The popularity and growth of financial technology (FinTech) companies in Africa is astounding. At the beginning of 2016, Disrupt Africa ? a start-up to provide information and advice on FinTechs ? released a report, African Tech Startups Funding Report 2015, which emphasized the funding pattern of FinTechs across various countries within Africa. The FinTech sector stood second after Solar Tech in raising funds from venture capitalists, and 125 FinTech start-ups collected $ 185 million, which is 29.6% of total VCs' funding in the country.
The report indicates that innovation of new technologies is not only reducing the barrier for new players, but it's also bringing relevance and transparency to the whole financial sector in Africa, Its ultimate impact is on consumers who feel empowered and comfortable to manage their financial needs.
Why are FinTech companies gaining significance in Africa?
Reports suggest that about 80% of adult population of Africa, which is estimated to 330 million, have no access to the formal banking system. These potential customers, mostly belonging to low and lower middle-income segment in rural areas, are completely untouched by banking benefits.
Experts from banking sector say that formal financial institutions don't find expanding their infrastructure to the countryside a profitable venture because of high operative cost. Due to this, there exists a wide gap between high rural demand for a bank account for financial transactions and availability of banking network. To cater to this demand, FinTech services like mobile money and e-wallet have arrived on the economic horizon of Africa. They are replacing the need for banks accounts and offering services at a lower cost in comparison to the banks.
Experts believe that the time is not far away when formal financial institutions might lose their relevance for rural population as FinTech is emerging as a better banking alternative for them. Even in urban areas, consumers are finding transaction through mobile more convenient than visiting a branch and spending time there. A lot of customers are also getting attracted to a new mode of financial services out of FinTech wave. Once a consumer experiences the simplicity and speed of FinTech services, he doesn't feel the need for traditional banking.
Mobile is increasing credit penetration in Africa
Like many developing countries, the collaborative model of FinTechs and traditional banks has started taking shape in Africa as well, thereby creating a win-win environment for both. While Fin-tech is helping banks to provide credit scoring of its subscribers, the latter are finding the information reliable for extending loan services. For instance, a US-based microfinance company, Finca has recently partnered with First Access, another US-based data analytics company, in which the former would offer loans by credit scores, which the later would provide after analyzing lakhs of individuals' data derived from their mobile phones.
In a similar initiative Kenya's largest bank, Kenya Commercial Bank and the mobile money arm M-Pesa of the leading telecom company Safaricom came together last year to disburse loan for micro, small and medium entrepreneurs. According to an estimate, KCB has benefitted from the collaboration and extended loan worth $200 m to various enterprises with an average loan size of $40 to $50.
A lot of customers of Finca, KCB or other microfinance companies, that are working on the similar model were supposed to be uncreditworthy and unable to access loans earlier because they were not registered on any platform and so their credit history was not available.
So how is mobile data identifying customer's creditworthiness? Companies dealing in mobile data analytics say mobile usage and mobile payments speak volumes about people's credit behavior. People buy airtime, pay electricity bills and spend money on other virtual products and services, which over a period generate a data bank of their credit behavior. Portfolio management companies such as Nomanimi and Musoni Systems are planning to capture as many data as possible through their latest ventures. Nomanimi plans to introduce one million Point-of-Sale devices to informal merchants by 2020 so that the company can achieve the credit behavior of these individuals. The creditworthiness gathered through these data is authentic, shows KCB-Mpesa venture, according to which, the default rate of customers accessing loans from KCB is less than 2%.
Increasing mobile penetration will intensify the FinTech wave
A new GSMA study, ?The Mobile Economy: Africa 2016? reports 557 million unique mobile subscribers in Africa at the end of 2015, equivalent to 46 per cent of the continent?s population, placing Africa as the second-largest in numbers, but the least penetrated mobile market in the world. This number is slated to grow to 725 million by 2020, covering 54 per cent of the expected population. This impending growth will further drive the number of mobile money users and even the Research by Legato Consultancy is pointing in that direction. It shows that till the end of 2015, 183 million people owned e-wallets in Africa, which were three times the use of e-wallets in the US. It projects that at this?expansion rate by 2020, every African will have an e-wallet.
Existing FinTech companies such as M-PESA, Musoni, Nomanini, Paga, SnapScan, Wizzit, Zoona, Cellulant, ExpenZa, GetBucks, Gust Pay, IMB, InterSwitch, InVenture, Kobocoin, Lendico, Microcred, RainFin, 22Seven, Bankymoon, Bitsoko and Bsaviis are not only expanding, some of them have plans to diversify into multiple financial products across Africa.
Summing up
There is no denying the fact that FinTechs players are all set to transform the commercial face of Africa, however, software and banking experts believe that there is an urgent need to put in place stringent regulation for mobile finance services to protect the interest of the end users and save them from fraudulent practices, which will cost the FinTech players their reputation. A set of guidelines such as the GSMA Mobile Money Code of Conduct, the SMART Campaign and the UN Principles for Responsible Investment is in force to provide a broad regulatory framework for mobile-based microfinance, however, there is a growing concern for more mandatory norms to keep the mobile finance services healthy in the long run.
Alex Kong