The African start-up ecosystem is booming: over the last decade, it has become a global leader in mobile financial services, with M-Pesa in Kenya just one example of the continent’s success. Now regulation has to keep up with innovation for the good of fintech and the people who use it.
The rapid development of financial technology – fintech – in Africa is attributed to a young and tech-savvy population that is largely unbanked, coupled with a high level of mobile and internet penetration. It is introducing disruptive technologies and innovative services into a vast playing field that has, so far, been underserved by the traditional banking and financial services sectors.
M-Pesa and fintech in Africa
M-Pesa, launched in 2007 in Kenya, marked the beginning of the boom and its success helped open the door to more innovation across the continent. The mobile phone-based money transfer and micro-financing service makes transactions easier for businesses and has altered the mindsets of commercial banks, which had previously seen fintech as an ‘unknown’ - and even a threat.
By offering a service that made digital payments possible and boosted financial inclusion, M-Pesa paved its own path. Initially, it was set up to facilitate microfinancing, allowing institutions to distribute and collect loan payments. However, the company quickly realised it could expand its userbase and help individuals too. With the backing of Kenya’s central bank, M-Pesa now counts 41.5 million customers in seven African countries, with expansion plans outside the continent accounting for USD 20.5 billion in transactions per month.
Progress and benefits
Africa has seen numerous other fintech success stories in recent years, each one making a considerable economic and social impact, notably through widening access to financial services such as payments, loans and crowdfunding for unbanked populations. Fundraising for fintech represented 25% of total African funding raised last year, according to the Partech 2020 Africa Tech Venture Capital Report.
Fintech has proven itself to be a model for financial diversity and inclusion as well, improving access to financial services for women. It offers a safe place for women to save independently of their husbands and enables access to much-needed microcredit for projects available to SMEs and smallholder farmers – of which women account for more than half.
Financial technology was also crucial during the Covid-19 crisis, as it eliminated the need for cash and allowed customers to maintain physical distance from cashiers to reduce the risk of spreading the virus. It also helped local SMEs that provide at-home services to stay in operation, as their customer base could pay for goods and services remotely.
Finding the regulation sweet spot
Despite the progress made, there are still challenges in fintech’s path. The biggest is identifying what kind of regulation is needed to ensure fintech can meet its full potential.
Although initially hesitant, commercial banks are now embracing fintechs and partnerships with them, as the relationship is mutually beneficial: fintechs need banks for scale and banks benefit from their innovation and service offerings. These new technologies present opportunities, but also risks in areas that are usually strictly regulated.
The regulator has the responsibility to oversee consumer protection and to protect depositors and financial stability. They require business models that are fit for purpose and focus on consumer needs and protection, which is why fintechs need comprehensive risk assessment and risk management strategies. To be successful and appeal to regulators, they should focus not only on the technology, but on how it is helping consumers.
While some African countries have evolved regulation to match fintech developments, others have stalled. Funding remains concentrated in a few markets: South Africa, Kenya, Nigeria and Egypt are the four fintech hubs in Africa, securing 80% of fundraising in 2020. While countries, such as Ghana, Ivory Coast and Senegal are catching up, regulation remains restrictive. For instance, although Morocco and Tunisia have seen encouraging initiatives, the financial landscape needs to evolve to allow a greater expansion of fintechs.
To help support fintechs, regulators need to engage earlier with them, enable the right environment to test their products and systems and offer support in risk management. With central banks now taking an interest, promoting regional and international cooperation with a variety of regulators and policymakers will help to modernise the legal and regulatory framework to create an environment where fintechs can flourish.
Forging partnerships for innovation
Expanding to new markets will require strategic partnerships, which are crucial to ensuring the smooth integration of fintech into the financial ecosystem.
There is a common interest for banks, telecom operators and fintechs to work together and create synergies between business models – partnerships that are gamechangers for unbanked populations that have been historically denied the opportunity to gain access to financial services and build credit. Telecom-banking alliances with fintech will allow banks and telecom companies to expand their services and products and help reduce costs for both themselves and their customers.
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Innovation in fintech is steadily evolving into new territory: high added value services using data analytics and artificial intelligence such as credit scoring are entering the scene, as well as KYC-AML solutions and blockchain and cryptocurrency. Invest-tech – technology that raises expected risk-adjusted net returns – is on the rise with African-born players like ‘Invest Bamboo’ and ‘PiggyVest’ paving the way for customers to invest in Africa’s stock market and abroad.
Looking ahead, fintech’s creators, users and investors are focusing on improving payment options and services by partnering with banks, development finance institutions and other fintechs, in addition to cooperating with regulators. Each partnership and each initiative is an important step towards the democratisation of financial services, offering insurance, savings and other services that improve quality of life.
Promising yet challenging future ahead
For fintech to continue making a beneficial economic and social impact on the continent, there is a need for greater cooperation - at both the regional and continental level - and a need to strengthen the technical and educational fintech infrastructure.
Fintech is transforming the banking world and traditional business models and there is clear growth potential for it in Africa. Overcoming regulatory hurdles remains a challenge, but the proven benefits of these new technologies make fintech an essential part of all our futures. Governments, regulators, investors and entrepreneurs now need to work together to ensure Africa can continue to be a continent where fintech thrives.