• Oliver Warren, Associate at DAI Magister


• 09.06.2023 10:30 am
#FinTech #Startups

Africa has experienced extraordinary growth in internet penetration over the past decade, fuelling a digital revolution across the continent. The number of internet users has skyrocketed from 162m in 2013 to a projected 580m by the end of this year. This rapid expansion of internet access and the widespread availability of affordable mobile phones has created a vibrant online economy and digital banking ecosystem.

Business-to-consumer (B2C) fintech companies have flourished in this digital landscape, leveraging the digitalisation wave to create popular mobile banking apps and platforms. They have garnered significant attention and investment, capturing the imagination of investors. Fintech investment surged to over $1.5bn in 2021 and 2022*, with 85% of it flowing to companies in the B2C fintech segment, according to our estimates.

This means less than 15% of total investment went to traditional banks undergoing digital transformation and the start-ups building the infrastructure needed to sustain such widespread digitalisation. Despite this disparity, the ongoing adoption of digital financial services and the increasing commitment of banks to embrace digital transformation present a compelling opportunity for Africa’s overlooked banking infrastructure start-ups to emulate the success achieved by the B2C fintech segment.

The European fintech market followed much the same trends in its nascent years, with now household names such as Revolut, Monzo and Starling dominating the fundraising landscape. However, the roles have now reversed, with the B2B segment raising more than 4x the amount of B2C fintechs during 2022, and that trend seems set to continue. If the African market is even remotely following in the footsteps of Europe, there is huge void for the rising B2B stars to step into.

Core and open banking

The open-banking landscape in Europe was ignited by the introduction of Payment Services Directive Two (PSD2), removing the ownership of consumer payments data from the bank and allowing third party apps to access it. Several countries in Africa are on their way to creating an open banking framework that would allow the above trailblazers to thrive. Nigeria, despite having an interest in open banking since 2017, is the first country to issue operational guidelines for an open banking framework for consumer data sharing. Kenya is also implementing their own digitalisation roadmap, including an open banking framework that we should expect by 2025.

Africa’s Business-as-a-Service (BaaS) landscape is home to a growing number of innovative fintech companies enabling a new era of fully digital banking and improved access to financial services.

Among the innovators is Qore, a company that has helped over 500 banks and financial services providers across Africa digitally transform. By leveraging Qore’s cloud-native BaaS software, banks can digitise and automate their back-office operations and create relevant digital financial products without investing in expensive infrastructure or hiring specialised staff.

Stitch is a leading player in the open banking space based out of Cape Town, South Africa. The company enables digital businesses and fintechs to offer their customers a range of critical payment services. With Stitch’s single API, businesses can quickly start accepting online payments, initiate pay-outs and refunds and manage their payment operations.

Nigerian start-up Mono is another leader in open banking. Mono’s platform currently serves over 200 digital businesses throughout Africa, providing access to financial and identity data and payments that can be used to build new products and services.

Lami Technologies is a promising insurtech start-up from Kenya with plans to expand across Africa. The company has built a comprehensive digital insurance platform and API that enables businesses to create tailored insurance solutions for their customers. Leveraging its API, underwriting institutions can establish vital connections with consumer-oriented companies allowing them to offer convenient and affordable insurance products to customers.

KYC and fraud

The availability of a vast and growing data pool brought about by digitalisation has given rise to unprecedented opportunities in financial services and banking. However, it has also created a fertile ground for fraudsters and identity thieves to exploit, with fraud rates surging by 28% in 2022 and likely to escalate further. A small but growing contingent of companies are emerging to combat this surge and safeguard the integrity and security of Africa’s digital banking and BaaS landscape.

In the realm of Know Your Customer (KYC) onboarding and identity verification, Smile Identity is emerging as a pioneering force, propelled by its state-of-the-art proprietary machine-learning algorithms specifically built to work with African devices and identification requirements. The company recently unveiled the successful completion of its Series B funding round in February 2023, securing an impressive $20m investment primarily led by Costanoa and Norrsken22. 

South African-based iiDENTIFii is another leading digital identity start-up that recently achieved a significant milestone by securing $15m in late 2022, the largest series A in the identity verification segment to date. iiDENTIFii’s face authentication technology is trusted by banks and insurers across the continent to ensure customer and employee authentication via mobile devices and PCs.

Also hailing from South Africa is payment security company Entersekt which provides secure and frictionless authentication software to financial institutions. The company has introduced a Europe-first FIDO-based payment authentication system and an AI-powered 3-D Secure solution and has a growing list of African and foreign bank customers.

North to Nigeria, we find Youverify, an innovative company specialising in automating and streamling onboarding and KYC processes for banks and businesses. The company’s customer base now stands at 400 banks and start-ups, including many of Nigeria’s largest institutions.

The RegTech fundraising environment has been an outlier in recent years, pushing through difficult market conditions to continue to grow year on year. In 2022, when many segments saw fundraising dry up towards the end of the year, RegTech in Europe was able grow nearly 60%, and we expect Africa should be able to at least keep pace.

Africa’s neglected infrastructure fintechs can ride on the coat-tails of digitalisation to success

The remarkable growth of digital banking in Africa has made a significant impact and its trajectory only promises to intensify in the coming decade. In recent years however, the B2B segment has been largely left behind and traditional banks will be left to play catch-up with their digital offering.

With the increasing adoption of digital financial services by consumers and businesses alike and banks doubling down on digital transformation initiatives, the demand for core back-end systems and infrastructure to support these services will experience a significant rise. This will catapult infrastructure-focused fintech start-ups, which have long been overshadowed, into the spotlight.