Fintech is the New Oil in Frontier Markets Like Africa
Total global fintech funding continues to remain strong, with $8.2 billion invested in the third quarter of 2017, after more than doubling to $9.3 billion in Q2 of 2017, according to KPMG. Although deal volume declined, investments in Q3’17 stood well above the $6.3 billion. Venture Capital (VC) investment in fintech in Q3’17 saw a five-quarter high of $3.3 billion, although the total was well shy of the record $7.4 billion raised in Q3’15.
Until Q3’17 US-led global fintech investment totalled $5 billion across 142 deals and Europe invested $1.66 billion across 73 deals. In the more nascent market of Asia, fintech investment rose to over $1 billion for the first time in 2017. China accounted for over half of Asian fintech investment at $745 million. The above numbers reflect the trend of investors focusing on larger deals and higher quality companies with proven business models. Corporate participation in Asia fintech VC deals remained high at 22 percent of overall round counts, although actual direct investment has been quite minimal in 2017.
China is critical to the fintech story in Asia. China is the home of consumer fintech adoption as measured by client numbers. Tencent’s WeChat has over 800 million monthly active users, and Alibaba’s Alipay has over 400 million. It is clear from the China story that the key elements needed for fintech investment to succeed are high internet and mobile penetration, a rapid rise in ecommerce, rise in the middle class, and sluggish response from incumbent financial institutions.
Fintech in Africa
One such potent geography for fintech investment, with similar landscape and strong fundamentals in place, is Africa. In 2017, 45 African fintech startups got a total of $253 million, that is 33 percent of the overall funding raised. In a market where banking penetration is only 17 percent, fintech is not just disrupting the traditional financial sector but is bridging the gap not addressed by the banking sector for years.
Over the past 18 months, African fintech startups have particularly grown in appeal and reputation with many big-ticket deals, most notably a $10 million series A raise by payments company Flutterwave—one of the largest series A rounds by an African startup. That appeal is linked to the upside for these startups who, rather than entirely disrupting the financial sector which currently exists, are plugging many of its gaps. South Africa and West Africa largely dominate the fintech space with 34.2 percent and 34 percent of the startups born in those regions, respectively.
Away from the “big two” countries, investors also gambled on startups in Ghana and Egypt. Investors have shown interest in Somalia-based fintech startups—a first for the country—and venture funding momentum is picking up in Uganda, Tunisia and Morocco. Of the nine sub-sectors of fintech, payments, remittances, lending and financing startups remain the most attractive platforms for investments in Africa.
1. Payment businesses in Africa
Africa is world leader in mobile payment space with 12 percent of the adults in Sub-Saharan Africa (SSA) using mobile payment accounts, as opposed to global benchmark of only 2 percent. In 2015/16, Nigerians spent $650 million through their PayPal accounts, in overseas shopping; depriving local banks of their forex fees. Budding startup such as Interswitch (Nigeria) has already crossed a valuation of $1bn while Zoona (SA) boasts of processing $1bn in transactions in 2016 alone; valuation success of both is eclipsing that of most banks in Africa.
2. Blockchain businesses in Africa
In the recent past, African blockchain startups have seen sweeping success with 40 percent of them being able to successfully raise funds for their venture. Bankymoon(SA) is using blockchain technology to enable securities trading and electronic payments. Bitland (Ghana) is using blockchain for land and real estate management. BitHub (Kenya) offers consulting services in block chain space and promote the use of the same from financial services to identity management.
3. Credit score assessment and micro lending businesses in Africa
While lending from large banks is still focused on the wholesale and public infrastructure projects; fintech startups are pioneering in the space of credit scoring and micro-financing. Startups such as Bashi (Nigeria), Branch, Getbucks -- use indicators such as Uber consumption, airtime consumption, GPS logs, and mobile wallet balances to calculate the creditworthiness and subsequently grant micro-loans up to $500. In 2016, Silicon Valley-based Branch raised $9.2 million from VC firm Andreessen Horowitz to expand its operations in SSA.
4. Wealth management and savings businesses in Africa
In many cultures around Africa, wealth is expressed in the form of Livestock. Live Stock Wealth (SA) provides a platform for the customers to trade/invest in the livestock and help them generate ROI Of 40 percent (in most cases). 22seven (acquired by SA wealth manager Old Mutual in 2013) is a sophisticated tool offering African users a dashboard to track their spending and saving habits, creating a more transparent and accountable process.
In an innovation-friendly continent of rapidly changing trends and rapidly flowing investments, many fintech startups could may well become ‘unicorns’. In fact it might only be a matter of time before these ‘unicorns’ turn into ‘golden dragons’, in terms of size and implied valuations.
