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Maintaining fintech's momentum in Africa

Maintaining fintech’s momentum in Africa

Maintaining fintech’s momentum in Africa

Maintaining the fintech momentum in Africa is key to enabling sustainable growth. Fintech and its transformative potential were therefore among the themes of the latest Mobile World Congress, held in Kigali, Rwanda. The event focused on “unleashing tomorrow’s technology – today”, exploring ways to tap into technological innovation to drive the digital economy. GVG is the technological partner of several African regulators aiming to harness digital financial services to promote socioeconomic growth. We therefore have a special interest in the MWC’s Fintech theme. In this blog, we share our expert insight about the growth and benefits of fintech in Africa, the challenges that need to be met and what can be done to foster fintech development on the continent.

Growth and benefits of fintech in Africa

Fintech has been a champion of digital transformation in Africa, especially since the pandemic. This market remains the most populated within the continent’s digital ecosystem, says Disrupt Africa’s Finnovating for Africa 2023 report. Indeed, according to this same report, the number of fintech startups keeps on increasing, with 17.7% from 2021 to 2023. This growth rate is similar to the one observed from 2017 to 2019. Overall, the number of active fintech startups has increased by 125.2% from 2017 to 2023. Trends such as increased smartphone penetration, lower connectivity costs and improved network coverage underpin the success of fintech companies.

These companies develop products and services that revolutionize the African financial sector, by enhancing its efficiency and integration. Indeed, they help streamline processes, improve service delivery, and enable cross-border digital payments. An analysis by McKinsey highlights the added value fintechs bring to their customers, especially when it comes to cost reduction. For example, their transactional solutions can be up to 80% cheaper and the cost of remittances six times cheaper. Fintech is also acknowledged, by the IMF among others, as a driver of financial inclusion and socioeconomic growth in Africa. That is because it gives unbanked populations access to financial services and help formalize the informal economy.

In recognition of this positive impact, the latest edition of the MWC included fintech-specific sessions. The latter provided platforms for participants to share insights, visions and strategies as regards technological innovation, fraud prevention, key trends and product diversification in the fintech space.

Challenges to fintech’s growth

Despite its exponential growth, the African fintech ecosystem is still in its infancy, and facing challenges to its sustainability. These challenges include inappropriate regulation, the continuing dominance of cash-based transactions, inadequate connectivity, and data security concerns.

McKinsey states that Africa’s “fragmented financial regulatory framework” affects fintechs. Indeed, national fintech ecosystems are not evolving at the same rhythm. As a result, neither do fintech-specific regulations. Some African regulators have implemented measures to support the development of fintechs. However, the complexity of the regulations can impact businesses and their ability to comply with said regulations. And when it comes to cross-border digital payment services, for example, heterogeneous regulation between countries also interferes with expansion.

Furthermore, inappropriate regulation undermines data security, another challenge fintechs have to contend with. Not all African countries have implemented national data privacy regulations. Understandably, this causes concerns among the users of fintech services and undermines trust in the ecosystem, thus delaying adoption.

Inadequate connectivity also negatively impacts adoption. According to 2022 data from the ITU, only 40% of the African population uses the Internet. This means that 60% cannot access digital financial services. The connectivity gap may partly explain why 90% of financial transactions on the continent are still made in cash.

Maintaining fintech’s momentum in Africa

Driving the adoption of fintech services in Africa therefore means providing a favourable and harmonized regulatory framework that includes data security. It also involves improving connectivity and supporting the transition to a cashless economy. While fintech companies have the responsibility to innovate, ensure quality of service, and comply with regulatory requirements, governments and regulatory authorities play a crucial role in providing an environment that is conducive to the growth of fintech.

The regulatory challenge can be addressed through collaboration between fintechs and regulatory authorities. A transparent exchange of information between the stakeholders would indeed contribute to the creation of regulations conducive to the development of the fintech ecosystem. Some successful companies like OPay, M-Pesa and Fawry have already opted to work together with regulatory authorities to create a mutually supportive framework, McKinsey reports. Collaboration between regulatory authorities, for its part, would support regulatory harmonization, and thus promote interoperability and the use of services such as cross-border digital payments.

In addition to working in partnership with the fintech companies, some African regulators have elected to acquire technological solutions that connect them directly to the fintech ecosystem and provide them with actionable data to support decision-making. These solutions assist the regulators in ensuring transparency, compliance, and security within fintech services, thus building the users’ trust in these services, and supporting their adoption. For example, Rwanda and Tanzania have implemented GVG’s data-driven technologies to enable the good governance of the Mobile Money ecosystem and harness its socioeconomic benefits.

The regulator’s crucial role

Data-driven policymaking is of course also relevant when it comes to improving connectivity and promoting the digital economy. The more reliable the intelligence about the fintech ecosystem is, the more effective the regulators can be in creating the right conditions for maintaining fintech’s momentum in Africa.

Africa’s growing fintech industry has an enormous potential that requires effective nurturing for it to be fully realized. This applies not only to the financial sector, but also the lives of Africans. Indeed, a dynamic fintech ecosystem can lead to job creation, improve financial inclusion, and ultimately boost development on the continent. The onus is on governments and regulatory authorities to create a fertile terrain for fintech to grow and contribute to Africa’s socioeconomic development. Building their technological capacities and working together with the fintech players will enable them to fulfil this crucial mandate.

Want to read about the use of data for inclusive fintech? Click here.