Africa’s next cohort of billion-dollar startups
The African fintech sector has attracted over $3 billion in venture funding and created five unicorns, but what is next?
About two-thirds of the $4.9 billion in funding to African startups in 2021 went to fintech, and at least five fintech unicorns have emerged where none was recognised before 2019.
Given the rapid growth, funding continues to chase fintech startups in pursuit of new unicorns. Investors want to finance companies that will return capital in exciting multiples- essentially, the next generation of billion-dollar companies.
No doubt, the opportunity to create many more fintech unicorns exists in Africa– there are still significant challenges to be solved if fintech continues to improve the lives of African consumers and businesses. These challenges are around open banking, lending, and Know-Your-Customer (KYC) processes. Advancements in these niches will bring Africa into fintech 2.0, creating the next wave of fintech unicorns– but how?
Open banking
It is no surprise that most of Africa’s fintech unicorns today are payments companies. Before payments startups such as Flutterwave launched, it was incredibly difficult for small businesses to offer their products online and easily collect payments.
Now, payments providers serve as critical enablers for e-commerce and help in bringing African businesses online. However, despite significant progress in financial inclusion rates, millions of Africans still lack access to robust financial services that cater to their unique needs, including payments, credit and savings.
For example, the Nigerian Bureau of Statistics reported that only 3 out of 10 customers of Nigerian banks could access loans in the first quarter of 2019, a situation that persists until today.
Open banking can help bridge the gaps by allowing consumers access to tailored financial services via the businesses and products that reach them without relying on traditional banks.
Open banking enables financial and non-financial institutions to openly share financial data through APIs and data aggregation services, allowing more businesses to offer tailored and better financial products. For example, merchants can easily offer buy-now-pay-later services if they have instant access to data that confirms their customers’ creditworthiness thanks to open banking APIs.
Therefore, open banking is positioned to bring about Africa’s next fintech evolution on the heels of payment gateways. By enabling products that broaden and deepen access to financial services for consumers and businesses, open banking startups will be creating tremendous value, easily translating into billions of dollars.
Read: Ghana: Public debt reaches 80.1% of GDP
KYC
The Pan-African Payments and Settlement System (PAPSS) was recently launched to enable cross-border payments across Africa, demonstrating a continuous commitment to continental free trade.
As this helps continent-wide commerce become a trend, financial service providers must verify and authenticate customer information from different countries for KYC processes. Financial services require KYC to establish trust and check illicit financial activities.
However, most African countries currently do not have centralised or digital identity systems to enable easy verification of customer identities. A GSMA report found that many identity systems in Africa still require manual authentication, and even when it is possible to verify digitally, it cannot always be done securely. Also, few systems across the continent are accessible to third-party service providers.
Similarly, verifying other vital customer information such as home addresses or incorporation status for businesses remains an arduous task due to a lack of accessible databases.
One solution is to leverage digital technology to leapfrog these infrastructure gaps. Take Smile Identity, for example; the company leverages the smartphone camera and access to multiple identity data sources to help fintechs carry out KYC.
As Africa opens up and fintech services expand by onboarding millions of businesses and individuals, startups that help them fill KYC gaps are poised for incredible growth.
Lending
Access to credit facilities is still a challenge for both individuals and SMEs across Africa. For instance, only 20% of SMEs reportedly have a line of credit, despite that SMEs employ 50% of the population and are recognised as growth drivers for economies. Startups in different verticals demonstrate a significant opportunity to fill this gap by providing credit products, whether as their primary or secondary business.
Trends show that digitally savvy Africans are quickly moving away from the “Pay-as-You-Go” model (where you spend what you earn to survive) to adopting the use of credit to supplement lifestyles and businesses.
Considering the limited availability of sustainable credit products to support this trend, emerging startups with robust and efficient credit solutions across the continent will be fulfilling billion-dollar opportunities.
Startups that tackle problems in the highlighted niches have immense potential to join the next generation of African unicorns, attract international funding, create paradigm shifts in finance, and reach global recognition. They just need to master the continent’s diverse and promising markets as growth levers.
About the writer, Clara Wanjiku Odero
Clara Wanjiku Odero is the CEO and Co-Founder of Credrails. She is a seasoned fintech executive having served as the Africa and Middle East Head for major payment networks including Flutterwave, Rapyd, and Nium.
She specializes in business development and expansion in emerging and high-growth markets. She has a strong track record of developing new businesses, building genuine relationships with key stakeholders, and strategizing market entry.
Clara co-founded and launched Credrails in order to make it possible for fintech companies to build apps for 50+ countries through a single API access and become the infrastructure API for Africa. Clara holds a Bsc from Kenyatta University.
