Fintechs are driving the next wave of financial inclusion in Africa and other emerging markets, but they need to partner with incumbent market participants, banks and telcos in order to be successful. Why do the incumbents need Fintechs and vice versa? Where does this leave our technopreneurs in terms of opportunity?

A McKinsey report published in 2020 predicted that Fintech revenue will grow some 8 times by 2025, and that the financial services market in Africa should then reach $230Bn, much of the increase being taken by “nimble Fintech players”.

I first became aware of financial inclusion when my wife, then working at Standard Bank, mentioned working with the Director of inclusive banking, Coen Jonker. Following the story from that point, it appeared that Standard Bank could not get its head around the economics of a “low cost bank” (thinking of low cost airlines in those days) which would serve communities at no or low cost. I believe everyone could see the need but not the solution.

Coen then pursued the idea independently leading to the rise of TymeBank. Firstly being incubated with a Deloitte Innovation team and then launching on its own, soon finding a banking partner in the form of the Commonwealth Bank of Australia. Tyme has now expanded to Asia and has received significant funding from African Rainbow Capital, Tencent and other major African investors.

Has it addressed the original target of the unbanked, though? To set up an account is free and so far Tyme has attracted 8m customers, many of whom weren’t banked before. As a comparison, Capitec, a more traditional South African rival, has managed to bank 21m customers in South Africa over the past two decades, offering low priced services. Many of these customers came from the big four incumbent banks

Financial inclusion refers to the process of providing access to financial services  to individuals and businesses who are otherwise excluded from the formal financial system. It is not only the inclusion of those who are out of the formal financial system but also “deepening” that access through products that people would not otherwise have access to. Deepening is to offer more products such as savings, credit, payments, insurance and investments, something that the incumbent banks have not been able to offer cost effectively.

Cash is the enemy of financial inclusion. A merchant or person dealing only in cash will not easily have access to other financial products. The McKinsey report  “Fintech in Africa” notes that 90% of retail transactions in Africa still take place using cash!

Fintech partnerships are the new oil

Starting with the incumbent market participants, banks and telcos; these will continue to provide the underlying capital and infrastructure muscle, but our belief is that partnerships will be key. Indeed, in a panel discussion on Fintech innovation at the recent MWC Kigali conference in Rwanda, the conclusion was that the partnership between banks, telcos and Fintechs will drive innovation. The panel moderator summarised that partnerships are the new “oil”.

The value of such business can be seen in the recent sale of a stake in the MTN Fintech business in Africa and the Middle East to Mastercard, at an enterprise valuation of $4.3Bn. It is interesting to note that MTN, having invested heavily in payment infrastructure, saw fit to bring in an incumbent card player as a partner. VISA invested $200m into Interswitch, a Nigerian-based financial payments group, at a valuation of $1Bn in 2019. VISA and Mastercard have partnered with POS companies such as Yoco that have reach into communities that are difficult for traditional acquirers to reach.

Why is there an opportunity for Fintech technopreneurs despite the gorillas?

Firstly, incumbent players struggle to deliver the user experience. This is not only the UX but the entire user journey, which evolves more rapidly than big company systems can cope with. The evolution of APIs is key to this success – leaving the space open for fast-footed Fintechs to innovate. A further point here is the “open data” era, which in Europe has been ushered in through the introduction of PSD2; sharing of data with the permission of the data owner makes effective delivery of services easier and potentially wider. For instance data from your energy or telco supplier may help your credit application. Experian, a global credit bureau, has just announced a partnership where it will leverage MTN’s cross-industry API marketplace, Chenosis, to build alternative credit scoring systems to drive financial inclusion in South Africa.

It is a lower risk for a bank or telco to partner with an early stage company which may or may-not succeed; if the initiative does not succeed it is easier to terminate a partnership than shut down a business.  But there is also the monopolistic behaviour of large companies that we need to be concerned with. “We can do it better ourselves” is a common attitude and one that often leads to massive cost overruns and write downs. Another problem for large companies is the obsession with overhead recovery – the reason I suspect that Standard Bank could not succeed with its inclusive banking all those years ago. Apply large overheads to a start-up and it is unlikely get off the ground.

The problematic (financial and non-financial) cost for all participants is regulation. Large companies worry about their government-granted licenses, which are constantly under threat of fines or even withdrawal. This is, in our view, the biggest stumbling block to innovation for incumbents, whereas Fintech startups have little to lose – and can afford to “ask for forgiveness rather than permission”.

Take blockchain for instance; instant settlement without massively complicated systems. Who wouldn’t want this? The confusion of blockchain and bitcoin or any other crypto instrument has led some African countries to ban outright any form of crypto including the building blocks of blockchain. In fairness, the South African Reserve Bank has set up an Intergovernmental Fintech Working Group (www.ifwg.co.za) and a sandbox to prove technologies in the digital payments industry and it is experimenting with Central Bank Digital Currencies (see our recent blog on this subject). Different regulation across Africa has also not helped the confusion and expense for companies, given that Fintechs really thrive on scale.

Notwithstanding these challenges, there are six Fintech unicorns in Africa, showing that Fintechs can achieve scale. But they cannot do it on their own.