African Fintechs are knocking down old walls, unleashing growth

An old wall in Uganda begins to make way for the new

As discussed last week, Africa’s digital economy is accelerating rapidly.

Unlike in the U.S. where the debate is about whether to put up physical walls, in Africa, the virtual walls previously blocking online payments and financial product innovation are starting to crumble and unsurprisingly, money is at the center of the change.

Following a global trend in venture activity, much of the investment into Africa has been into “Fintech.” In 2017, Fintech startups took home nearly a third of all African venture funding.

Depending on how you count it, in 2018, that number was as high as 45%:

These major fundraising events drove it (comment if I missed one):

• $70M into Branch International
• $65M into Tala
• $52M into Jumo
• $48M into Cellulant
• $13M into Mines.io
• $9M into Paystack
• $7M into Lidya
• $7M worth of cryptpo-coins issued by SureRemit
• Another $10M into Pagatech
• And seed rounds into more than a dozen new fintechs like: BuyCoins.ng, Wallet.ng, Cowrywise.ng, Piggybank.ng (now Piggyvest), Nala, Pezesha and Clane

These sizable expansion rounds and rapid seed financings are going into companies that are:

1. Delivering digital input/output of money — As discussed in our last post, expanding Internet access is critical to accelerating economies overall but for digital financial services specifically, the ability to reliably send and withdraw payment, whether through the web, apps or USSD, is the killer app. This is particularly important in sub-Saharan Africa where as of 2017, most people still did not have a bank account but where mobile money, agent networks and short codes are driving dramatic increases in financial inclusion in just the past few years. In markets like Nigeria where (historically) online transactions frequently failed due to rules set by local banks and international processors, and mobile money lagged due to regulatory favoritism for banks, new players like Flutterwave and Paystack opened up the door for startups and international companies. They did this by upgrading old bank SOAP APIs to RESTful ones and simplifying and improving developer and consumer interfaces for complicated transactions like those involving mobile wallets, international cards or recurring billing and reducing the costs. These changes ensured the success of online payments in Nigeria and have allowed new startups like Wallet.ng and Piggyvest.ng to flourish. Meanwhile Services like GT Bank’s *737* (quickly copied by its peers) have made it easy for anyone to send money, quickly and affordably similar to the role Safaricom’s MPESA has played for a decade in East Africa.
2. Using alternative datasets to determine creditworthiness — Many new fintech apps analyze every piece of data they can get off a consumer’s phone: SMS logs, mobile money receipts, contact lists, social media posts, etc. Critiques of this practice call it “data hoovering,” because it usually involves literally sucking up all data about an individual in order to figure out what is important and deterministic in credit scoring. But whatever your perspective on the privacy concerns associated with this practice, these datasets have proven to be an extremely valuable alternative to traditional credit scores in Africa. In particular they have driven a massive expansion in the consumer and small business credit economy in East Africa.
3. Using Super Platforms to achieve distribution at Scale — Facebook and Google Play store ads (supplemented by the occasional press release or media event) have given companies that use them well an efficient way to acquire new customers, by using hyper-targeted, interactive and referral-based ads. These campaigns produce tons of data, are less expensive and more iterative than legacy offline advertising channels and enable nimble startups as well as large players to advertise on a relatively even playing field. In addition, tools like Twitter and WhatsApp give creative companies another method of interacting with customers or redressing complaints. These channels, particularly Facebook, have allowed a number of startups, to achieve bank-like scale of hundreds of thousands to millions of users inside of a few years.

The companies doing these things to change the status quo are being rewarded with fast growth and substantial expansion capital.

Not to be forgotten, banks are knocking down their own walls, exploring mergers to improve their reach and digital offerings, stay relevant to a young, digitally native population, and improve their capital positions as they begin to compete outright with telcos for control of customers’ wallets and spend across Africa.

How banks are becoming telcos and telcos are becoming banks in Africa

In the last 12 months Nigeria’s Access Bank bought rival Diamond bank to create Africa’s largest lender, and NIC and CBA to merged, in Kenya’s largest merger in a decade to pursue Pan-African expansion.

And of course with more money and commerce now becoming digital, telecoms have stepped into the Pan-African banking arena as well with Orange applying for banking licenses in 8 West African countries and even partnering with Africa’s largest telecom, MTN to offer a Pan-African mobile money answer to MPESA.

And this is where identity becomes critical.

As money moves increasingly in and out of digital channels, across borders, through agents and startups and finally into the hands of a bank (or telecom?) who knows where it’s been? who do you trust to make a payment? who will ensure its delivered? who will ensure that its not used to commit a crime? who will ensure a loan is repaid?).

In the analog world, transactions involving credit or remittance were constrained to people you knew, could meet or talk to in person and could therefore “trust”. In a world of greater digital financial anonymity, knowing your customer becomes crucial to avoid fraud, money laundering, terrorism finance and crime. Thus solving identity becomes an enabler of greater and greater scale and risk.

In the next post we’ll cover the basics of what #GoodID systems do and some best practices for handling #digital identity, and #KYC throughout a user’s lifecycle with your product or service.

Learn more about Smile Identity and our KYC solutions here.

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