What investors are looking for in Africa's fintech sector
By Anton Gaylard, Co-Founder of CrossFin Technology Holdings
Africa has long been considered a global leader in fintech innovation and adoption. The continent's low penetration rates for traditional banking services coupled with high penetration of mobile phones makes it a rich breeding ground for fintech innovation, and in many respects the continent has been miles ahead of other developing – and most developed - markets.
According to EcoBank, more than 57% of all mobile money accounts globally can be found in sub-Saharan Africa, with the African fintech market set to grow from $200m today to $3bn by 2020. A recent study by McKinsey found room for growth in meeting unmet banking needs in Africa that includes borrowing, saving, and investing across the continent, with South Africa alone set to see an increase in banking revenues of $4-billion over the next five years.
KPMG's latest quarterly Pulse of Fintech Report found that in Q4 2017 global investors continued to prioritise investment into fintech companies that focus on the B2B market, including payments platforms, SME lending platforms, and SaaS solutions aimed at making back-office operations more efficient. The report further highlights growing pressure on financial institutions thanks to increased regulatory reporting and compliance pressures, which may point to investors shifting focus slightly toward RegTech solutions.
African fintech: what to expect?
Despite global hype around bitcoin and other cryptocurrencies reaching a fever pitch in 2017, don't expect too much excitement from investors. While the underlying technology - blockchain - has enormous potential to add value to traditional and new financial services, cryptocurrencies are too high-risk for most institutional investors.
However, this reluctance does not extend to other forms of payment innovation, as the Virgin Group's recent investment into South African mobile transacting technology provider wiGroup has shown. Fintech companies that help solve issues around fraud and KYC (know your customer) will also feature prominently, especially in South Africa which has the continent’s most advanced financial system but ranks 23rd on the global cyber crime list.
The 2017 Finnovating for Africa report found that South Africa was home to 94 of the continent’s 301 fintech start-ups, of which 22 focused on some form of lending support. With the SME sector projected to become the main driver of employment and economic growth in South Africa and the rest of the continent, expect local investors to follow the lead of their international peers and put serious focus on fintech solutions servicing this sector.
Disrupt or partner?
While 'disruption' was arguably the word of 2014 following Uber's rapid global expansion and massive market impact, investors today look more for partnership opportunities between would-be disruptors and market incumbents. KPMG's Forging the Future report in 2017 found that more than 80% of companies surveyed considered partnership to be the preferred avenue through which to engage the market. This may partly be because corporate venture capital investment in fintech now accounts for 19% of all global fintech deals.
Crossfin recently concluded a deal with Investec to identify 3-4 early stage fintech startups in which to invest through Crossfin’s angel funding arm Blue Garnet Investments. Akash Maharaj, Emerging Companies at Investec, comments: "The financial needs and requirements of consumers and businesses are constantly evolving. They demand innovative, cost-effective technology solutions to help them easily transact, save and invest, both locally and abroad. As an international organisation, rooted firmly in South Africa, we’re excited to work with reputable, proven partners like Crossfin. We see it as a strategic investment in entrepreneurs, their innovative ideas and in the future of financial services.”