Payments landscape in Africa
Growth factors and untapped opportunities.
Product Insights Series #1
The map does not claim 100% comprehensiveness and aims at showcasing major opportunities in the region.
The Product Insights Series is the 3.0 chapter of our flagship market mappings and offers context around the role played by, and the growth of dozens of selected verticals across Africa’s technology ecosystem. Written articles accompany the visual #InnovationMaps to offer deeper information on each product or cluster. The natural place to kick off this series is the payments landscape, representing one of the fastest-growing products in the continent’s startup scene.
To get a better understanding of the factors influencing the way payments companies do business and the opportunities for growth in Africa, Briter Bridges spoke to five startups providing payments services across the continent.
This week’s contributors are:
Paga Group | https://www.paga.com
MFS Africa | https://mfsafrica.com
Yoco | https://www.yoco.com/za
Julaya | https://julaya.co
Cellulant | https://www.cellulant.io
What are payments companies in Africa?
In this context, ‘payment companies’ refers to players that leverage technology and digital solutions in order to enable transactions between parties, digitally or without the need for physical cash. Payments companies in Africa have emerged among some of the undisputed beneficiaries of the digitisation process initiated by the rise in internet and mobile adoption rates in Africa. As early pioneers in the tech sector, many such businesses were able to grow their user base during the COVID-19 pandemic, as millions of customers and businesses turned to digital transactions in the context of widespread lockdowns and social distancing.
The sector has grown significantly in the last two years of the pandemic. Consumer trials of, and trust in, digital financial services have increased [and several] businesses have had to digitise their operations to meet the changing consumer demand and behaviour”, says Daniel Oparison, Growth, Brand Strategy, and Marketing at Paga. But the growth is not only related to the pandemic. Increased digitisation and customer adoption fits into a larger trend of payments company growth, which has taken place over the past decade due to factors such as:
More players in the industry;
Lower internet data costs;
Lower smartphone costs;
Better and more comprehensive regulation; and
A better understanding of digital financial services.
Paga was founded in 2009, as one of the earliest digital payment companies in Nigeria and Africa.
Funding to payment companies in Africa
According to our data, roughly $2.8 billion was raised by Africa-focused fintech companies in 2021 across more than 180 disclosed deals. Around $1 billion of that sum was raised by payments companies. Payment companies have witnessed significant growth in the past half-decade, capturing some of the largest rounds and M&A deals to date, including Stripe’s acquisition of Paystack and Network International’s acquisition of DPO Group.
The 2021 figure includes raises by OPay ($400m), MFS ($100m), Yoco ($83m) and Flutterwave ($170m), but it does not include rounds from companies like Chipper Cash (which is counted under ‘transfers’) and Tymebank (which is counted under ‘banking’).
What are the key growth factors and untapped opportunities?
Verticalisation and specialisation
A shift away from the ‘mass market’ strategy that was pioneered by some of Africa’s earliest payments companies is a move towards verticalisation and specialisation. Rather than looking at connecting businesses in general, some startups are positioning themselves to build payment solutions and products for a specific sector. There are “verticals like the insurance industry, where startups are really tackling the needs of that sector” says Mathais Léopoldie, CEO of Julaya, an Ivory Coast-based fintech that works in the corporate payments space for traders and SMEs. Other highly-targeted verticals include health, education, and retail. The development of bespoke services shows that the sector is growing in sophistication as a more diverse range of players build targeted business models to dedicated customer niches.
Unbanked and offline merchants: Africa’s digitisation process’s long road ahead
As companies chase customers in auxiliary industries, the more common strategy for B2B companies has been targetting digitally savvy sectors like e-commerce, tourism and banking. But as the payments sector matures and consolidates, a significant opportunity is found in unbanked and offline businesses. “The size of the offline marketplace is around eight to ten times larger than the online market”, explains Akshay Grover, CEO of Cellulant, a Kenyan-based B2B payments company, referring to the vast proportion of cash-based transactions across Africa (and beyond). “We are likely talking about a trillion-dollar market”. Digitisation of cash payments remains a vastly untapped market and the majority of growth is likely to be found in companies that transact with cash or mobile money and do not currently use formal money transfer systems. These include SMEs and small traders in the hospitality, FMCG and agriculture sectors, for example.
Enabling digital payments in Africa is a long game. Despite the growth in digital payments, there is still a long way to go as offline transactions remain the dominant mode of doing business, points out Grover. In fact, while startups are beginning to scope out new business models, the market is a long way from oversaturation, not least because levels of digital connectedness vary significantly between each African market. “Take Kenya. There is a lot of digital sophistication happening here, but it doesn’t necessarily mean that this is true for the rest of Africa. Nigeria, for example, is a market which is still very cash-heavy with [proportionally] few digital transactions” compared to what the volume is likely to be in the coming years, Cellulant’s Group CEO concludes. The Nairobi-based startup is already processing around $1.3 billion payments a month with a presence in 35 African markets, and Grover notes that “[they] are just scratching the surface [as there is] a long way to go” in Africa’s digitisation process. Digitisation among small and medium businesses (SMBs), which represents over 90% of all businesses on the continent, remarks Paga’s Oparison.
Geographical expansion and building to attract global players
The rapid growth of fintechs, the need to find new customers and the persisting gaps in digitisation across the continent is likely to lead to far greater regional expansion, outside Africa’s big tech markets, says Marcello Schermer, Head of International Expansion at Yoco, a Cape Town-based startup that facilitates payments between SMEs. New growth areas include the rise in home-grown payments companies in markets that are not usually associated with tech. Indeed, an underlying trend is that successful payments companies in Africa are no longer limited to certain regions or products.“ What was happening in Nigeria, with the explosion of the payment ecosystem with Flutterwave and Paystack, is also happening to other countries across the rest of Africa. The landscape is maturing,” says Julaya’s Léopoldie. For example, many founders believe that francophone Africa will be a key area of growth and investor interest in 2022. This is largely due to the success of Senegal-based mobile money transfer startup, Wave, which raised $200m in a Series A round led by Californian investors last year. Analysts and entrepreneurs expect the raise to act as a windfall for investment in francophone Africa, where ticket sizes have traditionally paled in comparison to anglophone markets.
Find more about the opportunities in Francophone Africa in our regional report!
Beyond Africa
Aside from establishing payment gateways in Africa, some companies are beginning to explore connecting Africa with the rest of the world. Nika Naghavi, Director of Strategic Projects at MFS Africa, a payment hub that started out connecting mobile money wallets and solving telco-related interoperability challenges for individuals and businesses. MFS is looking to connect intercontinental payments gateways such as linking up Africa to China and the US. Despite the growth in cross-border trade, processes remain complex and subject to several barriers. Naghavi explains that bridging the gap between Africa and other regions often still involves chasing partnerships with global payments companies, like Wise, WorldRemit and Alipay. MFS Africa currently works in 37 markets, with more than 320 million mobile money wallets and 80 partners.
Consolidation and acquisitions
Mergers and acquisitions (M&As) are also increasingly making headlines as the past 24 months saw several large scale deals from SendWave, Paystack, and DPO Group. Learning, experience, regulation, and go-to-market timeframe are all benefits of acquiring companies. “When you are looking to launch a product into a market, there are several elements and know-how to be learnt, such as studying a new customer base, being granted licenses, technical costs, and the like. M&A activity can offer a way to fasten such processes,” explains Naghavi, providing context about MFS Africa’s acquisition strategy. In 2020, the company acquired Ugandan payments company Beyonic. In October, it acquired Nigerian digital solutions and distribution company Capricorn Digital, the parent company of Baxi, in an all-cash deal.
Expanding B2B to B2C and vice versa
A key point to emerge from interviews with founders is that payments companies are beginning to target new customer segments in order to sustain competition and growth. This is driven by a number of factors, including the ability to leverage existing infrastructure and licenses to broaden the customer base and the need to keep up with larger-scale competitors that are developing digital financial suites comprising multiple products. B2B models have traditionally been low-hanging fruit for payments companies, usually connecting banks with other financial institutions, small businesses and telcos. This was the model that transformed many of the sector’s earliest startups into multi-million-dollar companies. It was a ‘volume’ play that sought to interlink entities that were already online and familiar with financial tools, explains Grover.
However, the shift has seen B2B companies designing products targeted at consumers rather than businesses. But traditional business-focused companies that are exploring B2C products will likely face challenges. Marcello Schermer explains that “entire operating models will have to change” as companies look at mass-market products for individuals. This means learning about new segments and finding faster ways to grow, clarifies Schermer.
Peer-to-peer transactions and remittances are two areas of obvious interest. Indeed, payments companies are beginning to step into the mobile money space as telcos face competition from well-funded fintechs that are often able to move at a much faster rate. Nigeria’s OPay is a good example of a mobile money and financial services startup that is expanding rapidly in its home market. It raised $400 million last year to build on monthly transaction volumes that exceeded $3 billion, with five million registered app users. The raise was the single largest investment round by a payment startup to date in Africa, which represents a huge opportunity for fintech if they decide to aggressively enter the space of consumer-focused products.
Synergies with banks, regulators and government
Founders report that 2022 may be a “mixed bag” when it comes to tax and regulation in Africa. On the one hand, regulators across the region have started ramping up efforts to tax mobile money, in countries such as Uganda, Zimbabwe, Tanzania and Cameroon. In January, a brawl erupted in Ghana’s parliament as lawmakers traded blows over the introduction of a 1.75% levy on mobile money transactions. The disruption demonstrates just how controversial the issue is as founders and industry organisations are worried that tax-hikes will set back years of progress towards financial inclusion. Along with mobile money, there are concerns that governments - which have become more interventionist during the pandemic - may start setting limits on fees and interest rates for financial services.
However, most payments companies report that relationships with regulators have improved over the past few years. Regulatory frameworks are becoming more comprehensive and accepting of the coexistence of traditional actors and new, digital financial technology players. Many African governments have been working more closely with payments companies during Covid-19 to facilitate shifts to cashless societies, which led to an increased appreciation for the sector. Grover from Cellulant recalls positive interactions with regulators in recent months: “I had a conversation with a senior representative of one of the central banks, he said he wanted to meet me. Can you believe it? – They [central banks] are inviting us [fintechs] to have a conversation, and [even] asked us to suggest what some of the most important changes that needed to happen could be,” he says.
Many regulators across the continent are slowly moving towards creating stand-alone fintech licenses, which is set to fundamentally change the way payments companies interact with banks. Most startups currently partner with brick and mortar lenders to facilitate financial services without having to meet onerous regulatory requirements. Yet, as fintechs slowly evolve into legacy companies like banks, Grover remarks that “[traditional players] will have to accept that we are part of the financial ecosystem and we cannot operate without regulation”.
A few years ago, banks were defensively partnering with fintech companies to avoid the cannibalisation of their customers. This is beginning to change as some banks in Africa take proactive steps to compete with payments companies by providing similar services. There appears to be a gradual blurring of the lines between the two entities as fintechs begin to be regulated like banks and banks start to offer services as fintechs do. “This, however, does not necessarily mean that cooperation isn’t possible and, on the contrary," Cellulant’s CEO explains, “banks have become more open to partnerships over the last twelve to eighteen months than they historically were”.
Looking forward
It is increasingly clear that as the sector matures, companies are building out new growth models while doubling down on current strategies. The biggest unknown on the horizon is whether payments companies can sustain the incredible growth rates that they have engineered and experienced over the past few years, fuelled, in part, by the pandemic.
International players such as VISA, Mastercard, Stripe, AliPay, WhatsApp and the like are increasingly looking at Africa as their next expansion market. While M&A appears to be a go-to growth strategy for many such players, direct competition implies that local companies will need significant capital to retain market share and face global names, often sourcing funds from outside the continent.
On the other hand, although the debate remains unsubstantiated and controversial, some analysts predict that funding to the payments sector may decrease, as interest rates rise in developed markets and the global economy enters a slowdown that is not underwritten by trillions of dollars in government stimulus packages. Though this remains to be seen, the proliferation of Africa’s payments sector shows that the market is maturing and companies will have to think more deeply about positioning, appealing selling points and value propositions.
Written by Tom Collins | Edited by Lisa With, Dario Giuliani
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