Africa is on track to be the area where fintech income grows the fastest.
This is what the Boston Consulting Group (BCG) and QED Investors found in a recent study. With a compound annual growth rate (CAGR) of 32% from now until 2030, Africa’s fintech market, which is led by South Africa, Nigeria, Egypt, and Kenya, is expected to grow thirteenfold, hitting an impressive $65 billion by 2030.
Caio Anteghini, a partner at BCG in Johannesburg, pointed out that Africa’s advantage is that it doesn’t have a lot of old infrastructure. This means that it can jump right into a new financial ecosystem that can help its mostly unbanked or underbanked people deal with their problems.
“Because Africa doesn’t have a lot of old infrastructure, it can move quickly to a new financial environment and deal with the problems of a population that is mostly unbanked or underbanked. 52% of people in the Middle East and Africa (MEA) region don’t have a bank account, and 43% don’t have enough money in their accounts.
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Smartphones can help fintech close the access gap. Smartphones can improve payments and loans. These changes can help with financial inclusion in the region.
Financial technology revenues are expected to six-fold from $245 billion to $1.5 trillion by 2030. Emerging economies, particularly the Asia-Pacific (APAC) region, are likely to lead the fintech revolution, surpassing the US as the largest fintech market by 2030 with a projected 27% CAGR.
Anteghini says that both internationally and in Africa, fintech is still in its early stages and could change the financial services business.
“Financial services is still one of the most profitable parts of the global economy, but it has trouble coming up with new ideas, and the customer experience is still bad,” Anteghini said.
“Everyone has to grab the moment. He also said, “Regulators should lead by example, and incumbents should work with fintechs to speed up their transitions to digital.”
But the study shows that fintech problems are likely to be short-term. An excerpt says, “We think that the problems fintechs have been having lately are just a short-term correction in an otherwise long-term growth story.” This is because the basics of the business haven’t changed.
As the number of people with mobile phones and Internet access grows, African fintechs will have more possibilities. Changes to the rules may be important. Kenya seems to have changed its mind after making changes to the Finance Bill 2023 to tax cryptocurrency.
But Nigeria just put out rules for open banking, which analysts think will make competition stronger. The Central Bank of Nigeria’s effort to get rid of cash, which many Nigerians think is cruel, led many people who hadn’t used fintech before to start using it.
Fintech’s future in Africa
In Africa, although cash is still king, fintech could be a vehicle to solve the access issue, as most of the population is still either underserved by banks or fully unbanked. The report says that as the youngest and fastest-growing region in the world, with a median age of about 19 and a predicted growth of 1.2 billion more people by 2050, demographic changes and increases in earning power will make the need for financial access even greater.
BCG, and BCG Investors expect technology to make some big leaps, especially when it comes to cashless payments. 73% of people in Nigeria have a smartphone, but only 2% have a credit card.
“Most Africans’ first contact with the financial services sector may be through their smartphones. This presents major fintech opportunities in payments and lending for regional champions with full-stack attacker models,” the study said.
In the past, telco-backed fintech players like Safaricom’s M-Pesa and MTN Mobile Money have driven a lot of the growth of the sector in the region. Along with local fintechs, these big players are likely to keep playing a big part.
African fintech challenges
Despite their promise, African fintechs confront many obstacles. The first obstacle is macroeconomics. Most fintech breakthroughs occur in Nigeria, Egypt, and Kenya, which are expected to rise by single digits in 2023. This economic slowdown may prevent fintechs from realising value beyond payments.
Fintech business models also matter. Many Nigerian firms use a freemium strategy to attract users. As money becomes scarcer, many are charging for services they formerly provided for free.
They now compete with traditional financial institutions by launching competing products. GTCO, the holding firm of Guaranty Trust Bank, launched Investment One and Squad, a payment gateway, to compete with fintechs.
Ensuring the sustainability of their business models is another challenge for fintechs. While some have experienced growth in user numbers due to tightened forex access regulations imposed by the Central Bank of Nigeria (CBN), a relaxation of these regulations could pose challenges for startups built around this value proposition. Although fintechs are agile and can pivot, the fact that most of their customers are already banked may still present difficulties.
Foreign investors fund the majority of projects in Africa, so having access to money is crucial. As global investors in new businesses get tighter with their money, this reliance on foreign funding grows. Even though local investors are getting money, startup support in Africa will suffer. Local investors raise less money than Western investors, which makes it harder for fintechs to get the money they need.
During economic downturns, local investors may give more funding to the companies in their portfolios than to African fintechs. A 2022 McKinsey fintech study took note of this growing problem and suggested that local investors may be essential to staying in business.