Payments innovation the key to financial inclusion in Africa

Africa is witnessing a fintech boom. In 2021, nearly half of the 5200-odd tech start-ups in Africa focused on financial technology, says consulting firm McKinsey in its August 2022 report on the African fintech industry.

According to news and research portal Disrupt Africa, which has been covering the tech start-up ecosystem in Africa since 2015, the African fintech sector secured $1.45bn in funding for 2022, a 39.3% increase from the previous year. The most attractive sector to investors, fintech garnered 48.3% of known start-up funding on the continent in 2021 and 43.3% in 2022.

More than 40% of Africa’s population remains unbanked today, while around 90% of financial transactions are cash-based. In this environment, fintech companies are enabling access to financial services through innovative solutions that are both convenient and cost effective.

This trend is boosted by technology advances, improved mobile penetration, lower data costs, a young, rapidly urbanising population and, more recently, the Covid-19 pandemic that has mainstreamed digitalisation initiatives.

McKinsey analysis reveals that new technology-based solutions for everyday requirements such as buying airtime, transferring funds and paying bills are available to lower-income households for up to 80% less than these services would cost with traditional banking players.

While fintech offerings range from mobile money and lending to regulatory technology solutions, currently fintechs are predominantly focused on payments. Kelly Parkhurst, head of design and new digital at Absa Bank, says: “The payments segment is huge – it can be digital payments or payment rails. Anything that supports elements around payments is a market leader.

“A lot of the payments-related ones are getting a lot of traction in the market because of ease of use as well as the accessibility they provide.”

Kenya’s M-Pesa was an early mover in the fintech space – launching in 2007 – and today has more than 50 million monthly active customers spread across seven African countries. Its services have expanded to include payments, lending and savings. Notably, in this same period, financial inclusion in Kenya grew nearly four-fold, from around 25% in 2006 to nearly 85% in 2021.

“Fintechs have challenged the status quo and they have encouraged banks to really pick up and try to keep up and modernise with growing technologies and opportunities,” says Ms Parkhurst. She adds that though fintechs started off competing with banks, increasingly they are adopting a collaborative strategy.

Counterintuitive cooperation

“There’s quite a strong symbiotic relationship that would have originally seemed very counterintuitive. Fintechs have the ability to be agile and to scale up quickly, while banks have the market reach. They’ve got the balance sheets and they’ve got the trust for most parts in the markets,” says Ms Parkhurst.


“If you get that model right of collaboration between banks and fintechs and leveraging off each other’s strengths, that’s when some real magic can happen,” she adds.

Absa has been working with fintechs for several years, says Ms Parkhurst. In December last year, Absa partnered with Melanin Kapital, a financing marketplace, to increase access to credit for women-led micro and small enterprises in Kenya.

In September 2021, Tanzania’s telecom company Tigo, fintech firm Jumo and Absa inked a tripartite agreement to increase the availability of Tigo’s existing short-term credit product to its customers.

Similarly, in October 2021, Standard Bank, Africa’s largest bank by assets, partnered with African unicorn Flutterwave to enhance the digital payments experience for its customers in eight African countries.

Flutterwave’s CEO said in a press release that the partnership with Standard Bank demonstrates that fintechs and banks are not competitors but trusted partners, with the key focus being the customer.

McKinsey earmarks 11 countries as being at the centre of the fintech market evolution: Cameroon, Côte d’Ivoire, Egypt, Ghana, Kenya, Morocco, Nigeria, Senegal, South Africa, Tanzania and Uganda.

Together, these countries account for 70% of Africa’s gross domestic product and half of the continent’s population. They offer fintechs and investors a favourable environment, including increased digital readiness and higher mobile and internet penetration.

Regulatory drivers

The regulatory push towards financial inclusion in these markets presents fintechs with a significant opportunity to migrate Africa’s sizeable population of cash-based customers to new solutions.

In addition, says McKinsey, regulatory developments such as the African Continental Free Trade Area (AfCFTA), which will create the largest free trade area in the world, and the planned roll-out of the Pan-African Payment and Settlement System, may open new avenues of growth for fintechs by increasing cross-border payments and trade.

Ms Parkhurst points out that the African market remains extremely varied, with diverse consumer behaviour and regulatory environments. Fintech offerings are therefore very regional in nature and specific to the market in which they are operating.

“When people look at Africa from outside they say that this is a world of potential, which it is. But the trick is to have a solution for each market individually and set up your platforms in a way that can be modularised or adapted for this variation across regions,” she says.

Ms Parkhurst explains that M-Pesa, which completely bypasses banks, gained high adoption in Kenya and countries where access to financial services was either very expensive or difficult.

In South Africa, on the other hand, where access to banking products and trust in the banking sector is much higher, the penetration of mobile money solutions is low, she says.

Going forward, Ms Parkhurst expects fintech action to expand beyond payments. “I think as we progress and data insights become far more rich, and with the advent of artificial intelligence, we will probably see a lot more growth in short-term lending.

“Thinking out of the box, looking at alternative data models – that is probably going to be the next wave.”

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