A new report by Endeavor draws on numerous sources, including analysis from McKinsey & Company, to conclude Africa is the next digital growth frontier. The continent’s market fragmentation, informality, and low consumption makes it ripe for disruption. And that’s what happened when the pressures of the COVID-19 pandemic serendipitously coincided with a youthful, digitally empowered population and growing penetration of digital technology.
A new generation of African innovators and entrepreneurs has been emerging. This is evidenced by the rise of 11 unicorns in the last six years, of which six were fintechs. However, what’s even more exciting is that the report indicates the depth and breadth of the opportunities offered by the continent.
Africa’s Digital Opportunity
Africa’s $115 billion digital economy is predicted to grow sixfold by 2050, to $712 billion. This is based mainly on the growth of internet usage and active mobile-broadband subscriptions. (Both currently sit around half the world averages.)
And it is concentrated in Nigeria, South Africa, Egypt, and Kenya. Together these four countries make up roughly a third of Africa’s population and half its GDP. They are also home to half the continent’s professional developers and almost three-quarters of its accelerators.
Africa’s combined GDP has tripled since 1990, making it one of the fastest-growing regions in the world. In 30 years, it will likely be home to a third of all young people globally, and its population is also urbanizing faster than average. Africans are increasingly inclined to tech roles, and this talent contributed to accelerating digitization during the pandemic.
High growth was experienced in entertainment activities (streaming), education (school children and self-directed adult development), and commerce (groceries and take-out food). As the digital economy grows, it will increase the continent’s GDP, create employment, and win recognition from the international community.
Africa’s Investor Landscape
Africa’s tech investments have grown 18x in the last six years and were twice average global rates for the last two. Its trajectory over the period makes it comparable to Southeast Asia five years ago and faster than Latin America during the same. Investors are active from seed to growth stages, but currently, early-stage funding is the most dynamic.
Last year, there were 600 deals between $0.2 and $5 million and about 150 in the $5-$50 million bracket. This suggests there may be a supply shortage for companies in the under $5 million categories should they require additional capital for scaling—a “white space” for investors.
Key Insights into Financial Services in Africa
The African financial services industry is worth more than $165 billion and growing. Currently, the industry is dominated by payments, banking, and insurance. Payments constitute about $10 billion in domestic revenue, $3 billion in remittances from the diaspora, and about $5 billion from cross-border trading.
Banking comprises about $40 billion in loans and $30 billion in deposits. However, growth on the continent is constrained by limited access to services; entrenched reliance on informal solutions; and multiple, disparate payments landscapes. Here are some things to know about fintech in the region:
Africa has a sizeable unbanked population.
The banking infrastructure on the continent is less than optimal, resulting in a high proportion of unbanked citizens, particularly in rural areas. As a result, people who are excluded use cash, mobile money, and prepaid cards as alternatives.
Africa has an extensive lending gap.
With limited credit data and reduced collection ability, African banks frequently cannot service their customers’ lending requirements. This has created a significant lending gap relative to global comparatives.
Cash is still king.
Only about 7 percent of Africa’s financial transactions are made digitally. Low urbanization rates mean cash is still king in the proportionally large rural communities.
Informal saving and lending prevail.
Due to the large unbanked population and high-interest rates charged by banks, saving and lending are still predominantly channeled through informal solutions.
Payments are highly fragmented.
There are many different digital payment methods across the continent, with dominant methods varying between countries. This presents an integration challenge for merchants, which naturally wish to increase their market share. And it slows down cross-border payments, with interoperability coming at high costs.
Deep Dives
According to the Endeavor report, new entrants are seizing opportunities for disruption, for example, by providing seamless peer-to-peer payment solutions and then migrating clients to more traditional banking offerings such as lending and savings products. Deep dives into the four leading countries revealed the following information regarding their fintech activity:
Nigeria is Africa’s largest internet economy. Of the country’s tech companies in key sectors, 144 (44 percent) out of 324 companies are in fintech.
South Africa is Africa’s most inclusive internet economy. The report found that 154 (51 percent) of its tech companies are in fintech.
Egypt has one of the most diverse digital business landscapes. According to Endeavor, 39 (26 percent) of its tech companies are in fintech.
Kenya’s internet economy has the highest contribution to GDP in Africa. In that country, 93 (46 percent) of tech companies are in fintech.
Advice to Investors
The report concludes with the following tips for investors interested in entering the African market:
Local funds service the majority of pre-seed to seed-stage funding requirements, while global funds have focused on growth-stage financing. This has left a gap in the provision of capital for Series A/B ($10m to $50m) rounds.
The business landscapes of African countries differ significantly, so it’s critical to acquire local market intelligence.
Be open to refining mental models to cater to complementary online and offline services and other Africa-specific market dynamics.
Look beyond the C2C opportunities getting all the attention. B2B opportunities exist, with micro and SME businesses contributing between 40 and 50 percent in countries like Kenya, Nigeria, and South Africa.
Exits are possible, but they should be planned collaboratively with founders, considering future investors or acquirers.