Africa’s leading fintech start-ups share six characteristics

A Yoco point-of-sale device.

This article is an excerpt from McKinsey & Company’s ‘Fintech in Africa: The end of the beginning’ report.

As digital transformation accelerates across the continent, Africa’s population has shown itself eager and ready to adopt emerging financial technologies. However, for fintechs entering the market, there are no quick wins on the continent. When it comes to building a sustainable business and creating long-term success, African fintechs may need to be prepared to play a long game. Not only is the African market highly fragmented – consisting of 54 countries with varying levels of financial literacy and internet penetration – but variable digital infrastructure, low consumer purchasing power, complex and inconsistent regulations, and a competitive playing field can all hinder sustainable growth for fintechs. Succeeding in Africa takes a special blend of talent, perseverance, and strategic ability.

While it is still early days and, as Idris Bello of LoftyInc Capital Management points out, “hard to call anyone a winner because the race has just begun,” we think that there are some clear signs of what’s driving success in African markets. Our analysis shows that the most successful African fintechs tend to share a common set of characteristics, with features that mirror those of successful global companies, but also with adaptations to their business models that recognise the unique economic realities and customer needs of Africa.

1. Match value proposition to the market

Successful fintechs seek first to understand the market, including customer needs and where the specific market stands on its infrastructure development journey. Once established in the market, they expand their offering with a raft of tech-based B2B and B2C products and solutions that address specific financial needs and plug gaps in the local financial services industries.

Globally, the market evolution for fintech companies has typically proceeded according to one of three scenarios. The first route to scale echoes the strategies of companies such as the Alibaba Group, a multinational technology company based in China, which amassed 150 million users before launching Alipay, a payment super app and digital wallet. This strategy sees companies set out as unique distributors of non-financial products, with the intention of growing their customer base. Having established themselves, they expand their offering to include basic financial products such as digital wallets and payment technology, before adding more complex financial services such as lending or savings, and ultimately evolving their own digital financial ecosystem or super app.

Like Alipay, in Africa, Safaricom and Vodafone established large and successful businesses with thriving customer bases before collaboratively launching M-Pesa as a mobile-based digital wallet targeting unbanked pre-paid mobile subscribers in Kenya. M-Pesa’s services have since expanded to include payments, lending, and savings, enabled through the M-Pesa network. Today, M-Pesa customers can also access a wide array of financial and lifestyle services, such as airtime, transport, health, and money-management tools.

A second strategy sees fintechs choosing to launch directly into the financial services market with a specific B2B or B2C financial product that bridges an infrastructure gap or meets an urgent merchant or customer need before expanding into other services and regions, and ultimately transforming into a licensed digital bank. While wallets and super apps are typical entry products, fintechs have also found success launching lending products as a market-entry strategy. In Kenya, Tala first launched its mobile application to offer credit and collateral-free loans to consumers, and to date has disbursed loans of more than $2.7 billion. Although credit remains its flagship offering, Tala continues to gain traction, and has evolved to provide savings and money management tools, and has even expanded to other regions, including the Philippines, Mexico, and India. FairMoney, launched in Nigeria in 2017, followed a similar pathway.

Starting out as an online lender offering instant loans and bill payments, it now also provides a bank account with free transfers and a debit card and holds a microfinance bank licence from the Central Bank of Nigeria. In 2020, FairMoney disbursed loans worth $93 million to over 1.3 million users through more than 6.5 million loan applications.

A third strategy sees fintechs focusing on the development of infrastructure that considers the unique circumstances and needs of the country in which they operate. For example, Interswitch established Nigeria’s first transaction and switching infrastructure in the country between 2002 and 2007, paving the way for payment acceptance across the country and enabling it to pioneer Africa’s largest card scheme – Verve – with payment acceptance in Nigeria and over 185 countries globally. Interswitch has since expanded its capabilities and geographic footprint.

Because African countries are still developing economies with considerable gaps in financial infrastructure, the continent’s oldest fintech companies – including Interswitch and Flutterwave in Nigeria and Fawry in Egypt – all started out by building financial infrastructure to serve the market, and are now the industry leaders. Followers started to build more complex B2B and B2C products that address specific financial needs, starting with mobile money.

There are currently more than 250 million registered mobile money accounts across Africa. Historically under-banked African countries have seen mobile money become a fiercely contested space, with the digital wallet space growing increasingly crowded as technology innovation looks to shake cash from its position as the most common mode of transaction.

Although fintechs have a significant market share of mobile money, telcos still lead this space, and newcomers face pressure when attempting to establish themselves. In Cameroon, for example, the mobile money service YUP recently announced it would be shutting down operations just five years after launching. This can be attributed in part to the existence of the country’s two main mobile operators (MTN and Orange) that entered the local market almost 10 years before YUP and have had the opportunity to establish networks that make it more challenging for new ventures to enter.

While competition for wallets and mobile money customers is intense, lending and saving services, together with digital banks, remain a key growth opportunity in markets where payment infrastructure is already established such as Kenya and South Africa, but few players have reached significant scale.

Credit penetration on the continent remains low compared to global indicators and lending in Africa focuses on relatively low-risk customers, B2B lending, infrastructure tasks, on-demand access to wages, and buy-now-pay-later (BNPL) credit in partnership with online and offline retail stores. The global average credit card penetration is 19%, eclipsing African countries like Kenya (6%), Egypt (3%), and even South Africa (9%).

As of 2018, only 11% of Africa’s population had their credit information recorded by private credit bureaus, compared to 17% in emerging Asia and 79% in Latin America. Since traditional banks rely on consumer credit models to evaluate risk and credit bureau coverage remains low, large swathes of the population are excluded from the world of credit. By contrast, fintechs have been able to onboard customers rapidly, offering sleek customer experiences and unsecured loans that do not require collateral or face-to-face conversations, with credit scoring backed by data derived from payment and other transactions. In Kenya, the fintech Tala’s credit-led approach to digital banking is enabled through leveraging users’ phone data and activities (for instance, the frequency and timeliness of paying phone bills) to generate credit scores.

Similarly, in South Africa, Jumo facilitates digital financial services such as credit and savings, leveraging an unconventional digital credit model that does not require customers to have prior financial account ownership or a credit history. Loan decisions are automated and the digital credit application process happens over a mobile device with no need for in-person interactions.

2. Acquire a large base of active users quickly

Africa’s fast-growing population of more than 1.3 billion people offers a large potential market for fintechs to connect with. However, customer acquisition and sustainable growth may be hampered by infrastructure constraints and low customer purchasing power. Fintech leaders in Africa have typically adopted one of two client acquisition strategies – pricing or physical network distribution – to enable them to scale their number of customers and grow more quickly than incumbents.

For instance, some of the biggest players across the continent have overcome infrastructure challenges by leveraging pre-existing physical networks to reach their customers and build their base. OPay in Nigeria has grown its business by building a vast agency network of more than 300,000 agents to counteract the lack of infrastructure in that country. PalmPay has taken a different rout, pre-installing their application on selected smartphone devices to encourage usage.

Digitally enabled fintechs have also frequently chosen to employ aggressive pricing strategies to drive rapid customer acquisition and market-share growth, offering cheaper fees and charges than traditional banking systems. Zero-cost bank accounts and reduced or free transfer costs have led to a shake-up in the mobile money industry. In Senegal, Wave’s aggressive pricing strategies, which apply a fixed transaction fee of 1%, influenced Orange, the largest telco in the country, to lower its prices to remain competitive. According to Aminata Kane, this trend is likely to continue: “The landscape is driving local transfer transaction prices towards almost zero – it’s a matter of time until what happened to Senegal … will happen across Africa.” Indeed, other experts we have spoken to agree that aggressive pricing strategies have helped at least four digital players on the continent (OPay, Wave, Palmpay, and Chipper) to gain customer share rapidly over the past three years.

However, strategies such as these may come at a cost, as customer loyalty is not guaranteed. Fintechs that wish to build long-term sustainability may also need to focus on customer retention and supporting healthy revenues by diversifying their offering to offset the risk of customers leaving for businesses that offer similar services at even lower prices.

3. Have clear monetisation strategies that are rolled out effectively

Globally, B2C fintech companies tend to invest heavily in customer acquisition, putting growth-at-scale ahead of profits. But to convert a large customer base into reliable revenues, fintechs need to develop strong and effective monetisation strategies.

Companies that have a long history of operations in Africa have either had a repeatable and healthy revenue source that comes from a core activity, for example card switching for Interswitch or serving merchants with point-of-sale (POS) for Yoco, or they have developed multiple monetisation strategies, such as adding a B2C arm to a B2B company or vice versa. For example, OPay has now diversified its services to include airtime, bill payments, remittances, and lifestyle services, as well as merchant services like payment gateways, merchant POS, and lending, in order to retain its customers and support healthy revenues going forward. McKinsey estimates that in Africa, customer acquisition costs for fintechs are significantly higher than revenue earned per customer, with some companies spending as much as $20 for every customer acquired while generating just $7 revenue.

To cover costs, African B2C fintechs tend to focus on doing business at scale, a strategy that will ultimately reduce their per-customer acquisition costs and enable them to reap the rewards. Second, a key source of revenue for B2C players comes from the fees charged to merchants when they accept payments from users’ digital wallets or cards. Merchants’ acceptance of a fintech company’s wallet or card is usually decided by the size of its customer base and how widespread its usage is. To secure additional revenue sources, most fintechs that started out as consumer-facing businesses are now also expanding to serve merchants by, for example, introducing multi-purpose payment gateways for merchants, engaging merchants to accept payments from their wallets, or offering offline payment services through POS and mobile POS. For example, Paga has launched a business platform, Doroki, to target small-to-medium businesses that enables merchants to collect and reconcile payments seamlessly.

B2B players, by contrast, tend to have significantly better unit economics, monetising their merchant customer base and generating revenues early without sacrificing profits. In fact, McKinsey analysis finds that revenues generated by African B2B businesses are almost comparable to global fintechs, both in terms of absolute revenue and in terms of revenue per customer, with some companies seeing a return on investment nearly double their average investment per customer.

To generate new revenues, leading B2B players are now looking at ways to add B2C services to their portfolio by, for example, increasing revenue from consumers directly, as Interswitch is doing with its B2C wallet, or by increasing fees from merchants that accept payments from customers using wallets and cards they have introduced.

4. Manage lower expected revenue per customer

Africa has the lowest-income population on the planet, with personal consumption expenditure (PCE) that may be up to ten times lower than that of North America and five times lower than in Europe. Since low PCE levels can limit the potential revenues per customer for African B2C fintechs, products, services, and operating models are being adjusted to take this into account. The African micro, small, and medium-enterprise sector also creates much less value compared to North America and Europe, which similarly limits B2B service revenues.

Leading fintech players are employing a variety of strategies to adjust to this environment, including using scale to reduce costs of serving customers, reducing operating costs by offering low-priced products to customers through the use of cloud-based technologies, adjusting business models, and developing alternative data sources and scoring to enable customers to access lending services. For instance, TymeBank is using innovative technologies and cloud platforms to reduce operating costs, while FairMoney and Tala are using non-traditional data sources to assess credit risk, enabling them to offer instant loans in countries where credit bureau data is scarce. Meanwhile, Yoco has adapted to a ‘pay-as-you-go’ business model, only charging fees for actual transactions, which allows them to serve businesses that can’t afford advance payments for pricey POS devices.

5. Understand and address Africa’s offline market

Most African countries are far behind developed countries when it comes to penetration of bank branches and formal ATMs. In Nigeria, for example, there are only four bank branches, 17 ATMs, and 147 POS devices for every 100,000 people compared to North America, which has 25 branches, 210 ATMs, and a vast network of nearly 3,000 POS systems for every 100,000 people. Since reaching clients offline is a key ingredient for success in Africa, fintechs are overcoming this challenge in a variety of ways.

One strategy is to utilise pre-existing infrastructure to increase penetration into the market. TymeBank, in South Africa, has taken advantage of an existing retail store infrastructure by partnering with two major retail chains that enjoy a wide footprint in the country at over 700 stores. Not only has TymeBank been able to eliminate the need for physical branches while maintaining a national physical presence, it has also been able to reduce its operating costs. This saving is passed on to their customers, providing millions of unbanked South Africans with low-cost financial access.

Using pre-existing networks such as a mobile network, as M-Pesa did, or pre-installation of apps on smartphones, as PalmPay did, could be another way to sidestep the infrastructure challenge.

The development of agent networks as a substitute for brick-and-mortar environments has become a key growth strategy for fintechs on the continent. Nigeria, for instance, has a network of over 700 mobile money and banking agents for every 100,000 adults, with 43 agents for each ATM in the country. In Kenya the numbers are even higher, with 1,322 agents for every 100,000 adults and 189 agents per ATM. Agent networks enable fintech players to grow their customer base, facilitate transactions, onboard merchants, and build trust in the brand. They also represent a prime job-creation opportunity, especially for young people. GSMA estimates that the mobile industry in sub-Saharan Africa directly employed 1.2 million youth in 2018, and this number is expected to grow to 1.5 million by 2025.

Telcos, fintechs, and banks are all significant players in the agency banking landscape, each with their own strengths and weaknesses. Telcos like M-Pesa and MTN have the advantage of a large pre-existing network of agents (600,000 agents and 800,000 agents countrywide respectively). Banks’ agent networks are smaller, ranging from 15,000 to 100,000; however, they benefit from being able to leverage their physical branches to facilitate training and management. Of the three players, fintechs have the largest pool of financially trained agents. OPay has approximately 300,000 agents, while in Egypt, Fawry had 166,500 active agents.

6. Actively engage, align with, and work with regulators

Fintechs building sustainable businesses are constantly aligning with regulatory policies, and having reached significant scale, they work with governments to move in a unified direction and gather support on a national level. Due to underdeveloped financial infrastructure, fintech start-ups may often play a critical role in enabling the economic development of African countries, helping to drive financial inclusion, fight poverty, and increase financial literacy.

Leading fintechs throughout the continent engage with governments around regulation to gain sustainable growth potential with the support of the government. This partnering comes in many forms, from associating with government programmes, as Fawry has done in Egypt, to providing solutions to state governments that enable the collection of internally generated revenues and taxes, as is the case with Interswitch. In Kenya, Safaricom – the owner of M-Pesa – is 35% owned by the Kenyan government. The Kenyan Government, Central Bank of Kenya, and Safaricom have effectively worked together to build public trust through well-aligned initiatives that benefit Kenya’s citizens.

Companies that neglect to work with regulators and the government could be negatively impacted by changing regulations. For example, in March 2022, the Ghanaian government ordered the payment firm Dash to cease operations after the regulator noted that the Dash app was offering services, including cross-border payments, wallet creation, and bill payment services, without approval from the Central Bank. Board member at the Africa Fintech Network and investor, Ali Hussein Kassim, believes it is therefore critical for fintechs with serious long-term ambitions for scale to partner with regulators and help them to achieve their vision for a particular country or region.