Africa’s Fintech Gold Rush: Why Banks Must Adapt to Survive

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These are interesting times in the fintech startup ecosystem in Africa. Foreign direct investment activity is increasing at a dizzying pace, as millions of dollars pour into the continent in pursuit of the next big thing. In the space of a month this March, we saw: the emergence of a second Nigerian fintech unicorn, Flutterwave; a $200 million TPG Rise Fund investment (at a $2.65 billion valuation) in Airtel Mobile Commerce BV, the holding company of Airtel Africa’s mobile money businesses; and a $25 million Series A round by Kuda, a Nigerian digital bank that had secured a $10 million seed round only four months earlier — the largest-ever seed round for a tech startup on the continent.

Nigeria, a leading destination for venture capital activity around fintech firms, had a record month in March, with over $202 million of technology investments — more than the country’s startups raised in the whole of 2020. In what is beginning to resemble the gold rush of the 19th century, these developments are generating a lot of excitement about the opportunity to create significant wealth in record time. However, it’s important to ask: What are the fundamental problems being solved by these companies that are grabbing the headlines?



Where Investors are Focusing in Africa
Payment-related challenges are a key issue getting a lot of investor attention. According to Weetracker, fintech startups in Africa raised over $1.2 billion in VC funding between 2018 and 2020. In Nigeria, a report on fintech startups concluded that the leading category of solutions offered by these startups was payments at 39%, followed by lending at 28% and savings at 11%.

Consumer spending in Africa is projected to reach $2.1 trillion by 2025 and according to Mastercard, around 95% of transactions there are in cash — hence there is a clear and large opportunity in digitizing a portion of this sum and collecting a small fee on each transaction. To do so at scale requires infrastructure, regulation, innovation and more. The race is on among tech entrepreneurs designing solutions to meet the payment needs of Africans, while regulators, mobile networks and other korea whatsapp number data players continue to build and adapt the support systems that enable these innovations.

In light of this momentum, the tech ecosystem on the continent is gaining more prominence, with startups being accepted into internationally recognized incubators and accelerator programs and commanding multi-million-dollar valuations in pre-seed and pre-revenue stages. Y Combinator, the storied Silicon Valley seed funding accelerator, has been host to 47 African startups, with 10 being selected this year alone. Receiving this kind of stamp of approval and measurable valuation (Y Combinator invests $125,000 for a 7% stake) has its benefits. However, this frantic pace of investment has also led to startup asset inflation, and should perhaps be approached with caution. For the investors, other than the celebrated Paystack acquisition by Stripe, there have not been many notable exits. For the entrepreneurs, while the large dollar cash infusions are helpful to meet hiring and development obligations, they will also bring tremendous amounts of pressure to deliver returns in U.S. dollars in the next few years — a significant challenge in African economies, many of which have depreciating currencies.