African fintech rises to the challenge

Vendors selling vegetables in the Kasoa market in Accra, Ghana. Photo by: Dominic Chavez/IFC

This article was produced by the IFC.

When Nigeria went into lockdown to contain the spread of coronavirus in 2020, Michael Terver was able to keep his small cybercafé afloat – and help friends and customers navigate new financial challenges – by partnering with a fintech company to offer electronic banking services.

Prior to the global pandemic, most of Terver’s café customers didn’t have bank accounts and preferred buying and selling with cash. But in a world of social distancing where most transactions were impossible in person, his customers were able to shift to digital by using an all-in-one online system in his café to pay bills, apply for microloans, transfer money, and deposit earnings.

The system, Quickteller Paypoint, was launched by Nigerian fintech Interswitch in 2016 to help individuals, as well as micro and small businesses, convert to cashless transactions.

“Having Quickteller Paypoint in my café came to the rescue,” says Terver. “The lockdowns did not permit businesses to operate as usual, thereby impacting cash (payments). Our Quickteller automatically became a substitute (for cash transactions) because keeping safe was most important.”

Terver is a small part of a major phenomenon. The confluence of finance and technology, known as fintech, is fast changing the way money moves among individuals and businesses around the world, especially in Africa. North Africa and the Middle East have recently seen the strongest growth in fintech transaction volumes globally, up 40% in 2020, while sub-Saharan Africa increased by 21%, on par with North America.

Over the past decade, fintech has helped 1.2 billion unbanked people gain access to financial services, reducing the unbanked population worldwide by 35%. By expanding financial inclusion, more people and small businesses can save money, receive government payments, do business, and secure their wages safely.

“Fintech investments are growing much faster in emerging markets compared to more developed markets because they are responding to a vital market gap. We expect this growth to continue,” says Aliou Maiga, IFC’s regional industry director for the financial institutions group in Africa. “For the first time, micro businesses and individuals with very limited financial assets can save money in a safe place, transfer funds without crippling fees, even take out small manageable loans that allow them to expand their incomes. This has been a sea change in our work to increase financial inclusion and eradicate extreme poverty.”

Room to grow

The African fintech market has room to expand even further. Only about 20% of adults in sub-Saharan Africa have a debit or credit card compared to more than 80% in developed economies. Cash is still king in many rural and under-served urban communities, which creates higher costs, difficulties in buying and selling goods, and a higher exposure to theft and fraud.

Traditional banks have been reluctant to offer services to individuals with small incomes and limited savings – but those millions of un-banked are a major economic force that make digital banking an attractive solution.

The continent’s multitude of small businesses can benefit from fintech as well. The World Bank estimates small and medium-sized businesses account for 90% of businesses patronised by some one billion Africans and create seven out of 10 jobs.

The continent has a large informal business sector which was hit particularly hard by the pandemic. Fintech has been helping micro, small, and medium-sized enterprises (MSMEs) stay afloat and continue to recover by offering online transactions for small amounts, as well as micro loans, and online platforms.

For example, in South Africa, Adumo, an IFC supported company, is enabling small businesses to grow by accepting digital payments for the first time.

The growth in the sector continued in 2021 with reports that venture capital tech funding in Africa tripled to more than $5 billion, outpacing every other region in the world. Most of the funding – 63% accounting for $3.3 billion – went to fintech.

IFC has been a key investor in Africa’s fintech space, having invested in Nigeria’s Interswitch, Egyptian e-payment platform Fawry, West-Africa based mobile money operator Wave, South Africa’s Adumo and Lulalend, and pan-African player TerraPay.

The pandemic push

Although fintech has been available since the early 1990s, the Covid-19 pandemic helped spur outreach to unbanked and vulnerable communities, especially when lockdowns limited the ability to conduct cash transactions. In a global survey co-authored by the World Bank, two-thirds of fintech firms reported they changed their business models during the crisis by reducing fees, revising criteria for loans, easing payment requirements, and offering extra informational services.

For example, payment infrastructure company TerraPay expanded into North America to facilitate affordable, same-day financial transfers from Africans working abroad. Also during the pandemic, fintech giant Tutuka, which has since merged with Paymentology, met the fast-growing demand for digital cards used by companies and governments to pay remote workers, provide assistance benefits, and issue insurance payouts. IFC is supporting these and other fintech services through direct and indirect investment in funds like Helios, Partech, and Apis Partners. Interswitch, for example, is supported by Helios and LeapFrog.

In the years to come fintech will likely become even more integral to African economies as businesses and customers alike recognise the long-term benefits of digital transactions.

Analysis in a McKinsey & Co report published in August found that fintech is delivering more affordable services to customers with “transactional solutions [that] can be up to 80% cheaper, and interest on savings up to three times higher than those provided by traditional players, while the cost of remittances may be up to six times cheaper.”

Businesses like Lulalend, which enables small businesses to apply online for funding, believes fintech is central to the continent’s future growth.

“Fintech is transforming Africa by giving business owners the ability to manage their cashflow better than ever before. It gives businesses every chance of success and successful businesses improve economies and help with job creation,” said Trevor Gosling, CEO of Lulalend.