In Africa, deals recorded by fintech players are rising dramatically. By 2021, 63% of funding to the technology sector went to fintech.The growth of fintech is helping to improve financial inclusion.
When Nigeria went into lockdown in 2020 to stop the spread of the coronavirus, Michael Terver was able to keep his small internet café afloat, but also to help his friends and customers facing new challenges brought on by the pandemic. He did this through a partnership with an electronic banking company.
Before the COVID-19 pandemic, most of the cybercafé’s customers, who did not have bank accounts, preferred to make purchases or sales with cash. But as social distance made it impossible to conduct most transactions “in person,” they were able to go digital with the help of an integrated online system, allowing them to pay bills, make deposits or transfers, or apply for microcredit from the café.
Dubbed Quickteller Paypoint, the system had been launched in 2016 by Interswitch, a Nigerian fintech company, to help individuals as well as micro and small businesses adopt paperless transactions.
“Accessing Quickteller Paypoint from my facility was a game changer,” says Michael Terver. Because of the lockdown, businesses couldn’t operate as usual, which affected cash payments. Our Quickteller Paypoint automatically replaced cash transactions, because staying safe was what mattered most.”
Michael Terver’s story is indicative of a larger phenomenon. A combination of finance and technology, fintech is rapidly transforming the way individuals and businesses conduct transactions, particularly in Africa. North Africa and the Middle East have recently seen the fastest growth in transaction volume recorded by fintech players in the world, with a 40 percent increase in 2020, while sub-Saharan Africa, with a 21 percent increase over the same period, was on par with North America.
Over the past decade, fintech has enabled 1.2 billion unbanked people to access financial services, a 35% reduction in the unbanked population worldwide. With this increase in financial inclusion, more individuals and small entrepreneurs are saving, receiving government payments, conducting business, and securing their wages.
“Investment in fintech is growing much faster in emerging markets than in developed markets because it fills a vital gap. We expect this growth to continue,” says Aliou Maiga, Africa regional director for IFC’s Financial Institutions division. For the first time, microenterprises and individuals with very limited financial assets can secure their savings, make transfers without exorbitant fees, and even take out small loans to increase their income. This is a real turning point in our efforts to promote financial inclusion and eradicate extreme poverty.”
Plenty of room for growth
The African fintech market has plenty of room for growth. Indeed, only about 20 percent of adults in sub-Saharan Africa own a debit or credit card, compared to over 80 percent in developed economies. Cash is still prevalent in many underserved rural and urban areas, creating additional costs, difficulties in buying and selling goods, and increased exposure to theft and fraud.
Traditional banks have been reluctant to offer services to individuals with small incomes and few savings. Yet these millions of unbanked people represent a significant economic force that the digital finance sector can leverage.
The multitude of small businesses on the continent can also benefit from fintech. According to World Bank estimates, SMEs account for 90 percent of the total number of businesses, have one billion customers, and create seven out of ten jobs.
In addition, the continent is characterized by a large sector of informal and micro businesses, which have been particularly affected by the pandemic. During the crisis, fintech helped microenterprises and SMEs to keep their heads above water by offering them the possibility to conduct small transactions online and by providing microcredit and electronic payment platforms.
In South Africa, for example, Adumo, an IFC-supported company, is enabling small businesses to grow by moving to digital payments.
The sector’s growth continued in 2021: a report shows that venture capital funding for the tech sector in Africa tripled to more than $5 billion, beating all other regions of the world. The majority of this funding-63 percent, or $3.3 billion- went to fintech.
IFC has been a leading investor in the African fintech market. Its investments include Interswitch; Fawry, an Egyptian online payment platform; Wave, a mobile money service provider in West Africa; South African companies Adumo and Lulalend; and TerraPay, a pan-African fintech infrastructure player.
A momentum propelled by the pandemic
While fintech has been around since the early 1990s, the COVID-19 pandemic spurred the development of its services to unbanked and vulnerable populations, especially at a time when confinements limited cash transactions. According to a survey conducted by the World Bank and other partners, two-thirds of fintech companies surveyed worldwide report changing their business models during the crisis by lowering fees, revising lending criteria, and relaxing payment terms.
For example, TerraPay expanded its operations to North America to allow Africans working abroad to transfer money within 24 hours at an affordable cost. Also during the pandemic, fintech giant Tutuka, which has since merged with Paymentology, expanded its virtual card offering to meet demand from businesses and governments for solutions that allow them to pay employees working remotely and to disburse government grants or insurance benefits.
IFC supports these and other fintech services through direct and indirect investment in funds such as Helios, Partech and Apis Partners. Interswitch, for example, is receiving funding from Helios and LeapFrog.
In the coming years, fintech will become an even more integral part of African economies as businesses and customers alike recognize the long-term benefits of digital transactions.
According to a McKinsey report released in August, fintech is indeed enabling more affordable services for customers. “Transaction fees can be up to 80 percent lower, and interest on savings accounts up to three times higher than traditional players. Money transfers can be up to six times cheaper,” the report said.
Lulalend, which allows small businesses to apply for financing online, believes that fintech will play a key role in the continent’s future growth.
“Fintech is transforming Africa, because it allows companies to manage their cash flow better than ever before. It gives every business the opportunity to succeed,” says CEO Trevor Gosling. And a successful business grows the economy and creates jobs.”