to the market they are entering. Globally, we have seen fintechs evolving to achieve scale through three major routes. Some start out as a distributor of unique nonfinancial consumer products and evolve into a fintech, while others start with a specific financial business-to-consumer (B2C) or B2B product and evolve into a digital bank. A third option is to start with a payment infrastructure solution and evolve into a national digital platform. In Africa, infrastructure constraints have meant that the continent’s oldest fintechs—for example, Fawry in Egypt, M-Pesa in Kenya, and Interswitch in Nigeria—entered markets by building infrastructure specific to a single country and, as a result, are now the market leaders.
Second, to achieve sustainable growth, companies that have a long history of operating on the continent have built their success on rapid customer acquisition. Africa’s fast-growing population of more than 1.3 billion people offers a large potential market for fintechs, but actually acquiring customers can be challenging because of factors such as infrastructure constraints and low customer purchasing power. Leading players have had to take steps to overcome such constraints by, for example, leveraging preexisting physical networks or by employing aggressive pricing strategies to offer cheaper fees and charges than competitors.
Third, once having acquired customers, leading fintechs have found a sustainable way to translate this into clear monetization strategies. Such strategies have one of two things in common: they either have a repeatable and healthy revenue source coming from core activities, such as card switching for Interswitch or serving merchants with point-of-sale for Yoco, or they have multiple monetization strategies, such as having a B2C arm for a B2B company or vice versa. For example, M-Pesa and MTN both have a strong lending component in addition to their wallets, while Paga has leveraged its strong position in wallets to expand into merchant acquiring.
Fourth, a key marker of success in Africa has been the ability to adapt to the reality of low average revenue per user (ARPU), both in the consumer and micro-, small and medium-sized enterprises (MSMEs) sectors. GDP per capita in Africa is the lowest of any continent, and fintechs have adjusted to this by, for example, using scale to reduce the cost of serving customers, as M-Pesa has done, or changing the business model to pay-as-you-go for businesses that can’t afford advance payments, as Yoco has done.
Fifth, another African reality is that, with 90 percent of all transactions on the continent still cash based, successful fintechs have had to find ways to reach clients offline. Key strategies here have included building agent networks or using preexisting infrastructure such as physical shops for delivery of financial services. For example, South Africa’s first digital bank, TymeBank, overcame infrastructure challenges through a strategic alliance with major retailers. This has enabled the bank to place account-opening kiosks in retail stores across the country, bypassing the need for a physical branch network.10
Finally, with regulators increasingly active in Africa, fintechs are required to pay attention to, and comply with, regulation. Many successful fintechs including OPay, M-Pesa, and Fawry have, after reaching significant scale, chosen to proactively engage with regulatory stakeholders so that they are able to move forward together.
Unlocking the potential of fintech in Africa
All the signs point to the culmination of African fintech’s first phase of development (Exhibit 4). Fintechs have become major players in the African financial-services sector (in some instances, rivaling traditional banks in terms of size and value), funding has increased, and value is being generated. In fact, the number of high-valued fintechs is increasing exponentially. Additionally, consumer access is at an all-time high. Today’s leaders have built the payment rails, effectively laying the foundations upon which the industry can grow, but tightening market conditions suggest that in their next phase of development, fintechs may need to adapt their focus as they look to consolidate and formalize to achieve enduring success.
Exhibit 4
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A growing fintech industry has the potential to create jobs, skills, opportunities, and wealth across the continent. An IFC study estimates that over 230 million jobs in sub-Saharan Africa will require digital skills by 2030, creating opportunities in adjacent industries as well, notably training.11 The fintech eruption in Africa is seeding an ecosystem that could also bring a number of social benefits by, for example, improving access to healthcare and insurance at scale and increasing access to lending in key sectors such as agriculture. The newcomers are also proving instrumental in driving financial inclusion, particularly among women.
However, to scale up these benefits, stakeholders, including governments, investors, the traditional financial-services sector, and fintechs, have a critical role to play in creating the conditions for sustainable growth and in supporting innovation.
Regulators, for instance, could consider taking steps to formalize data systems, promote predictable regulation, and keep pace with changes in the fintech landscape, while investors may look to expand local opportunities, educate African investors on potential opportunities on the continent, and focus on the tangible value added by start-ups rather than just on their sale valuation. As Jumanne Mtambalike, CEO of investment firm Sahara Ventures, commented: “Whether we call them ‘Zebracons’ or ‘Camels,’ we need to find a way to make African start-ups look more like African businesses and not vehicles created to be sold to the highest bidders in the private investor and stock markets.”12
Fintechs and incumbents could focus on building talent and training for the future as well as looking to build partnerships—with each other and with regulators—to build out the ecosystems necessary to support fintech growth alongside national development priorities.
Poised at the start of a new era, fintech players in Africa have a good reason for confidence; significant white spaces and underserved opportunities still exist in all markets. However, the path ahead will not be smooth. In addition to existing roadblocks, a tightening funding environment will likely put more pressure on Africa’s nascent fintech sector. Nevertheless, if stakeholders can work together to build on the momentum gained in recent years, the prospects for African fintech are strong—and the next marvel of African unicorns is ready to emerge.
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ABOUT THE AUTHOR(S)
Max Flötotto is a senior partner in McKinsey’s Munich office; Eitan Gold is a consultant in the London office, where Tunde Olanrewaju is a senior partner; Uzayr Jeenah is a partner in the Johannesburg office; and Mayowa Kuyoro is a partner in the Lagos office.