Fintech investment pours into Africa

2021 was a record year for fintech investment in Africa, and the momentum is only likely to increase. After a brief dip during the COVID-19 pandemic during 2020, the deals came back with foreign investment flooding in. Data shows that there was over US $1.6bn invested across 153 deals, two times the value of 2020 (US $800m)¹ and representing a 50% increase in transaction numbers.

The key markets remain Nigeria in the West, Kenya in the East, and South Africa in the South. Other countries such as Egypt have also seen some sizeable deals. In Nigeria, the value of deals in the first quarter of 2021 alone outstripped the total for the whole of 2020. To raise such a quantum of finance from foreign sources is unprecedented.

One of the key drivers of the uptake of fintech services is, of course, the spread of smartphones across the continent. They are becoming cheaper and much more prevalent, enabling users to access mobile apps and tools. In a sense, this is building on the foundations laid by the highly successful M-Pesa service for money transfers that started in Kenya on analogue phones.

Key services remain payments and transfers, with foreign remittances in and out an important part of this. This is something that the pandemic accelerated. For example, there is a large Zimbabwean diaspora in South Africa who used to physically take cash home across the border. COVID made this impossible for a number of months — and this fueled a growth in people trying out money transfers through their cell phones instead. That habit has now become much more entrenched.

Alongside individuals, small and micro businesses are a significant market too — enabling businesses without a card machine to take payments connected to a cell phone.

While the focus is on payment services and digital banking, at the same time lending is also a growth area. There is a huge untapped market, after all. In Nigeria, for example, credit penetration stands at only around 3%. With fintechs developing alternative ways for credit scoring through the use of AI and machine learning techniques, they are able to take on higher risk lending that traditional banks have largely opted out of.

As the market in Africa matures, you can expect to see more development of other areas such as wealthtech and insurtech.

The rise of fintechs is creating a number of new dynamics, and it should be fascinating to see how things play out. In South Africa, challenger banks have been launching with zero fees – a dramatic step in a market where fees had been universal even for basic banking. Whether traditional banks begin to lower or remove their fees remains to be seen.

Incumbent banks are reacting in a number of ways. Some are taking up a holding company license to set up fintech businesses of their own, carved out of the main institution. Others are setting up partnerships and collaborations with fintechs. This can work favorably on both sides: for the bank, it gives their customers access to fintech services; for the fintech, the bank’s customers are a ready-made distribution channel.

Fintechs also need such partnerships if they want to take money in, as to date no fintech has been given a deposit-taking license. Regulators in the region generally do not allow non-bank entities including fintechs to take deposits from customers. However, in some markets, fintechs have been able to overcome this barrier by taking up micro-finance bank licenses or through collaboration with licensed banks which act as their deposit taking partners.

Other traditional banks are concentrating on upgrading their own digital services, looking to improve the customer experience and provide more innovative services. The challenge they face with this is that they can’t move at the same speed as their nimbler start-up rivals.

In terms of the sources of funding, it is largely VC- and PE-based with significant investment from the US. Over a third of investment into Nigeria has been from US-based VC funds. Large corporates are investing too — in South Africa, for example, Visa and Fidelity have taken stakes in Jumo (which in fact mainly serves West African markets).

There is substantial investment from Asia too, especially China. Nigeria’s OPay raised US $400 million in 2021 and most of that came from Asian investors.

The foreign money flowing in has perhaps been something of a rude awakening for local investment funds. They are becoming more active, realizing however that they are late to the game. Nevertheless, plenty of opportunities remain for them to pursue.

While the future looks bright for fintech in Africa and it is expected to continue to grow at speed, there is a significant challenge: the availability of talent. Fintechs depend on their software developers and engineers to create, maintain and develop their services and there are already acute shortages on the continent. But this is now being made worse by the remote working model created by the pandemic, with African developers taking up lucrative positions with employers based in the US, Europe or elsewhere.

Another possible concern is that if interest rates escalate in developed markets (as seems likely), it could reduce the available capital coming into Africa from overseas.

Overall, however, the outlook remains extremely positive. There is a race to scale unfolding, as entrants look to deploy their funds and acquire customers. In what remains a fragmented market, we are likely to see some consolidation over the coming years as winners (and losers) emerge. One thing is for sure — it won’t be dull.

VC investment soars and M&A makes a big comeback.

Download this edition for:

• global and regional analysis with key investment data and insights
• top fintech trends for 2022 and beyond
• interviews with Quantexa and Thought Machine
• fintech segment insights for a deeper dive into payments, insurtech, regtech, wealthtech, cybersecurity, blockchain and cryptocurrency
• spotlight articles on emerging markets: LATAM and Africa.

To learn more about the analysis and topics raised in this edition, or to discuss your organization's unique fintech agenda and roadmap, please contact your local KPMG advisors or the contributors in this publication.