What Silicon Valley Hatched Companies needs to know about Africa tech startups

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Africa-focused financial technology startups are, by far, the tech rave of the moment. In each of the last three years, startups in the sector have received more investment than other sectors – and there’s a basis for this.

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Across the continent, fintech isn’t so much disrupting traditional financial services as building up a historically underdeveloped industry. By creating a raft of tech-based products and solutions, including mobile money, online payment processing, lending, and investing, these startups are plugging large gaps that exist in local financial service industries.

With around 66% of the adult population in Africa unbanked, the emerging industry has a huge opportunity to drive financial inclusion outside of traditional banking systems. In Kenya, M-Pesa mobile money service has been a runaway success by allowing users to pay bills, and each other, through mobile phones or an agent network, whether or not they have bank accounts. Since launching in 2007, the service has impacted local access to financial products and services: today, financial inclusion in Kenya stands at stands at 83%—up from 27% in 2006.

And it’s not just Kenya. Across West Africa, the reach of the mobile money sector is 13 times wider than local banks. In Ghana, MTN launched a mobile-money based IPO last year and raised over $200 million. Earlier this year, Flutterwave, the Nigerian-headquartered payments API, struck a landmark partnership with Chinese e-commerce giant, Alibaba to allow African merchants receive payment from Alipay’s one billion users.

Thanks to fintech companies that have focused on honing mobile technology as a solution to bypass age-old problems and building infrastructure from scratch, a new generation of young Africans are participating in local and global economies.

Paying attention

Africa is home to the world’s youngest labor force, and a rapidly growing rate of mobile phone use. Providing essential financial services to this market has major potential—and global investors, from Silicon Valley venture capital firms to international finance institutions, are taking notice and backing African fintech companies. Notably, global payments giants also want in.

Within the last 18 months, global payments giants Stripe and Visa have led a $8 million Series A round in Paystack, a Nigerian online payments company while Mastercard participated in a $20 million Series A extension round in Flutterwave, a major Nigerian payments solutions startup. As part of the round, former Visa CEO Joseph Saunders also joined the company’s board. Mastercard has also backed Jumia Pay, the in-house payments solution of the largest e-commerce player in Africa, amid plans for a PaylPal-inspired spin-off.

For its part, PayPal has also backed Tala, the popular online lender operating in Kenya and Tanzania, while Visa co-led a $170 million investment Series C round in Branch, another digital lender. The most landmark of these deals came just last week when Visa’s $200 million investment in Nigerian payments processor, Interswitch confirmed the company as Africa’s first fintech unicorn.

There’s the view that these global payment giants are looking to cash in on possibly profitable exits, Victor Asemota, a veteran investor in African tech startups suggest these are long-term plays: “They are all looking for market share and not exits,” he says.

African fintech startups backed by global payments giants
Paystack Visa, Stripe (Aug. 2018)
Flutterwave Mastercard (Oct. 2018)
Tala PayPal (Oct. 2018)
Branch Visa (April 2019)
Interswitch Visa (Nov. 2019)
China in Africa

Yes, China’s vast presence in Africa extends to the continent’s most promising start-up sector, too.

In Nigeria, OPay, incubated by the China-owned Opera browser, is going up against PalmPay, a subsidiary product of China-based Transsion Holdings, Africa’s top phone maker. How strong is Chinese interest? Consider this: both companies have jointly received over $210 million in funding predominantly from Chinese investors in the last five months alone already ranking them among the continent’s best funded fintech companies.

One theory is Chinese investors are looking to replicate the success of Ali Pay and WeChat Pay at home. But there’s also the view that the play is to fuel quick growth in an Africa-focused fintech company with an eye on a major IPO or acquisition by a global payments company. (Interswitch is due to launch on the London Stock Exchange next year.)

In the meantime, PalmPay and OPay are leveraging as much of their Chinese backers as they can. OPay is riding on the popularity of the Opera browser—the second most popular in Africa—while PalmPay will come pre-installed in Transsion’s fast-selling smartphones.

OPay is also driving mass use of its payments platform by launching operations in other verticals and pursuing aggressive growth. Since launch, ORide, its motorcycle hailing service, has run heavily-subsidized promotions to edge out other players in Nigeria’s competitive bike-hailing space. And the rising ubiquity of ORide bikes, particularly in Lagos—despite regulatory concerns—suggests the strategy is working.

Red flags

Despite the tremendous possibilities for financial inclusion, fintech startups may yet be hamstrung by stiff regulation.

Last year, Nigeria’s central bank set off alarm bells for fintech startups with a draft of a policy proposal to raise the minimum shareholder funds to a range between $275,000 and $14 million for fintech firms seeking licenses, which could prove a serious barrier to entry. The apex bank couched it as a move to address “existing risks” as new companies emerge and operate parallel to the traditional financial services sector. But industry insiders view it as emblematic of how several governments on the continent, not exactly known for fostering innovation, may limit tech-driven financial inclusion with red-tape.

Some fintech players are also drawing increased scrutiny. Digital lending apps have skyrocketed in popularity by essentially helping users look beyond traditional banks for access to credit by providing quick loans while determining creditworthiness scores by scouring smartphone data including call logs, contact lists and GPS data.

However, there’s growing evidence that the ease of access to quick, digital loans is leading to a spike in personal debt. And, as lending apps jostle for market share and revenue from interest payments, there are fears they will inadvertently nudge users towards indebtedness and poor spending choices.

The commodification of user data is also raising concerns around data privacy and ownership and, amid the scrutiny, some clampdown measures have been put in place: Kenya has passed new EU-inspired data protection laws while Google announced in August that it will bar lending apps that promote personal loans which require repayment in two months or less.

*This post was originally sent out as a Quartz Obsession email.

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