African's Fintech 101

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Happy Friday!

This week I had a conversation so good, I decided to turn it into an article (hence why it’s late).

More on that soon.

Before we dive in, I made a post about my move to Nairobi and it got a lot of love 🙌 

Thanks for making me feel so welcome!

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Alright - let’s dive in.

When you think of startups in Africa, you’re probably thinking of Fintechs. And fair enough. Of Africa’s seven unicorns, six of them are Fintechs.

It’s one of the most funded, hyped, and talked about sectors in African Tech.

And while we have touched on Fintech at Tech Safari (MFS Africa, MPesa, Crypto in Africa) over the next few months we’re going even deeper.

Fortunately, a Fintech expert made an impromptu stop in Nairobi.

Meet Wiza Jalakasi.

Wiza is what you would call an African Tech OG. He has been in the game for a while. A quick rundown of his track record:

• Wiza started coding at age 11.

• By 16, he built Malawi’s first-ever music download website. Wiza admits he was ahead of his time.

• His next startup, Djuaji, made it into Savannah Fund in 2015 and won $30K in seed funding.

• After Djuaji, Wiza moved back to Malawi and joined Africa’s Talking where he scaled the company across into 17 African countries and to $10 million in annual revenue.

• In 2021, he moved to African Fintech Giant, Chipper Cash, where he built out Chipper’s Global Merchant Business and led their expansion into Zambia with the acquisition of Zambian Fintech, Zoona.

• In February, he hopped over to Brazilian Fintech Unicorn, EBANX, where he will lead their African expansion.

Wiza has had experience at just about every stage of the startup journey.

And when he touched down in Nairobi, we caught up and spent hours nerding out about the state of Fintech in Africa and where it’s going.

I learned a lot, and figured it was a great chance to turn those learnings into a story. In this edition we’re covering our conversation on:

• How Fintech has evolved over the last twenty years

• Where it is today

• What we’re watching in Fintech

Africa’s Fintech History

Wiza explained how Fintech in Africa has changed over the years - and it turns out we have covered each stage of that evolution:

• Starting with Feature Phones - which became widespread in the 2000s

• Moving to mobile money- which allowed anyone with a phone to become ‘banked.’

• Expanding to interoperability - connecting mobile money wallets to each other, and to global services - mostly through the work of MFS Africa.

• And landing on digital payments - the next extension of Fintech today, and where we see Africa’s unicorns like Flutterwave, Opay, and Wave.

Just a note: Africa’s Fintech story is one of mobile money. But two countries are outliers.

Nigeria, where agency banking looms large, and South Africa which has deep banking penetration.

This is due to the maturity of banking infrastructure in these countries, and policies from regulators that tend to favour banking.

Phase 1: Cell phones

When cell phones first came to Africa, they changed the whole continent.

Before cell phones blew up in Africa, the continent was disconnected.

People had to personally travel from point A to point B to receive information and send or receive money.

Communication, transactions, and decisions could take hours, days, and weeks.

When cell phones came onto the scene, that all changed.

And while phone adoption started slow.. as the price of a phone dropped, adoption sped up.

It happened quickly. In 2001, there were 17 million cellphone connections on the continent.

By 2004, it was 53 million. And by 2010, there were 552 million cell phones connected - with no signs of uptake slowing down.

It was a rapid growth curve and the backdrop for Africa’s Fintech revolution.

The next step? Cellphones turned into bank accounts with mobile money.

Phase 2: Mobile Money

When mobile money kicked off, mobile phones unlocked a new level of utility.

M-Pesa is an example of that.

What started as a small test - a loan service for Kenyans to borrow money and pay it back from their phones - was actually Fintech penicillin.

The idea was simple and revolutionary. Providing banking through a sim card and using texts to send money in a cheap and easy way.

And no smartphone? No problem. All you needed to use mobile money was a mobile number. And it wasn’t just M-Pesa.

In Uganda, MTN Money (MoMo Pay) lets users send money and process business transactions.

MoMo Pay is powered by MTN group and currently has 10.9 million subscribers. Best part? The service is accessible using basic feature phones.

A year after launching in Nigeria in 2022, they already have 3.2 million users. But the next step in Fintech’s evolution is a concept we touched on last week:

Phase 3: Interoperability

The next phase in Africa’s Fintech evolution was interoperability. Mobile money was in a closed network.

If you had M-Pesa but your cousin had MoMo, you couldn’t send them money. Interoperability let different platforms to connect and let users to transact seamlessly across providers.

And not just between mobile money wallets, but between mobile money and other services too.

And the company at the centre of interoperability in Africa? MFS Africa

MFS Africa is at the center of mobile money interoperability in Africa.

At the end of 2014, they launched the first mobile money cross-border connection between Benin and Côte d'Ivoire.

Today, they connect mobile money wallets to services across the world. Want to pay for Spotify in Africa? You’ll get a message like this one.

And the response was epic. Transfers between mobile users in Côte d'Ivoire and Benin took off.

Now MFS Africa connects:

• Banks to Mobile Money

• Virtual and Physical Cards.

• Collections and Payouts.

• Last-Mile Money Transfer

Interoperability has unlocked services like peer-to-peer transfers, banking, and virtual and physical cards. And it leads us to where we are today.

Phase 4: Online Payments

With interoperability, now mobile money users can access services across the rest of the world.

But for a while, services (especially international ones) were not accessible to mobile money wallets.

To buy your Netflix subscriptions or book your Airbnb, you needed a virtual card issued by Visa or Mastercard.

Over the last few years, we have seen the rise of the USD Virtual Card - a feature rolled out by just about every Fintech.

The problem with this is interchange rates.

When you make a payment with a virtual card, the merchant gets charged a small percentage of the transaction value by the card acquirer.

And Wiza explains that setting up new payment methods is an expensive, lengthy process.

If Amazon wants to accept MTN Momo, they will have to get their best engineers to work on an integration project which can take weeks.

And setting up the local operational infrastructure to accept local currency in each market can take months.

International companies like PayPal, Airbnb, or Amazon had not seen enough payment volume on the continent to justify the investment in building these payment integrations.

But that’s starting to change.

Payment methods like mobile money are starting to reach critical mass, to a point that merchant integrations can be created.

That’s exciting. Recall interchange rates with virtual cards?

If money can be accepted natively, it reduces the prices of services on both sides.

This is where Fintech in Africa is going - acceptance of online native payments.

Where the money is at

But Fintech has a long way to go in the move from cash payments to digital payments in Africa.

McKinsey’s 2022 report, Fintech in Africa: The End of the Beginning, finds a few interesting trends:

• 90% of transactions in Africa are still cash based 💵

• Despite the spread of mobile money, only 5-7% of payment transactions were made digitally 🤳🏾

• And 40% of Fintech’s market value is concentrated in South Africa 🇿🇦

With an underbanked population of 350 million adults, Fintech has an opportunity to keep creating ‘financial inclusion’ and drive economic growth.

And they’re not just good for inclusivity - they are cheaper, too. Fintech can be 80% cheaper than traditional banks.

And Fintech is expected to boom, and shoot from $4 billion in revenue in 2020 to $30 billion by 2025.

So it’s no surprise that Fintech is where the money is going [pun intended].

In 2021, Fintech made up 54% of venture funding. And in 2022, it made up 37.5% of funding in Africa.

What we’re watching in Fintech

Payments.

This one is a bit cliche and seemingly oversaturated - with Moniepoint, OPay, and Pesapal all in the ring.

But the ability for more local merchants to access the digital economy, become more efficient, and make more money contributes to economic growth

Savings.

Wealthtech in Africa is on the rise. Companies like Piggyvest help 5 million Nigerians save money.

Save Now Pay Later is an up-and-coming model that lets consumers choose an installment plan and make payments and receive the item once they’ve paid the full purchase price.

Banking as a Service 

As Angela Strange (from Andressen Horowitz) says, every company will be a Fintech company.

Startups that are helping other startups build Fintech products are on the rise in Africa, with companies like Flutterwave, Bloc, Anchor, and Tembo making it easier for Fintechs to embed financial solutions.

Credit.

Africa has only a 3% credit card penetration rate, and even banked users in mature markets can’t get access to digital credit for large purchases.

It’s harder for Small and Medium sized businesses, where the funding gap is estimated to be a whopping $331 billion.

Startups like Jumo, Carbon and Payhippo are helping bridge this gap.

KYC [Know Your Customer].

You can’t have a Fintech without compliance, and KYC lets Fintech comply with regulations and minimize the level of criminal activity.

This gets even harder in a continent where hundreds of millions do not have legal identities.

Companies like Smile ID and Dojah are tackling this problem.

It’s still TBD where the next winners in Fintech will come from, but it’s definitely still early days for Fintech in Africa.

Over the next few weeks, we’ll be diving deeper into companies building in Fintech.

One thing is for sure - we can expect the customers to keep coming, and the money to keep moving.

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Catch you soon!

👋🏾 Caleb