The digital financial ecosystem in Africa is teeming with innovation, propelled by mobile technology to solve long-festering financial exclusion challenges. That culture has led to a variety of responses that range from widespread mobile money all the way up to top-tier digital banking and blockchain applications, with many companies already scaling up to “unicorn” status.
Key technologies and solutions
The platform harnesses several technologies to make financial services available and affordable across the continent:
Mobile Money – This is the first technology in the series that allows deposits, money transfers and withdrawals without the need for traditional bank branches. It has gained an extraordinary foothold in East Africa and today is ubiquitous.
Examples: M-Pesa (Kenya, Tanzania, etc.) blazed the trail and continues to dominate; MTN MoMo (Ghana, Uganda, etc.) and Airtel Money are commonly used across the continent.
Fintech-banking Digital Banking (Neobanks): Completely online banks that provide a very user-friendly experience with minimum fees, if any, and faster services than traditional banks.
Examples: In Africa, Kuda and Carbon (both based in Nigeria) or TymeBank (based in South Africa) are leading examples going after the underbanked/unbanked segments.
Payment Processing & Gateways: They make making payments on – and between – both people and businesses easy, aggregating loads of payment methods (cards, bank transfers and mobile money) together into one neat interface.
Examples: Nigeria’s Flutterwave and Paystack and Cellulant’s Tingg in Kenya. These payments/fintech startups provide critical business transactional infrastructure for e-commerce all across Africa.
Alternative Lending & Credit: FinTechs provide less red tape and quicker loans to individuals and SMEs not well served by the strict lending criteria of established, traditional banks.
Example: Tala (Kenya) and FairMoney (Nigeria) leverage mobile data for credit scoring to offer microloans through apps.
Wealth Management & Investment: Platforms that are making saving and investing accessible to everyone, as they can now also put their money not just at home but in the global markets with smaller investments.
Examples: PiggyVest and Cowrywise (Nigeria) are popular for savings and automated investments, and Bamboo permits trading in global stocks.
Cross-Border Payments & Remittances: Pain points around sending money across borders (including hefty fees) have been solved with a few high-profile solutions.
Examples: Chipper Cash is doing peer-to-peer cross-border transfers; LemFi focuses on remittances for immigrants in the US/UK/Canada to send money back home.
Blockchain & Cryptocurrency: While regulation is an evolving category, the region sees a lot of interest in cryptocurrency exchange for secure transactions and because the region suffers from high inflation and currency value fluctuation.
Examples: South Africa’s Luno and VALR are leading cryptocurrency exchanges.
APIs and Open Finance Platforms: Companies like Mono, Okra & Stitch are unlocking a new wave of innovation with secure access to end-user financial data (with consent), enabling the creation of personalised services and better risk assessment forecasts.
Key drivers & impact
Financial inclusion: The single greatest effect has been to add millions of unbanked people to the formal banking system.
Infrastructure: Ubiquitous mobile phones (estimated up to 80% smartphone utilisation by 2025) provide the essential back-end infrastructure.
Tech hubs: Nigeria, Kenya, South Africa and Ghana all boast a thriving technology ecosystem, with many hubs geared to enabling entrepreneurship.
Regulatory support: Many countries are working on supportive “regulations” or sandboxes to enable innovation and maintain consumer protection and financial stability. Regional programmes such as the Pan-African Payment and Settlement System (PAPSS) seek to streamline cross-border transactions even more.
Challenges
Despite advancement, issues remain, including infrastructural gaps (internet and electricity penetration), cybersecurity risks, data privacy challenges and fractured regulatory ecosystems across various African countries.
Building the digital financial solution for the market that does not exist.
Several African digital financial startups fail – essentially lose money – because of a lack of product-market fit; typically, this is driven by taking a cut and paste of successful Western business models without adequate customisation for local market realities (limited consumer money, infrastructure gaps/power problems, complex regulations). This high failure rate (up to 90% in the first five years, so it is said) owes to a mix of systemic and practical issues.
Why African startups fail.
Non-product-market fit & finances: The heart of the problem is largely building for “a non-existing market” in a realistic financial context. Startups tend not to do enough of this ‘boots-on-the-ground’ market research in the field for local spending and affordability levels before they introduce their business/concept. Despite the fact that there is a significant unbanked population, many of your would-be users have limited purchasing power and low disposable incomes, which could make monetising services challenging and being profitable very difficult.
Lack of access to early-stage financing: Access to early-stage capital is an ongoing challenge. African startups typically find it hard to secure the funding they need to scale, compounded by investor scepticism and a steep drop in venture capital over the last few years. It results in cash flow problems, too high a burn rate and no financial discipline and leads to early shutdowns.
Regulatory and infrastructure hurdles: The patchwork of regulatory systems found in Africa is expensive to negotiate, as companies must go through the process in each region separately. Poor infrastructure, such as erratic power supply and internet, also raises operational costs and reduces ease of service delivery.
Talent and execution problems: Most startups struggle to find sophistication in the management and leadership of their businesses, as well as talent for things like software development and data science. Bad execution and failure to localise the business expansion normally result in operational waste or strategic mistakes.
Future and opportunities for startups
Nonetheless, the future of the African digital financial ecosystem is bright with a young, tech-smart population and an urgent call for inclusiveness.
Huge unbanked customer base: There are more than 350 million unbanked adults in Africa, making it a huge market for tech companies that can offer affordable, easy and trustworthy financial services via mobile.
Focus on the local: The potential is in finding ways to have solutions meet local needs, not in foisting foreign models. This includes building special niche offerings in sectors such as agritech, health tech and cross-border remittances, where there exist enormous voids.
Enabling environment and regulation – government-private sector-development organisation relationships are strengthening. Projects such as regulatory sandboxes and national Startup Acts in countries like Nigeria and Kenya are fostering an innovation-friendly environment.
Strategic partnerships: Collaboration with established organisations, such as mobile network operators (MNOs) and major banks, can enable start-ups to access the infrastructure already set up as well as rely on the existing customer trust, building their footprint and reputation.
Start-ups that align with the market, manage their finances well and build robust ecosystem partnerships are also better equipped to overcome challenges and contribute significantly to economic growth in Africa.
Regulators’ intervention to build the digital financial ecosystem
In order for fintech startups to develop products that would cater to actual African needs without building for non-existent markets, central banks across Africa need to move from being reactive regulators of the market to proactive builders of ecosystems. This means strategic interventions that direct innovation towards the real local problems, such as inclusiveness and bringing financial services to my uncle in the village at lower costs.
Key actions for Central Banks
These are concrete things that African central banks need to be doing differently:
Create areas of regulation that are collaborative and data-driven.
Proactive engagement and clarity, rather than leaving startups to guess their regulatory situation, central banks should provide clear guidance and promote early-stage engagement for comprehension of new business models. This mitigates risk and saves startups from expensive delays.
Regulation that addresses outcomes: Move away from prescriptive, rules-based compliance and toward outcome-based regulation that considers consumer protection and financial stability but allows for flexibility in methods to achieve these outcomes.
Mandate data sharing and interoperability: Enforce open banking principles (as the Central Bank of Nigeria is implementing) as well as mandating interoperability between banks, mobile money operators and fintechs. This breaks down silos between data, creates a single marketplace and lets startups build on top of established infrastructure instead of reinventing the wheel.
Invest in shared infrastructure: Central banks can intervene to close infrastructure gaps by enabling the creation of shared, scalable digital infrastructure – including instant payment rails, comprehensive digital ID systems and open data platforms that minimise operation costs for start-ups.
Direct innovation to address “Real African Needs.”
Define and communicate gaps in the market: Central banks can release clear, detailed reports and strategies outlining specific market needs for underserved areas, for instance.
Cheap cross-border remittances: Sub-Saharan Africa’s average cost for sending money is currently the highest.
Rural access for women. Half of African adults are still excluded from formal finance [82], with a wide gender gap.
SME funding and farm-to-market support: Capital, even for small enterprises, while graduating from the informal sector, is an important requirement.
Link regulatory incentives to impact: Offer expedited licensing, capital incentives (e.g., tax credits) and/or a direct partnership with start-ups that can prove they are solving the very challenges identified locally as priorities and emphasise financial inclusion for the many.
Accelerate purpose-driven use of regulatory sandboxes: Focus the use of regulatory sandboxes on testing innovative solutions that have been customised to local challenges (e.g., low-bandwidth solutions, USSD-based services) rather than simply ideas that are not grounded in an understanding of the challenges.
Support capacity and trust building
Champion financial and digital literacy: Partner with both the public and private sectors on national campaigns as “trusted advisors” in helping to make banking and internet usage safer while working together to eradicate a major impediment towards adoption.
Invest in local talent pipelines: work with academia and industry to develop local talent, codifying it to stave off “brain drain” but also increasing the availability of highly skilled staff for startups who understand specific local circumstances.
Foster PPPs: Central banks can also drive PPPs targeting digitisation across government services (such as tax collection and conditional cash transfers), with these as initial large-scale deployment platforms for new collaborative and compliant local fintech solutions.
Through the above incentives, African central banks can cultivate an environment where startups are motivated and ablaze to develop relevant, sustainable and impactful solutions that cater towards our continent’s real economic and social needs – increasing their probability of long-term success.
Sola Longe-Okenimkpe is the COO of Nuvu Africa, specialising in digital transformation and financial ecosystems with over 30 years of experience in diverse sectors across Nigeria and Central/West Africa. She has expertise in FinTech, banking, telecommunications, and hospitality, holding various roles in marketing communications, brand management, sales, public relations, and e-commerce.
