The growing interest in Africa’s tech industry: recap of engagements, investments, and partnerships in 2021 and 2022.

Investments in African tech startups have been growing rapidly in recent years. In 2021, African startups raised between $4.3B to $5.2B. Preliminary data for 2022 suggests that tech startups in the region raised at least $4.8B in 2022. Although these figures represent a small fraction of the global total, they indicate increasing investor interest in Africa's tech industry.

On the flip side, the low funding portrays an unsaturated market, thereby presenting opportunities for early investors. It's no surprise that the big western fintech players are already staking their nets through partnerships, investments, and acquisitions. Similarities in language and culture are some of the driving factors fueling their expansion. Other driving factors include the market size reflected by the size of the population and the increasing mobile and internet penetration.

Mobile money Banking as an alternative to traditional Banking.

Mobile money account uptake and regional integration are enablers driving interest in the African tech ecosystem. 57% of Africa's adult population is underbanked. Although Africa's low bank penetration is often cited as a drawback, it influenced the development of mobile money banking in Africa. Mobile money accounts reduce the need for a bank account or serve as an alternative.

There are over 631 million registered mobile money accounts in Africa. This results in quicker onboarding of existing account owners to new tech products/solutions that require account ownership. To learn more about mobile money accounts, please read my previous articles.

Regional financial integration in East Africa Community.

Market expansion into several countries can be a tough nut to crack. However, when nations come together to create a common regulation for their financial operations, a business can cast its net in multiple countries without the hurdle of numerous regulatory and compliance commitments. The East African community comprising Burundi, the Democratic Republic of Congo, Kenya, Rwanda, South Sudan, Tanzania, and Uganda co-operate in monetary and fiscal matters at institutional and private sector levels. Their regional business model secured through community members permits expansion to other Partner states by client demand and other business opportunities within the region. This regional financial integration makes scaling across the region a scratch on the back. Also, the EAC payment system is interoperable. East Africa Payment System (EAPS), created in 2013, provides a secure and efficient funds transfer within the EAC region. The EAP facilitates EAC currency convertibility and is currently operational between Kenya, Tanzania, Uganda, and Rwanda, successfully linking their respective countries' payment systems. Banks and Fintechs operating within this community have operations in more than one Partner state.

 So, what other nuanced factors drive LATAM, Europe's, Asia and Australian fintechs, investors & governments' expansion interest in Africa? What about the big techs?

Enter Latin America, the new kid on the block.

Recently Latin American payment giants are starting to throw their nets into Africa's fintech environment by setting up direct operations in several African countries. For example, EBANX, a Brazilian Fintech with operations in 15 South American countries, started operations in Kenya, South Africa, and Nigeria in August 2022. In addition, EBANX is leveraging its partnership with Pipefy, a low-code platform for workflow management founded in Latin America, to engage in merchant collection on the continent. Africa is EBANX's first expansion outside Latin America since its operations in Brazil in 2012.

Similarly, dLocal, an Uruguayan Fintech, added two African countries, Cote D'Ivore and Rwanda, to its list of 10 existing African countries. dLocal expanded to Africa in 2019 and has a local presence in most of the 12 African countries where it accepts payments.

  Market and environmental similarities are driving the Latin America Fintechs in Africa and vice versa. For example, Paga's expansion to Mexico and Migo's to Brazil, as their respective second markets after Nigeria, reflects this. Their expansion strategies were based partly on the market and environmental similarities.

 United States

Visa- Deepening its hold in pursuit of global relevance.

At US-Africa Business Forum in December 2022, Visa pledged to invest $1 billion in Africa by 2027 to scale operations, deploy new innovative technologies and deepen collaboration with partners. Beyond that, Visa recently established local operations for the first time in the Democratic Republic of Congo, Ethiopia, and Sudan to help support and strengthen the local financial ecosystem. In addition, in April 2022, Visa unveiled the first dedicated Visa Sub-Saharan Africa Innovation Studio in Nairobi, Kenya, in April 2022.

Historically Visa has invested in five of Africa’s most promising payment and banking startups, such as Paystack, Interswitch Group, Bloom, and JUMO. Global positioning and deepening existing clients relationship are fuelling Visa's investments in Africa.

Big Techs-

Microsoft and Google, securing new stakes and laying the groundwork for the internet economy.

Like Visa, Microsoft, and Google, recent investments in the continent are driven by their global positioning. For example, under the auspices of its recently established Africa Transformation Office, Microsoft announced a new initiative in March 2022 to support 10,000 African startups and invest in Africa's startup ecosystem over five years. To implement the initiative, Microsoft would create new partnerships with African accelerators and incubators to mentor and facilitate access to $500 million in potential funding through a network of venture capital investors.

Similarly, Google announced in 2021 its announced plans to invest one billion dollars in Africa over five years. Later in October 2022, during the Google for Africa event, it announced it had spent over 20 percent of the $1 billion on the 12,000km Equiano subsea internet cable. The cable landed in Nigeria in April 2022 and connects St. Helena, Togo, Nigeria, Namibia, and South Africa with Europe. Google also disclosed the intent to establish a new Google Cloud region in South Africa – the first in Africa. While the Cloud region would help users, developers, businesses, and educational institutions across the continent to move more information and tools online, the cable would deliver faster, lower-cost internet to the continent. Considering that Amazon launched Africa (Cape Town) Region, the first AWS infrastructure region in South Africa, in 2020, it is not strange that Google is towing the same line.

Between 2019 and 2021, internet use in Africa jumped by 23 percent. Still, at a 33% internet penetration rate, the big techs are banking that more consumers and businesses would come online as internet penetration deepens. Another way that Google is positioning itself in the continent is through the Google for Startups Black Founders Fund Africa. Between 2021 and 2022, Google supported 110 startups in Africa

Asia- exporting the Super App model and affordable devices.

As the big Western techs deepen their foothold in Africa, a popular Chinese tech shut down a portion of its Africa operation while another’s partnership is yielding fruit. One year after launching in South Africa, Chinese ride-hailing giant Didi Chixung announced that it would end its operations in South Africa in April 2022. DiDi launched services in Egypt in September 2021 and is still operational there. Its competitor, Uber, and Bolt, regularly face regulatory challenges from the South African government, which protect traditional metered taxis in the country.

On the other hand, China’s Alibaba Group Holding Ltd and Vodacom Group Ltd announced a partnership in 2020 to develop Africa's first super-app is thriving. The app launched in South Africa in 2021; in 2022, Vodacom Group Ltd announced its plans to launch financial services in Egypt via the super app. According to the CEO, Vodacom plans to start the complete Alipay platform in Egypt. Vodacom and Alibaba's super app, called Vodapay, grants subscribers access to a wide range of services, including taking out loans, shopping online, and making standard mobile payments.

Other Chinese fintechs exploring the Super App strategy in Africa are OPay and Palm Pay. PalmPay, an electronic/digital finance application launched in November 2019, is owned and managed by Transsnet. Transsnet is a partnership venture between Chinese companies NetEase and Transsion Holdings. While Transsion Holdings manufactures Itel, Tecno Mobile, and Infinix mobile phone brands, NetEase is an internet technology company. As a result, the PalmPay app is pre-installed on these phone brands. In addition, there are cases where Chinese investors buy a business, as with Opera/OPay's acquisition of Paycom in 2017.

 The logic driving China’s tech expansion in Africa in terms of the affordable mobile devices created for the continent is driven by the law of supply and demand. At a broad level, market and environmental similarities in their economic development journey are also driving factors. While China is the world's largest developing country, Africa has the largest number of developing countries.

Australia- joining the bandwagon and acquisition as an entrance strategy

Fear of missing out/Bandwagon effect, new market, and the infrastructural gap/opportunities are driving Australia’s push into Africa’s fintech space. Most of Australia-Africa Relations are in the natural resource sector (mainly mining and oil), with more than 170 Australian Stock Exchange-listed companies operating in 35 African countries. Joining the bandwagon, in 2022, the Australian government organized a fintech event for stakeholders across the FinTech sector in Australia keen to learn more about FinTech opportunities in East and South Africa.

KPMG’s survey of Australian Fintechs in 2022 found that over 51 percent of respondents have customers outside of Australia, of which 3 percent are in South Africa. Of the companies planning to expand (or continue to expand) internationally, 1 percent intends to expand to the South African market. Zip is already ahead of the pack. Zip, an Australian BNPL fintech company, acquired Payflex, a South African digital payments company, for an undisclosed amount. The acquisition comes after Zip purchased a 25% stake in Payflex in April 2021. Zip’s entry into Africa exposes it to a largely untapped market where even though the credit appetite is in its infancy compared to developed markets, it has enormous growth potential. Australia is well known in Africa within the mining and agriculture markets and is gradually positioning for the tech market.  

Europe- building a bridge between Europe's startups and Africa.

Europe is adopting an acceleration/facilitator/bridge approach to drive expansion into the African markets. Partech Shaker, the innovation division of the Paris-based VC firm Partech launched an accelerator program in 2022, christened Chapter54, to help European startups launch in African markets. German promotional bank KfW backs the program on behalf of the German Federal Ministry for Economic Cooperation and Development BMZ. The accelerator plans to take 40 technology scaleups over four years. Current and projected young and tech-savvy demographics present a new market for European tech companies to scale their product. This is the driving factor behind the Partech acceleration program interest in Africa.

 In February 2021, the UK held ‘The UK-Africa Fintech Summit’ – a two-day virtual event focused on financial technology that provided a platform to demonstrate the UK Fintech sector’s industry-leading capabilities and put a spotlight on the opportunities in Africa. These activities lay the foundation for Europe's fintech expansion plan in Africa.

Looking beyond the flattering "next frontier" rhetoric.

Despite the growing interest, the African market has its challenges, and investors would do well to understand and take steps to mitigate a variety of risks. First, it is worth noting that Africa is not a single/uniform market; it is home to over 1.4 billion people living across 54 countries and jurisdictions. Differences in regulations, political and economic environments, existing payment structures, and even sociocultural nuances pose considerable challenges to scaling across the region. A one-size-fits-all strategy is unlikely to work in the region, given the various limitations around the infrastructure and regulations required to scale Fintech services. Some of these limitations include the following:  

·      Formal identification

The need for formal identification in Africa has long been a hurdle to extending the reach of digital finance. A World Bank Global Findex report recorded that Sub-Saharan Africa has the highest proportion of financially excluded individuals (18%) who cite a lack of official identity as the reason they do not have an account at a formal financial institution. Scaling fintechs require onboarding clients electronically and ensuring adequate AML provisions have been followed. In Nigeria, the Bank Verification Number (BVN) is processed by taking the biometric features of the new account holder. The BVN is a unique ID number required as an entry point for any financial account ownership in Nigeria. Like Nigeria, most African countries still need help with identity management, although eKYC companies are springing up to fill this gap.

·      Regulatory license timeline

Receiving the required license to operate can take time, with the result uncertain. A recent survey found that 63% of FinTech firms in SSA suggest they 'urgently need' faster authorization and licensing processes for new activities.  

·      Data Discrepancy

There is also the need for more reliable data, especially for fintech looking to scale their products. Conflicting data from reliable agencies or a complete lack of data sometimes make reasonable assertions difficult. Data reliability is well captured in an article by Tech crunch questioning the discrepancy in three credible sources that quoted three different amounts raised by startups in Nigeria. Working with the reports gives you the picture. Still, you need an expert (KoreFusion) with industry knowledge to interpret the data, share methodological assumptions often unaccounted for, and then work backward.

·      Low consumption power

The average GDP per capita in sub-Saharan Africa is $4,069.9 in 2021, compared to the global average of more than $12,000. Weak consumer spending means that cost influences users' subscriptions to a service. In addition, currency volatility and devaluation makes pricing service in currency other than local currency expensive

The gold in the dirt

These limitations present opportunities for companies to create services that can benefit vast potential users without initial challenges from incumbents or legacy competitors. It is the only continent with a birth rate certain to stay above the replacement rate. Still crude and developing, Africa presents a fertile ground for innovation. Though infrastructure gaps, political instability, and geographic complexity exist, successful businesses combine growth with risk. Successful companies build resilience that enables them to manage the inherent risks in their country of operation. This explains why fintech multinationals are throwing their net on the continent to catch the fish of opportunities.

These expansion details are not exhaustive and correlate with our observation at KoreFusion that the number of foreign fintechs entering a developing market accounts for a whopping 25% to 55% of all players in the ecosystem. If measured in terms of the origin of capital, it is an astounding 80% to 90%. These statistics, coupled with fintechs’ ravenous appetite to scale, often mean the nuances of regions, countries, and ethnicities are overlooked or deliberately set aside. A lack of understanding of market sizes, dynamics, current offerings or main players, and lack of proper value proposition suitable to the target market are some of the problems we have helped great companies to solve.

Our team at KoreFusion is ethnically diverse and has a rich background working and developing financial product strategies in 75 countries. We enjoy understanding how people use financial services and pay for things, be it in the open markets of Lagos, the farmers’ markets of Cambodia, or the shopping malls of Singapore. 

For more information on KoreFusion’s payments and fintech research, please contact: information@korefusion.com