Africa’s digital financial ecosystem is brimming with innovation driven by mobile technology to solve the long-plagued challenge of financial exclusion. That culture has led to a variety of responses, from widespread mobile money to top-of-the-line digital banking and blockchain applications, with many companies already scaling up to “unicorn” status.
Key technologies and solutions
The platform leverages several technologies to make financial services affordable and available across the continent.
Mobile Money – This is the first technology in the series that allows deposits, transfers and withdrawals without the need for a traditional bank branch. It gained a tremendous foothold in East Africa and is present everywhere today.
For example: M-Pesa (Kenya, Tanzania, etc.) became a pioneer and continues to dominate. MTN MoMo (Ghana, Uganda, etc.) and Airtel Money are commonly used across the continent.
Fintech Banking Digital Banking (Neobank): A completely online bank that offers a very user-friendly experience with minimal fees and faster service than traditional banks.
Example: In Africa, Kuda and Carbon (both based in Nigeria) or TymeBank (based in South Africa) are prime examples pursuing the underbanked/unbanked sector.
Payment processing and gateways: aggregates many payment methods (cards, bank transfers, mobile money) into one neat interface, making it easy to make payments to and between individuals and businesses.
Examples: Flutterwave and Paystack in Nigeria, Cellulant’s Tingg in Kenya. These payments/fintech startups are providing critical business transaction infrastructure for e-commerce across Africa.
Alternative financing and credit: FinTech provides less hassle and faster financing to individuals and small businesses that are underserved by the strict lending standards of existing traditional banks.
Examples: Tala (Kenya) and FairMoney (Nigeria) leverage mobile data for credit scoring and offer microloans through their apps.
Wealth management and investment: A platform that makes savings and investment accessible to everyone, allowing them to invest small amounts of money and invest in domestic and global markets.
Examples: PiggyVest and Cowrywise (Nigeria) are popular for savings and automatic investing, and Bamboo allows trading in global stocks.
Cross-border payments and money transfers: The pain points associated with cross-border money transfers, including high fees, are being addressed by several high-profile solutions.
Example: Chipper Cash offers peer-to-peer cross-border money transfers. LemFi focuses on remittances for US/UK/Canadian immigrants to send money back home.
Blockchain and Cryptocurrency: Regulation is an evolving category, but as the region suffers from high inflation and fluctuations in currency values, there is a lot of interest in cryptocurrency exchanges for secure transactions.
Example: Luno and VALR from South Africa are leading crypto exchanges.
APIs and open finance platforms: Companies like Mono, Okra, and Stitch are ushering in a new wave of innovation by securely accessing end-user financial data (with consent), enabling the creation of personalized services and better risk assessment predictions.
Key drivers and impacts
Financial inclusion: The single biggest impact has been bringing millions of unbanked people into the formal banking system.
Infrastructure: Ubiquitous mobile phones (smartphone usage is estimated to be up to 80% by 2025) provide critical back-end infrastructure.
Technology hubs: Nigeria, Kenya, South Africa and Ghana all boast thriving technology ecosystems, with numerous hubs aimed at enabling entrepreneurship.
Regulatory support: Many countries engage in supportive “regulation” or sandboxes to enable innovation and maintain consumer protection and financial stability. Regional programs such as the Pan-African Payments System (PAPSS) aim to further streamline cross-border transactions.
assignment
Despite progress, issues remain such as infrastructure gaps (internet and electricity penetration), cybersecurity risks, data privacy challenges, and fragmented regulatory ecosystems in various African countries.
Build digital financial solutions for markets that don’t exist.
Several African digital finance start-ups have failed due to a lack of product-market fit, incurring substantial losses. This is usually caused by cutting and pasting successful Western business models without properly customizing them to local market realities (limited consumer funds, lack of infrastructure or power issues, complex regulations). This high failure rate (reportedly up to 90% in the first five years) is due to a mix of systemic and practical problems.
Why do African startups fail?
Non-Product Market Fit and Financials: The core of the problem is primarily the creation of a “non-existing market” in a realistic financial context. Start-ups tend not to do enough “on-the-ground” market research in this area regarding local spending and affordability levels before implementing a business or concept. Despite the fact that there is a significant unbanked population, many would-be users have limited purchasing power and low disposable income, which can make it difficult to monetize the service and make it very difficult to make a profit.
Lack of access to early-stage funding: Access to early-stage funding is an ongoing challenge. African startups typically have difficulty securing the funding they need to scale, exacerbated by investor skepticism and a sharp decline in venture capital in recent years. This results in cash flow problems, burn rates that are too high, lack of financial discipline, and premature closure.
Regulatory and infrastructure hurdles: Africa’s patchwork of regulatory regimes is expensive to negotiate, as companies must go through processes in each region individually. Poor infrastructure, such as unreliable power and internet, also increases operational costs and reduces the ease of service delivery.
Talent and execution issues: Most startups struggle to find talent in areas such as software development and data science, as well as sophistication in business management and leadership. Poor execution or failure to localize expansion typically results in operational waste and strategic mistakes.
Future and opportunities for startups
Nevertheless, the future of Africa’s digital financial ecosystem is bright with a young, tech-savvy population and an urgent call for inclusivity.
Huge unbanked customer base: Africa has more than 350 million unbanked adults, creating a huge market for technology companies that can provide affordable, easy and reliable financial services via mobile.
Focus locally: The potential lies in finding ways to deliver solutions that meet local needs, rather than imposing foreign models. This includes building special niche services in areas such as agritech, healthtech and cross-border remittances, where there are huge gaps.
Environmental and regulatory enablement – Strengthening relationships between governments, the private sector, and development organizations. Projects such as regulatory sandboxes and national start-up laws in countries such as Nigeria and Kenya are fostering innovation-friendly environments.
Strategic partnerships: Collaboration with established organizations such as mobile network operators (MNOs) and large banks allows startups to not only rely on the trust of existing customers, but also access existing infrastructure to build a track record and reputation.
Startups that engage with markets, manage their finances well, and build strong ecosystem partnerships are also better equipped to overcome challenges and contribute significantly to Africa’s economic growth.
Regulatory intervention to build a digital financial ecosystem
For fintech startups to develop products that address Africa’s real needs without building for a market that doesn’t exist, central banks across Africa need to move from being passive regulators of markets to active builders of ecosystems. This means strategic interventions that direct innovation to real local issues, such as inclusivity and providing low-cost financial services to village uncles.
Main central bank actions
Here are some specific things African central banks need to do differently:
Create a collaborative and data-driven regulatory realm.
Active engagement and clarity. Rather than leaving start-ups to guess the regulatory landscape, central banks should provide clear guidance and encourage early-stage engagement to understand new business models. This reduces risk and saves startups from costly delays.
Regulation that addresses consequences: Moving away from prescriptive, rules-based compliance and toward outcome-based regulation that takes into account consumer protection and financial stability, while providing flexibility in how these outcomes are achieved.
Mandating data sharing and interoperability: Enforcing open banking principles (as implemented by the Central Bank of Nigeria) and mandating interoperability between banks, mobile money operators, and fintechs. This breaks down silos between data, creates a single marketplace, and allows startups to build on top of established infrastructure rather than reinventing the wheel.
Investing in shared infrastructure: Central banks can step in to fill infrastructure gaps by enabling the creation of shared, scalable digital infrastructure, such as instant payment rails, comprehensive digital identity systems, and open data platforms that minimize operational costs for startups.
Direct innovation that responds to “Africa’s real needs”.
Define and communicate gaps in the market: Central banks can publish clear, detailed reports and strategies outlining specific market needs, for example for underserved areas.
Cheap cross-border remittances: Average remittance costs in sub-Saharan Africa are currently the highest.
Access to the countryside for women. Half of African adults are still excluded from public finances (82 people), with large gender differences.
Small business financing and farm-to-market support: Capital is a key requirement for even small businesses when graduating from the informal sector.
Linking regulatory incentives to influence: Offer rapid licensing, capital incentives (e.g. tax credits), and/or direct partnerships with start-ups to demonstrate that they are solving the very challenges identified as local priorities and highlight financial inclusion for many businesses.
Accelerate the use of purpose-based regulatory sandboxes: The use of regulatory sandboxes focuses on testing innovative solutions (e.g., low-bandwidth solutions, USSD-based services) tailored to local challenges, rather than just ideas that are not based on an understanding of the challenges.
Support capability and trust building
Championing financial and digital literacy: Partnering with both the public and private sectors in a national campaign as a “trusted advisor” to make banking and internet use safer, while working together to eradicate major barriers to adoption.
Invest in the local talent pipeline: Collaborate with academia and industry to develop local talent and codify it to prevent “brain drain”, as well as increase the availability of highly skilled staff for startups who understand the specific local context.
Fostering PPPs: Central banks can also promote PPPs that target the digitalization of entire government services (such as tax collection and conditional cash transfers). We will use it as the first large-scale deployment platform for new collaborative and compliant local fintech solutions.
Through the above incentives, African central banks can foster an environment where start-ups are motivated and committed to developing relevant, sustainable and impactful solutions that respond to the continent’s real economic and social needs, increasing their chances of long-term success.
Sola Longe-Okenimkpe is the COO of Nuvu Africa and has over 30 years of experience in various sectors in Nigeria and Central/West Africa, specializing in digital transformation and financial ecosystems. She has expertise in FinTech, banking, telecommunications and hospitality, and has held a variety of roles in marketing communications, brand management, sales, public relations and e-commerce.
