Africa’s startup industry has grown immensely over the years. Startup funding between 2015 and 2022 grew by an amazing 2,600 percent — $185 million to $5 billion — and fintech is one of the key sectors that led this growth.
The fintech sector alone received $1.9 billion from the $5 billion African startups raised in 2022. Also, fintechs made up almost half of all the startups in Africa between 2020 and 2021.
From payments to lending, and remittance, these startups are some of the most celebrated and most valued in Africa. And while their success is evidence of innovation and growth, there are stumbling blocks that could hinder further growth.
McKinsey estimates that revenue earned by African fintechs could grow by up to eight times, but this is dependent on the penetration of digital payments. McKinsey’s research also finds that 90 percent of transactions on the continent are still cash-based, meaning fintechs have a lot of room for growth.
Standing in the way of this growth are security, regulatory, and infrastructure challenges. Security, for example, has eluded fintechs and even traditional financial institutions in Africa.
This security challenge forced one of Africa’s most promising fintechs, Union54, to temporarily shut down its virtual card services — this unfortunate incident which was caused by $1.2 billion chargeback fraud affected about 100 fintechs. After the temporary shutdown, the CEO of the Zambian startup admitted to TechCrunch that there are major challenges standing in the way of fintech growth in Africa.
Meanwhile, these challenges also present themselves by way of regulation. It is a known fact that technological innovation often moves faster than regulation, and this fact affects fintechs too. Regulation in some cases stifled the growth of innovative fintech companies because no clear rules and regulations had been established to guide the operations of such startups. For example, regulation is one of the issues that forced, Nigerian fintech, ThePeer, out of the market.
Complex licencing and compliance procedures also deter the growth of fintechs. Given their size and financial capabilities, some fintechs may not even make a debut in the African financial market before they go under.
Additionally, infrastructure challenges also stand in the way of African fintechs multiplying revenues eightfold as predicted by McKinsey. While existing financial infrastructures have significantly improved digital payments in Africa, 90 percent of transactions are still cash-based.
Moving these cash-based transactions to digital will require scalable infrastructure.
Already, three out of every ten digital payments in Africa fail. These failures contribute to a $14 billion loss in recurring revenue for digital businesses across the continent annually. Consequently, taking 90 percent of cash transactions upon digital rails will increase this failure rate and in turn increase revenue losses.
Nigeria witnessed a glimpse of this when a major cash scarcity in 2023 led to an increase in digital payment, which in turn led to failed digital transactions.
Evidently, the current infrastructure needs a major improvement and it appears blockchain could help in this regard.
Although popularised by cryptocurrencies, blockchain has diverse applications. For example, American multinational technology company, IBM has built blockchain solutions in different industries including logistics, healthcare, and even governance.
In its simplest form, blockchain is a decentralized way of storing data. Decentralization being the keyword, means that data is transparent and available to all required parties in real time.
The concept of decentralization also makes breaches near impossible as data is stored across various nodes. This means that attacks need to occur across thousands of nodes simultaneously to be successful.
Interestingly, while blockchain is a relatively new technology, major use cases are already being seen in the global financial industry.
One such use case is Ripple, a blockchain payment solution that is being used for cross-border transactions by over 100 global banks. Ripple’s major selling point is making cross-border transactions faster and cheaper.
Despite the growth and innovation that has come to global finance, cross-border transactions are still slow and expensive. Transactions on Society for Worldwide Interbank Financial Telecommunications (SWIFT), which is the traditional standard for cross-border transactions can take anywhere from three to five days, and cost between $22 to $27. Whereas, fees on Ripple are as low as $0.0002 regardless of the amount of transactions on the network.
In Africa, blockchain adoption by fintechs is gradually taking shape. M-PESA, which is arguably Africa’s most successful mobile money service, integrated Stellar blockchain to allow cross-border transactions.
In Nigeria, Zone, Africa’s fastest-growing payment infrastructure company, has built a regulated blockchain infrastructure that can help existing financial institutions eliminate issues like chargeback fraud which has been a thorn in the flesh of fintechs like Union54.
The blockchain network infrastructure provides real-time monitoring and communication among member institutions which is why Nigeria’s top banks and the Nigeria Inter-Bank Settlement System (NIBSS) have embraced it. From crossborder payments to chargeback fraud, and scalability, blockchain seems like a solution that African fintechs should embrace.
However, it is not without its challenges. Being a relatively new technology, it is bound to encounter regulatory and compliance issues. Ripple recently ended a four-year-long lawsuit with the US SEC and such issues might come up as African fintechs adopt blockchain.
Furthermore, there’s a dearth of talent when it comes to building blockchain solutions. According to blockchain recruitment agency, Blockchain Staffing Ninja, “few experienced professionals are available for employment due to the novelty of blockchain technology.”
Ultimately, while blockchain has demonstrated, in theory and in practice, early signs of its ability to enhance fintech in Africa, it is yet to be seen if it fulfills its potential in the long-term.
Article first appeared in Ventures Africa.
Photo by Allison Saeng via Unsplash.