#78 - How to Win in the Next Iteration of SME Payments

Despite productivity challenges, SME's will continue to be critical to African Economies. The next wave is about using payments to power value added services. A handbook for the industry.

Illustrated by Mary Mogoi

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Introduction

The reports of my death are greatly exaggerated - Mark Twain

I’m a firm believer in the African SME story and its future potential. I think more and more SME’s will be formed and this will be the fastest growing vector in Fintech. My view is that SME Payments and particularly unifying SME payments will be a critical wedge to the broader SME enablement play. Nonetheless not everyone agrees with this view. At the beginning of the year, the Economist published an article called “Too Many Businesses, Too Little Business”. The premise of the article was that Africa has a significant productivity issue that ensures that large businesses are not being formed at the same rate as in other regions. The outcome is that we have too many SMEs that are actually masking unemployment figures. The graph below was used to show how Africa is not creating new large businesses vis-a-vis other regions. The graph shows that there’s a net-drop off in the number of billion dollar companies in Africa vis-a-vis other markets.

The core challenges cited were capital and electricity with the infamous US$ 5.2 trillion funding gap rearing its head again. Across social media and particularly LinkedIn, Africa’s intelligentsia quoted the article with their own takes. Resoundingly, it was as if the Economist has unearthed a major insight that we’ve all been getting wrong.

In my view, the hype to insight ratio from this article was off-the charts. These insights have been around for decades. Ory in an article on Quartz over a decade ago talked about how “We can’t Entrepreneur our way out of poverty”. Her argument was that we’re fetishizing entrepreneurship as a Panacea for Africa’s ills. Deeper productivity and governance issues still remain. A recent Moniepoint Informal Economy Report similarly cited unemployment as the biggest cause for entrepreneurship. These findings were similar to a MSME Survey done by the Kenya National Bureau of Statistics in 2016. All point to a massive long-tail of Micro SMEs that grapple with productivity and mask unemployment. Moreover, smart people in the continent know that there are major barriers to growth that are tied to leadership, the political economy and broader trade practices. That SME productivity is an issue is not in doubt.

The article nonetheless misses a critical nuance that would make it a more balanced take. In 1990, The International Institute for Labour Studies released a report called the Re-Emergence of Small Enterprises. The central idea was that across all major economies, there was a trend in key markers such as output and share of employment away from large enterprises and towards smaller enterprises. This finding was corroborated in a HBR study called Can Small Businesses Help Countries Compete?. This was published in 1990. The HBR article also noted a trend in share of production and employment moving away from larger enterprises to smaller enterprises. The core insight in the article was that it’s not about size but largely it’s about organisation. From the article;

But technological and economic developments are making possible a new kind of organization that combines the virtues of both. In this new organizational model, it’s not the size of a company that matters so much as the quality of the business relationships tying companies to each other. The key unit of production is no longer the individual company but a decentralized network of companies. Sometimes, these networks consist of vertical links tying small suppliers to large final assemblers. In other cases, the links are horizontal—binding together a number of more or less equal small companies. In both cases, these networks make possible continual innovation through a delicate balance of competition and cooperation, demands and support.

These observations in the 80s and 90s led to governments instituting more SME friendly policies and shifting focus from job creation to enterprise formation. The key factors that were driving increasing SME-fication across the world were;

1. Globalisation - Smaller firms increasing accessed global supply chains enabling them to be more productive and profitable;

2. Technology - The internet, improved communication and e-commerce enabled small companies to access tools that previously were only accessible to large firms. This is currently being accelerated by AI, social media and cloud computing;

3. Pro Enterprise Policy - Governments across the world are making it easier to register a business. This is being augmented by Digital Public Infrastructure across the world that helps in credit scoring, asset registration, digital payments and other services that empower SMEs;

4. Cultural Shifts - Young people across the world are seeing themselves more as entrepreneurs and less as career-men;

Too many small businesses is increasingly a global phenomenon and not just specific to Africa. The aim shouldn’t be solely to aim for a larger share of big businesses, but to increase the probability of success for the smaller enterprises. The article duly noted that capital is a big issue. Financial services companies in Africa should have this nuance in mind. Whilst there may be a productivity issue, how can we enable small businesses to thrive? This is the core thesis behind M-Kopa, Watu Credit, Capitec and Moniepoint. You can’t talk about SME’s in Africa without looking at global trends in SME formation. African markets will continue to struggle with productivity amongst both large and small enterprises. Nonetheless, the SME sector will continue to grow as it rhymes with the global trends driving small business formation.

This article will discuss how SME payments provide a wedge into providing the tools that enable SME productivity. The focus will be on Urban SMEs that have embraced digital payment tools and are aiming for growth. I argue that Fintech 1.0 which was useful for digital enablement has run its course, the next wave of Fintech and particular payments, will be more about data and insights that can be turned into higher value services that enhance SME productivity.

The African SME Context

Most people believe the media is biased. Anyone who doesn’t see this is paying scant attention to reality, and those who fight reality lose. Reality is an undefeated champion” - Jeff Bezos

The quote above is from an Op-Ed that Jeff Bezos penned in the Washington Post back in October 2024. The point is not that The Economist is biased, although an argument can be made here. The point is that analysing the SME space in Africa must be based on reality. Bezos’s call for realism applies to Africa’s SMEs. We must focus on what works, like technology-driven solutions, not media narratives.

Analysing the continent requires appreciating that it’s part of the world. It’s the same way the older generations talk of Manufacturing, specifically how Africa had a relatively strong manufacturing base post-independence that no longer exists. This debate can’t be genuinely had without looking at global trends in manufacturing. Manufacturing declined in the whole world and not just in Africa due to the China story. Looking at Africa as a unique entity that is not a part of a wider ecosystem misses the point.

That being said, the SME story is complex. The story of too many businesses is true. It’s also true that there are many SME’s in Africa that are developing both in services, trade and manufacturing that are solid sustainable businesses. These small businesses will continue to capture a larger share of the economy from both employment and total output. These small businesses are being powered by tech and particularly how tech powers productivity and enhances reach. I’m running a media company with very little Opex because of technology. I’m an SME in a highly specialised niche that can generate above average return? Am I amongst the too many businesses?

Africans need to learn to not only think for themselves, but trust their insights, conclusions and importantly instincts.

The image above speaks volumes. When the continent was being called a “Hopeless Continent”, the likes of MTN, Access Bank, Safaricom, Equity Bank, Helios and Celtel were expanding across the continent. Most of Africa’s giants were formed during this time. The Africa Rising era saw the birth of the Jumia’s and others that fell for the “increasing disposable” income story. Businesses formed during the Africa Rising story have struggled the most. Now, we’re being told that there are too many businesses. My bet is that taking the alternative view will bear fruit. If productivity is an issue, then tools that super-charge SME productivity will be valuable.

The SME Opportunity

The last couple of paragraphs can be summed up as: To succeed in Africa means understanding the nuance. There are no broad brushstrokes here. The Moniepoint Informal Economy Report highlights unemployment as a key driver of business formation, yet it also reveals that businesses lasting more than five years are often fuelled by passion. Strikingly, over 99.3% of surveyed entrepreneurs said they would return to their businesses even if offered a 20 million Naira (US$12,500) gift, over ten times Nigeria’s GDP per capita. This resilience signals a deeper truth: SMEs are not just a response to necessity but a foundation for sustainable growth.

Enabling large businesses is a worthy goal, but the immediate job to be done is increasing the probability of success for these small enterprises. Success isn’t about size alone, it’s about equipping SMEs with the tools to thrive, scale, and contribute meaningfully to the economy. Some will grow into productivity-enhancing corporations; others will remain sustainable small businesses. Either way, their success hinges on practical support, access to markets, technology, capital, and, crucially, efficient financial services. Tosin of Moniepoint captures this perfectly:

As a child, I learned to make my own toys since I didn't have any. By the time I was in university, I was helping other students and working-class people conduct research to make extra income. This was my first step into the informal economy. It was just a side hustle, so it never occurred to me to register a business and access tools that might have helped me build a practice. This ceiling is where most Nigerian businesses in our economy get stuck. - Tosin CEO of Moniepoit

The realistic take is that SMEs will remain the backbone of Africa’s economy, and their story is inseparable from the evolution of financial services. Technology, particularly in payments, is already transforming how these businesses operate, streamlining transactions, expanding reach, and unlocking new opportunities.

Payments are the lifeblood of any business, and for Africa’s SMEs, they’re a critical lever for turning resilience into growth. Efficient, accessible payment systems don’t just facilitate transactions, they unlock markets, improve cash flow, and pave the way for financial inclusion. In the next section, we’ll dive into Africa’s payments landscape to see how banking, fintech, and mobile money solutions are equipping urban bankable SMEs, like that mobile phone retailer in Lagos to thrive in a competitive world. The last decade of fintech built the foundation, payment gateways, wallets, and lending primitives. The next phase is about empowerment: delivering services that don’t just facilitate transactions but actively drive commercial success. Payments, as the lifeblood of any business, are at the heart of this shift.

This article focuses on urban bankable SMEs; businesses with formal or nearly formal structures and growth potential, like a tech enabled media company, a retail outlet in Nairobi, a mini-pharmacy in Accra or a small logistics company in Cairo. These are not the micro enterprises that operate in shacks by the road in a village. These are the SMEs poised to drive Africa’s economic future if equipped with the right tools, starting with payments.

Overview of Payments in Africa

When it comes to urban SMEs, studies by both Mastercard and Visa show that the adoption of digital payments is high. Across Nigeria, Egypt, South Africa and Kenya, digital payments adoption stands at over 90%. This growth is fuelled by a combination of traditional banking solutions, innovative fintech platforms, and the widespread use of mobile money (MoMo). In addition to these factors, necessity such as the recent cash shortages in Nigeria, Strategic benefits such as accessing wider markets due to new payment options as well as payments as a form of enhancing customer experience are all driving digital payments adoption.

This is the Fintech 1.0 wave that I mentioned earlier. I will give an overview of the SME payments landscape, focusing on banking solutions, fintech solutions, and mobile money solutions, while acknowledging the remarkable growth of digital payments.

1. Banking Solutions for SME Payments

   1. Traditional banks are a cornerstone of Africa’s SME payments landscape, offering essential digital services.

   2. Instant Bank Transfers: Nigeria’s NIBSS enables real-time payments, processing ₦600 trillion ($780 billion) in e-payment transactions in 2023.

   3. POS Systems: Millions of POS terminals are deployed, with Nigeria having over 3 million by mid-2024, processing ₦10.73 trillion ($14 billion) in 2023.

   4. Merchant Services: South African banks like FNB provide card payment and instant EFT services for SMEs.

   5. These solutions are reliable in urban areas with strong banking infrastructure, often complemented by fintech and mobile money elsewhere.

2. Fintech Solutions for SME Payments

   1. Payment Gateways: Paystack, Peach Payments, Ozow, Pesapal, Paymob, Fawry and Flutterwave enable seamless online payments, with Paystack processing over ₦1 trillion (US$ 625m) in July 2024.

   2. Cross-Border Payments: Fintechs like Verto, Waza and Onafriq facilitate international payments, vital for global trade.

   3. Value-Added Services: Tools like invoicing and payroll management enhance SME operations.

   4. These solutions are key for tech-savvy SMEs and e-commerce businesses, offering affordable alternatives.

3. Mobile Money (MoMo) Solutions for SME Payments

   1. M-Pesa in Kenya: Used by 95% of Kenyan SMEs, it facilitates over $300 billion in transactions annually.

   2. Mobile Wallets in Nigeria and Egypt: Platforms like MTN’s MoMo and Vodafone Cash are growing, supported by initiatives like Egypt’s Meeza QR code network.

   3. Accessibility: Extends to rural and informal SMEs, boosting financial inclusion.

   4. Its simplicity and adoption make it a backbone of SME payments in many African countries.

The table below gives an overview of the broader payments landscape. It shows how SME payments enablement is being done across the different markets.

Gaps with Existing System