African Fintechs can chart their own course

Financial technology (Fintech) is one of the most significant – and disruptive – developments in financial services for decades. Digital technologies, often developed by innovative start-up companies, are transforming banks’ operating models and the way they deliver services to customers. This is not a trend restricted to developed economies as mobile money and payment solutions contribute to a seismic change in the personal wealth and lifestyles of many Africans, facilitating financial inclusion across the continent.

Fintech is not a new concept in Africa. Suzanne Prosser, Group General Counsel at MicroEnsure, a developer of emerging markets insurance products, says: “Innovation is part of the DNA of Africa.” Mobile payments technology was embraced by African consumers well before it gained traction in more developed economies, for example.

One of the most high-profile examples of Fintech disruption in the region is M-Pesa, a mobile money transfer service developed by Vodafone for mobile network operators Safaricom in Kenya and Vodacom in Tanzania. It has since expanded to Afghanistan, South Africa, India, Romania and Albania. M-Pesa allows users to deposit, withdraw, transfer money and pay for goods and services with a mobile device.For many Africans, their only experience of financial services is via mobile phones. Originally designed to address financial inclusion, 40% of Kenya’s GDP now flows through the M-Pesa system, says Edward George, Head of Group Research at pan-African bank Ecobank. M-Pesa hasn’t yet repeated in other countries its stellar performance in Kenya. The secret of its success there, says Mr George, is the backing it received from the authorities. The financial regulator and the Kenyan Government were involved in M-Pesa from the start and the central bank is committed to its success.

In many aspects of financial services, African countries can leapfrog developed nations and move to more innovative products and services. Financial institutions in developed countries are often burdened with legacy technology and business models that prove costly to adapt to changing customer demands.

Viola Llewellyn, co-founder and president of Ovamba Solutions,a Fintech-driven platform for small and medium sized enterprises (SMEs) in Africa, says financial institutions have not been very innovative in the region during the past 40 years. “There are no credit departments in Africa and it is very difficult to find data to build a risk profile that would enable access to credit,” she says.  There are, however, alternatives to banks that can provide SMEs and individuals with access to capital. Ovamba, for example, develops mobile applications and online platforms that provide alternatives to bank capital.

There are “endless start-ups” investigating the application of technology to address unbanked people in the region, says Mr George. Companies that are using disruptive technologies such as blockchain are forging ahead in financial services in Africa and “unless banks get their heads around this” they could lose around one third of their business in the region during the next five years.

Challenges for African Fintechs

There is significant promise for Fintech businesses in Africa, but there are also challenges, including distribution, mistrust of financial institutions, under-developed infrastructure and a varied customer base. A pragmatic approach to providing financial services in the region is often required.

“Old-fashioned” distribution models are not always appropriate for all consumers. In targeting low-income consumers, products should be simple and reliable, says Ms Prosser. They also should be scalable and grow with customers as they become more comfortable with financial products.

A long-standing characteristic of Africa, says Mr George, is the ambition of many governments in the region to develop ‘perfect’ solutions from end to end. In the case of financial services, disruptive solutions do not have to be holistic. The Atlas Money remittance solution in Senegal uses the blockchain currency bitcoin, which are transferred but not always direct to the end user, who may not have access to a mobile phone because of a lack of mobile network infrastructure. In such cases, a representative will withdraw the cash equivalent from an ATM and deliver the funds to the recipient via a motorbike.

Perhaps the most challenging aspect for financial services in Africa is the lack of credit history and collateral that many citizens experience. Money transfer systems, such as M-Pesa, address this by enabling users to build up credit histories. Another solution, First Access, combines financial and mobile data to reliably predict credit risk for borrowers in informal markets. Users are given a credit score that they can then take to a bank.

Fintech has the power to disrupt consumer expectations and behaviour around financial services. The ineffective approach of financial institutions towards credit, says Ms Llewellyn, means that Fintechs are emerging that act as a bridge, or a gateway, to the independent and alternative delivery of credit. “Ovamba uses Fintech solutions to assess the collateral of customers based on goods that are in transit. Via electronic commerce we can buy these goods on behalf of the customer and sell them back using Sharia finance principles,” she says. This enables people to access capital in the absence of collateral.

The role of regulation

Financial regulators have a role to play in setting the right environment for Fintechs to continue to flourish in Africa. It is worth bearing in mind that Africa is very regionalised and one answer will not be applicable across all countries. Francophone countries, for example, are characterised by a lack of government engagement and immaturity of regulation related to financial services and technology. In countries such as the UK, which has a strong Fintech industry, the financial regulators are engaged in dialogue with Fintech companies and financial institutions. The Financial Conduct Authority has established a ‘regulatory sandbox’ which enables Fintechs and banks to experiment with products and services in a controlled, risk-free environment.

In many countries in Africa, however, there is a question as to whether incumbent financial services providers lobby governments to put up barriers to new entrants such as Fintechs. In many ways, however, Africa is better placed to harness Fintech as there is not a significant legacy of existing regulations that must be reviewed.

The future of African Fintech

International investors have recognised the opportunities that exist in African Fintech but businesses in Africa in general face serious difficulties in raising capital. Ms Llewellyn describes intellectual property in Africa as “chronically under-valued” versus the rest of the world.

But investors see an opportunity in Fintech to deliver a very positive social impact. Fintech can help people to access financial services and improve their lives. On a macro level, it will enable financial institutions in the region to move toxic assets off their books and blockchain will help to speed up the movement of capital, surpassing the generally non-functioning bourses in the region.

Roger Tym