Africa currently hosts around 500 fintech firms, most of them in South Africa, Nigeria, and Kenya. The opportunities for them are vast as around two-thirds of Africans are still unbanked, despite 60% of the world’s mobile money passing through Africa. Johannesburg-headquartered investment bank Verdant Capital is one of the largest advisors to the fintech sector in Africa. Its managing director Edmund Higenbottam joined us to talk about the rise of the sector and its attractiveness to investors.
What are the main deals you’re working on?
We’re a mid-sized investment bank, we operate on a pan-African basis, we’re physically headquartered in Johannesburg but have done deals in 24 of the continent’s countries. We’re quite specialised – we really focus on financial inclusion, a variety of disruptive financial service providers whether credit-only, more traditional micro-finance banks or insurance. Over the last two to three years, the biggest part of our business has been financial technology, or fintech.
Why are people so interested in African fintech right now?
M-Pesa is a very interesting case study, and there are three key takeaways from it. The first is the successful case study for development finance. Development finance has contributed enormously to the development of Africa but at the same time it’s much criticised – are development banks only looking for larger transactions, is there more money coming from Western European and US governments, is that forcing them to look at bigger and bigger transactions and actually less developmental transactions?
I think there’s an element of truth in that but, equally, development banks have taken great steps to ensure they’re covering the full impact of developmental opportunities and taking into account that it’s in small and mid-sized transactions where they’re really additional and incremental to sources of private capital.
It’s also an interesting theme because it’s changed how people see money on the continent, but it’s also responding to constraints within the African continent, the fact that two-thirds don’t have bank accounts. In Nigeria, one of our clients, Capricorn, best known by its brand-name Baxibox, has a very successful product which until four or five years ago was focused on paying bills but is now expanding into a much broader range of payments on behalf of individuals who have bank accounts and individuals who don’t.
The third thing is that M-Pesa was launched around the time of the disputed election in Kenya, which led to many fatalities. Out of those tragedies, the adoption of technology changed. It’s about adoption by individuals, and sometimes you need to get a shock to get you over risk aversion. If you don’t want to go out of your home because of violence on the streets or because you’re nervous about catching Covid, that again is a potential spur in terms of the adoption of technology and that creates its own virtuous cycle which M-Pesa benefited from very significantly.
Fintech investment is beginning to record impressive numbers, but is there still a long way to go?
Financial services are a hierarchy and the lowest hanging fruit is payments. The next levels up are basic savings, and then credit, a more difficult financial service. The level beyond that is insurance – it tends to be a difficult problem to underwrite and lots of variables are taken into account in individual policies.
Payments have been a success story over 10 years and like most success stories it’s become very commoditised, less lucrative on a transaction basis for the operators. A lot of the interesting stories and opportunities are more about credit. It’s easy to lend money but difficult to get paid back, that’s the challenge. That’s the differentiator with credit. You only create value when customers pay you back.
Credit has spawned a number of opportunities in the sector – for example, companies looking to extend credit through fixed assets. One client for which we raised north of $10m this year in debt and equity is Tugende in Uganda, which does loans specifically for motorcycles, predominantly motorcycle taxis. The $1,000 loan is used for a bike. That individual then has an income every day. That bike is tracked so there’s no moral hazard in terms of looking to free ride and not pay the loan – the collateral can be recovered. Different models have entered the market to cure that credit risk angle.
How should fintechs be regulated?
The regulatory environment is different from country to country. You can’t jump to the conclusion that light-touch regulation is the right way – look at the US and Europe before the financial crisis. There are profound reasons why institutions that take deposits have to be regulated by central banks. So we have to have regulations, we have to have the right form that strips things back to first principles – are we protecting depositors, clients, insurance customers? But that doesn’t go any further than those basic pillars of protecting the consumer and the taxpayer.
What are the implications of fintech for the “gig economy” and Africa’s labour market?
The vast majority of the labour force in sub-Saharan Africa are working in the gig economy. Companies like Tugende can make things better for them. That individual can drive a bike, make a decent living, after two years pay off his loan and then he’s got an asset worth $800 – it might be the first thing he’s owned in his life and he might be able to get another loan secured against that asset.
I don’t think we’re going to take sub-Saharan Africa out of the gig economy and back to some sort of idealised view of how the labour market worked in the US in the 1950s. But we can improve the lives of the people who are going to work in that environment.
What makes Africa different in terms of opportunities?
Africa is a very large economy in total. It’s a big opportunity, it’s a number of different countries as far as regulations are concerned, as far as how businesses can scale up across borders. But taking it in total it’s a meaningful part of the global market.
Whether it’s different types of credit, different means of payment across borders, there are so many themes in Africa at an early stage that you may not be first mover but you can be second or third. You can get that real estate as a company, get in and get a significant presence in that market. You can take it from one to the next and build and build – you’re getting in at the ground floor.
In most countries economists forecast GDP growth. What’s really exciting are industries which benefit faster than GDP growth – assets in the financial sector should grow faster than GDP.
Listen to the whole interview with Edmund Higenbottam on the African Business magazine podcast.