African fintech companies have made significant inroads into the market over these past couple of years, with revenues reaching US$4 billion to US$6 billion in 2020 and average penetration levels of between 3 and 5% (excluding South Africa), an McKinsey analysis shows. That momentum is projected to continue on with fintech revenues expected to grow eight times their current value to reach US$30 billion by 2025.
These estimates are provided that the sector overall reaches similar levels of those seen in Kenya, a country with one of the highest levels of fintech penetration in the world, and take into consideration the fact that cash is still used in around 90% of transactions in the continent, leaving huge potential for fintech revenues to grow.
The rise of Africa’s fintech industry will be driven by growth in the broader financial services sector, the consultancy says, a space that could see revenues grow at about 10% per annum to reach US$230 billion by 2025 (US$150 billion excluding South Africa).
Within this, blockchain and cryptocurrencies are set to grow the fastest, recording a projected compound annual growth rate (CAGR) of 50% from 2020 to 2025. This sector will be followed by payments and digital wallets, both at around 20% CAGR, and account management at 10% CAGR.
Currently, the lion’s share value in the market, or approximately 40%, is concentrated in South Africa, but moving forward, the fintech market is expected to grow fastest in Ghana and Francophone West Africa, by 15% and 13% per annum respectively, over the next three years. These markets will be followed by Nigeria and Egypt, each with an expected growth rate of 12% per annum over the same period.
Overall, McKinsey anticipates that the growth opportunity in fintech will mainly be concentrated in these 11 markets, namely Cameroon, Côte d’Ivoire, Egypt, Ghana, Kenya, Morocco, Nigeria, Senegal, South Africa, Tanzania, and Uganda.
Together, these nations account for 70% of Africa’s gross domestic product (GDP) and half of the continent’s population, McKinsey notes. Additionally, they are providing fintech companies with a favorable environment to develop and thrive, including increased digital readiness, higher mobile and Internet penetration, and supportive initiatives from the government.
Ghana and Nigeria, for example, have recorded the highest growth in smartphone usage in the world; Nigeria, Ghana, and Uganda have launched programs to improve financial inclusion and reduce cash transactions; and Egypt, Ghana and Nigeria are currently the only three jurisdictions in the continent to have introduced a real-time payments system and modern payment infrastructure to enable rapid scale-up of fintech services, McKinsey notes.
Africa’s booming fintech sector
Fintech is the fastest growing startup industry in Africa, collecting between 40% and 60% of all startup funding in 2021, according to various research.
The success of the sector and companies part of it have been driven by several trends, McKinsey notes, including increasing smartphone ownership, declining Internet costs, and expanded network coverage, coupled with the region’s young, fast-growing and rapidly urbanizing population.
Though adoption of fintech, notably digital payments and wallets, has been growing steadily for several years, the COVID-19 pandemic accelerated the trend amid social distancing requirements.
A 2020 global study conducted by the Cambridge Centre for Alternative Finance (CCAF) at the University of Cambridge Judge Business School, the World Bank Group and the World Economic Forum, found that fintech companies in the Sub-Saharan African region reported a year-on-year (YoY) average increase of 12% in transaction volumes in H1 2020.
Digital payments witnessed the strongest growth, with transaction volumes rising 25% YoY in H1 2020 and new customer increasing 22%. Insurtech companies also gained notable traction during the COVID-19, with transaction volumes rising 15% YoY in H1 2020 and the number of new customers growing 18%.
In Africa, fintech companies have risen in popularity largely because they offer products that are more convenient and affordable than traditional financial services providers. McKinsey estimates that transactional solutions provided by fintech companies can be up to 80% cheaper, while the cost of remittances may be up to six times cheaper. Interest on savings meanwhile can be up to three time higher than those offered by traditional players.
Featured image credit: Edited from Unsplash and Pixelsdesign
