African Fintech Is Booming despite Challenges

Financial technology (fintech) startups in Sub-Saharan Africa are growing in spite of myriad challenges. Cash is still king in most African markets, as more than half of all Africans remain unbanked or underbanked, which presents an opportunity for financial technology companies to digitize payments. The African electronic payments market will grow by 20 percent every year to 40 billion USD by 2025, according to Mastercard, whereas the industry is only expected to grow by 7 percent globally in the same period. Venture capital (VC) financing for fintechs in Sub-Saharan Africa grew by 894 percent year-over-year to 1.6 billion USD in 2021, accounting for 61 percent of the 2.7 billion USD in VC funding of African tech startups that year. African fintechs could earn revenue of up to eight times current levels of about 4 billion USD (2020) to 30.3 billion USD by 2025, according to McKinsey, as they are delivering better value than traditional financial services firms at lower costs.

Progress varies across countries in the region, with Kenya leading on most fronts. Factors underpinning African fintech growth are rising smartphone ownership, lower internet data costs, more internet bandwidth, urbanizing populations, and a bulging youth demographic. Blockchain and cryptocurrency technology, payments, and wallets are expected to be the fastest-growing segments of fintech in Africa, according to McKinsey, with expected compound annual growth rates of 50 percent, 20 percent, and 20 percent in 2020–25 respectively. The most attractive fintech markets are Nigeria, Ghana, South Africa, and Egypt, owing to their relatively larger economies, better tech infrastructure, and concentration of talent. Francophone Africa is also, as its regional monetary framework offers opportunities to scale efficiently.

Regulatory volatility and variability are huge concerns, which, in tandem with the multiplicity of currencies across more than 50 markets, weigh on African fintechs’ ability to scale profitably across borders. Still, the regulatory environment has been improving, with more than 90 percent of the region’s markets having robust regulatory regimes for digital payments. Know-Your-Customer (KYC) processes are problematic, as national identification systems are unreliable in all but a few African countries, as are physical address systems. Tech infrastructure is also still largely weak across the continent. Scarce talent is also a constraint, as more and more able hands increasingly prefer to work abroad, where remunerations are more attractive.

Profitability can take longer than expected as well, as customers acquired with costly scale marketing strategies are hard to monetize thereafter. These constraints do not appear to be discouraging international investors, especially American ones, which dominate later-stage VC financing of African fintechs. Still, foreign VC financing is beginning to slow owing to tighter global markets in general, with VCs expected to increasingly seek efficiencies that African markets are not well-suited for. The African Continental Free Trade Agreement (AfCFTA) protocol on digital trade and Pan-African Payment and Settlement System (PAPSS) will ease some of the intra-African constraints on payments and talent mobility in due course. But progress is slow. The United States should align its trade and foreign policy with the region’s continental frameworks, especially on the digital economy, to quicken the pace.

Rafiq Raji is a non-resident senior associate with the Africa Program at the Center for Strategic and International Studies in Washington, D.C.