Over the next three years, Africa’s fintech industry is projected to hit record-breaking revenues for startups in the financial sector and herald a new growth phase characterized by more advanced financial services.
The latest McKinsey report shows the revenue generated by fintech startups is set to grow eight times to $30 billion by 2025, as Africans find digital finance solutions more convenient — and cheaper — when seeking credit, making purchases, settling bills, and managing expenses, than traditional financial services.
At a maximum average penetration rate of 5% in 2020 — excluding South Africa — the report estimated that some African fintechs would be generating revenue of about $4 billion to $6 billion per annum by 2025 — in line with global market leaders.
“With digital becoming a way of life in Africa, the stage is set for the next phase of fintech growth,” says the report, titled Fintech In Africa: The End of the Beginning.
Fintech markets in Ghana and French-speaking West African countries are predicted to grow even faster than two of the continent’s biggest startup ecosystems, Nigeria and Egypt. Ghana’s annual fintech growth rate is the fastest, at 15%, followed by Cameroon, Côte d’Ivoire, and Senegal. Nigeria and Egypt are tied, with growth rates of 12%.
Growth opportunities are also anticipated in Kenya, Morocco, Tanzania, Uganda, and South Africa. The latter accounts for 40% of all fintech revenue in Africa. These 11 markets account for 70% of Africa’s GDP and half its population.
Mature fintech markets, such as South Africa and Nigeria, will begin moving from offering wallets, payments, and distribution to offering advanced services to support the liquidity and regulatory aspects of business-to-business transactions.
Compliance services for mature markets
The report lists anti-money laundering and know-your-customer compliance as among the new services that will begin dominating more mature markets with more complex financial systems and digital infrastructure. For growing ecosystems, there will be a rise in offerings such as buy-now-pay-later, services for SMEs, and insuretech offerings.
However, the road to sustainability in this sector is not easy. The report says, with varying levels of maturity in these markets, startups are bound to face key challenges to growth.
Markets with weak mobile and internet penetration, lack of identification coverage, limited payment rails and low incomes will make it hard for startups to reach scale and build profitable business models.
Businesses will also have to navigate an uncertain regulatory environment where different markets are at different stages of developing fintech regulation — presenting complexities that can make business continuity and compliances difficult.
A rise in competition for growth funds, the report shows, is also bringing in a tough operating matrix. There is a slowdown in funding for later-stage startups on the back of reduced levels of venture investment globally and as more early-stage startups begin to disrupt the market.
Currently, 70% of fintech startup deals are financed by foreign investors — mostly from North America — with locally financed deals concentrating on early-stage startups.
“This suggests that African fintech will likely have to tighten their belts to adjust to a new venture-funding reality,” said the report.
CB Insights State of Venture Report Q2 2022 shows global venture funding fell by 23% to $108.5-billion in the second quarter of this year. This is the largest quarterly percentage drop in close to a decade. However, in value terms, it was still the sixth-largest quarter for funding on record.
Key foreign investor regions such as the US (25%), Asia (25%), and Europe (13%) recorded drops in venture funding. However, growth prospects, coupled with the fundraising upswing recorded on the continent since last year, could be enough to deliver more African unicorns.
“Despite all the activity seen on the continent, Africa has only produced a handful of unicorns and the profitability of many ventures is precarious … With the right incentives and support, the next marvel of African unicorns is just waiting to emerge,” said the McKinsey report.
To date, only one unicorn — KuCoin, a Seychelles-based crypto exchange that raised billions of dollars from foreign investors, pushing up its valuation to $10 billion (making it a “decacorn”) — has been delivered on the continent this year.
In February, Wasoko came closer to growing into a unicorn after raising $125 million from international investors, pushing up the company’s valuation to $625 million.
Fintech founders have also been challenged to develop an ambitious strategy to attract, develop and retain the very best talent amid high competition in and out of the market.
In addition, to build a strong, positive organizational culture that provides stability, clarity, and direction, fintech companies on the continent will need to strengthen their corporate governance foundations, according to the report.