All eyes seem to be on Africa as the next emerging fintech ecosystem following a remarkable two years of venture capital funding rounds, despite the global economy enduring tumultuous conditions.
In a report compiled by Partech Africa, funding for new tech and financial startup companies in Africa grew by 8% throughout last year, with the total valuation of new fintech reaching $6.5 billion through more than 764 rounds. Additionally, the same report indicates debt funding doubled by 102% through 71 rounds, making Africa one of the most active emerging startup markets globally.
Despite the challenging headwinds experienced across the tech sector, African fintech companies prevailed and remain an attractive investment opportunity for venture capital investors.
The bumpy road of 2023
Although the last several years following the pandemic revealed the upside potential of Africa’s growing fintech ecosystem, conditions have somewhat slowed this year, as venture capital funding has started drying up and those previously enthusiastic over the near-term potential begin to withdraw their support – for now at least.
A report covered earlier in the year revealed that there has been a 21% downturn in African fintech funding during the first six months of the year.
The same report suggests that slower, and perhaps less positive growth is expected for the full-year, as venture capital investors withdraw their support against a backdrop of continued macroeconomic difficulties.
Across the board, central banks have initiated aggressive monetary policies to tame soaring inflation. In the United States, the Federal Reserve began raising interest rates back in March 2022 to fight off sticky inflation.
Through a series of aggressive hikes, interest rates are now nearing a twenty-year record peak, with some experts suggesting that more rate hikes are still left for the year before the central bank begins pausing its inflation-busting campaign.
Among other factors that have aided the slowdown in Africa’s fintech ecosystem are political tension, civil unrest, and the slowing of economic activity across the region due to turbulent macro-economic conditions.
However, there remains a lot of upside potential despite the steady downturn experienced throughout the first half of the year. New technology and the advancement of Artificial Intelligence (AI) on the back of widespread digitalization are helping to expand the competitive landscape even further.
Fintech activity alive and well
While new funding rounds have slowed somewhat this year, the overall activity of new and existing fintech startups continues to experience significant growth.
According to Finnovating Africa, a report published by Disruptive Africa, the number of active fintech startups has increased by 17.7% over the last two years, with more than 678 fintech companies currently active in the region.
This is a significant increase compared to the 576 fintech startups accounted for in 2021 when the last Finnovating Africa report was released. What’s more, the growth in active fintech companies has been on track with previous estimates. Between 2019 and 2021, the number of active fintech ventures rose by 17.2%, and between 2017 and 2023 that figure has ballooned by 125.2%.
This development isn’t an isolated event and is seen taking place across the continent, with major markets including Egypt, Kenya, Nigeria, and South Africa seeing the biggest activity.
The same Disruptive Africa report indicates that participation rates of new fintech startups soared between 2019 and 2021, with nearly 40% of currently active fintech startups established within that time frame.
The onset of the global pandemic helped to fast-track these developments, as tech-enabled companies and financial service providers leveraged the opportunity to induce the regional market with technology and fintech-based tools.
Earlier analysis by the global consulting firm, McKinsey and Company showed that African fintechs accumulated between $4 billion to $6 billion in estimated revenues in 2020.
Yet, despite making inroads, cash remains the biggest and most important form of transacting across the continent, accounting for nearly 90% of financial transactions across Africa.
Considering the positive growth, the region now has nine fintech unicorns – companies with valuations of $1 billion or more.
These fintech unicorns, scattered across the continent, have helped reshape the financial landscape, further enabling existing financial service providers to seek more innovative solutions for the future African consumer.
Among the companies that have established their dominance across the region are Chipper Cash, OPay, Flutterwave, and MNT-Halan, an Egyptian-based financial services provider being the most recent addition to the list.
MNT-Halan recently secured $400 million in equity and debt funding at a valuation of $1 billion. Around half of the funding – around $200 million – was secured through an investment by Chimera Investments, an Abu Dhabi-based investment firm. The company provided the investment in exchange for 20% equity of MNT-Halan.
Growth in the region’s fintech market has primarily been driven by increasing demand for more affordable, reliable, and democratized financial services.
McKinsey research suggests that cryptocurrencies, blockchain, digital wallets, payments, and account management are among the segments that will see the biggest demand in the coming years, with an estimated 10% annual growth until 2025.
These estimates indicate the future potential new fintech companies can bring to the landscape in the coming years, and how venture capital investors can align their strategies with these companies to leverage these opportunities in the market.
Reaching global potential
While domestic activity has steadily been on the rise, a handful of African fintech companies have been making global headlines in more recent months.
A report compiled by CNBC together with Statista, an independent research firm, revealed that four African fintech companies recently featured on the list of top 200 global fintech companies.
The report categorized each of the companies and classified them into nine different categories, including neobanking, digital payments, digital financial planning, and digital wealth management, among other categories.
Among the 200 companies featured on the list, is in no particular order, Nigeria’s Kuda, Egypt’s, Fawry, South Africa’s digital payment platform, Yoco, and OPay, another Nigerian fintech startup.
These companies already have a significant presence within their home countries, assisting consumers and merchants with innovative and advanced digital payment solutions.
Kuda, for example, enables users to actively manage their finances and complete transactions online. The company reached more than six million active users in Nigeria last year, four years after its launch in 2019.
Also in Nigeria is OPay, a mobile-friendly finance application, that allows users to make payments, transfers, loans and manage their savings through the platform. Currently, OPay has more than 10 million registered users.
Elsewhere in South Africa, the digital payments and software company, Yoco now helps to power small businesses, with electronic card machines and convenient payment methods. The company now supports more than 200,000 South African small to medium enterprises (SMEs) and processes more than $2 billion in annual transactions.
While these companies only represent a small percentage of the bigger picture, the African fintech landscape continues to offer growing opportunities for both innovators and investors alike, as they set out to revolutionize how African consumers bank and transact.
Yes, there are still significant challenges ahead, and it would require venture capital investors to carefully consider their options as they seek to leverage the emerging African fintech ecosystem.
While the global landscape continues to experience softening demand and slowing investment, perhaps investors would look to Africa as the next big opportunity that would not only help fast-track the digitalization of the continent’s financial landscape but further boost the region’s active participation on the global stage.