‘African Fintech and Its Four Horns’ – McKinsey

As the fastest-growing start-up industry in Africa, the success of fintech companies is being fueled by several trends that include increasing smartphone ownership, declining internet costs, and expanded network coverage, as well as a young, fast-growing, and rapidly urbanizing population.

According to McKinsey in its 2022’s report, it is estimated 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. This is the largest and most mature market on the continent)

As the fastest-growing start-up industry in Africa, the success of fintech companies is being fueled by several trends that include increasing smartphone ownership, declining internet costs, and expanded network coverage, as well as a young, fast-growing, and rapidly urbanizing population.

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The outbreak of COVID-19 pandemic also accelerated existing trends toward digitalization and created a fertile environment for new technology players, as it caused significant hardship and disrupted lives and livelihoods across the continent.

Despite this success stories 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.

As put by the report, the followings are the horns that must be addressed to drive fintech growth and its sustainability across all spectrums in Africa.

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.

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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.

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.

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.”

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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.

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.