Frontier Fintech GPS #3 Sept 18th 2024

Why M-Kopa's troubles with the tax authority should worry you. Paymob expanding into the Middle East and why M-Pesa could be building the foundations for SME Lending.

Artwork by Mary Mogoi - Website

Hi All, Welcome to the 3rd edition of Frontier Fintech GPS where I provide key insights on the top global Fintech news items that matter to you. This newsletter will be arriving in your inboxes every Wednesday morning. The idea behind Frontier Fintech GPS is to help you navigate the endless stream of Fintech news and get smart about global Fintech. To those who are yet to subscribe, hit the subscribe button below and share with your colleagues and friends. 🚀

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🇰🇪 Kenya’s Most Funded Fintech M-Kopa Fined KSh 885.87 Million in Taxes in Jurisdiction Dispute

In a recent ruling, Kenya's Tax Appeals Tribunal partially upheld a tax assessment against M-Kopa Holdings in the case M-Kopa Holdings vs. Commissioner of Legal Services & Board Coordination, involving a total tax claim of Kshs 885.87 million (US$ 6.8 million). The dispute centered on whether M-Kopa, a UK-incorporated company, was a tax resident in Kenya, making it liable for Kshs 608.18 million in withholding tax (WHT) and Kshs 22.48 million in Pay As You Earn (PAYE) taxes. The Tribunal concluded that M-Kopa’s Place of Effective Management (PEM) was in Kenya due to key decisions being made by its senior management in the country. While the Tribunal upheld WHT on interest for the period after November 2019 and PAYE on employee stock options, it set aside WHT assessments for the period prior to November 2019 and on redeemable preference shares.

This is expected to be a landmark ruling for a number of reasons. The tax tribunal in Kenya found that despite M-Kopa Holdings being registered in the United Kingdom, its “Place of Effective Management” was in Kenya therefore meaning that it should be subject to Kenyan tax. The taxes applicable were then applied on two critical issues that are the main driver for Off-shore registration (Delaware, Dubai, UK); Withholding tax on preference shares and withholding tax on stock options.

1. On withholding Tax - M-Kopa Holdings issued the redeemable preference shares to its non-resident investors, who provided funding. These investors included shareholders from various global entities, represented by directors on M-Kopa's board. The Tax tribunal determined that payments based on these preference shares were debt repayments and therefore the “deemed” interest qualified for withholding tax. M-Kopa argued that the preference shares were equity and not debt given that there was no fixed interest or repayment period;

2. On PAYE - The tax tribunal determined that stock options issued by M-Kopa holdings qualified as a taxable employee benefit and therefore qualified for Pay As You Earn (PAYE) tax. When the employee exercises the option (i.e., buys the stock), the difference between the market value of the shares and the exercise price is treated as a taxable benefit and is subject to taxation under PAYE.

Some thoughts on this;

1. Most start-ups register in Delaware given that most funds are raised from global VCs who understand and accept Delaware company law. Part of the attraction is the ability to issue stock options as you scale as well as the flexibility on capital structure when fund-raising. This ruling really throws this into a tail-spin at the very least because it makes it more expensive to run a start-up from a tax perspective. To be fair, other jurisdictions similarly charge income tax on stock options as well as WHT on redeemable preference shares whether they’re debt or equity;

2. This ruling may enable a cascade of similar cases across the continent particularly in Nigeria. African countries are facing a debt crisis and are therefore facing incredible pressure to raise taxes. The way this actually works through the system is departmental targets within the respective tax authority;

3. The challenge with M-Kopa was that it was big and successful. In Africa, nobody attacks a small dog. If you’re a fast growing start-up, start thinking about tax compliance. If you’re just beginning, embed tax compliance from the beginning. When you’re big, you’ll either be scaling or dealing with tax ghosts from your past;

🇪🇬 Paymob raises $22 million in Series B extension round

Egypt-based fintech Paymob has raised a $22 million Series B extension round, bringing the company’s total Series B funding to $72 million. The funding was led by EBRD Venture Capital with participation from Endeavor Catalyst, along with existing investors, including PayPal Ventures, BII, FMO, A15, Nclude and Helios Digital Ventures. The firm claims to have recorded 6x revenue growth since the initial Series B funding in Q2 2022 and has now set its sights on expanding further across the Middle east and North Africa.

Paymob is a payments company. Simply think Paystack of MENA. Generally these companies were formed on the basis of how difficult it was for e-commerce merchants to receive payments. After solving this problem, they’ve found success with traditional businesses such as FMCG, Insurance companies and other traditional industries. Key products often include merchant POS, online payment acceptance, payment links, card issuance and virtual accounts. Paymob is already profitable in Egypt and is eyeing the entire MENA region including Pakistan.

It seems that one of the tail-winds for Egyptian start-ups is their ability to scale into the entire MENA region given similar language and culture. This may not necessarily apply to companies founded in Kenya or Nigeria in the sense that being in Kenya doesn’t give you any natural advantages in Tanzania or Uganda. The same applies for Nigeria although this is tempered by the fact that Nigeria is a massive market. Additionally, Paymob has proven just like Flutterwave and Paystack that an initial wedge of payment acceptance can lead to higher value services such as remittances, SME tools and SME lending. The control point of payment acceptance is a useful advantage for lending given that you can collect and explains Moniepoint’s success in Nigeria.

🇰🇪Visa partners with Safaricom for Payment Acceptance - Merchant Ecosystem

Visa has awarded Safaricom a payment facilitator certificate, strengthening its ongoing partnership with the telco. The expanded collaboration aims to diversify payment acceptance models by introducing card payments supporting all card networks through Visa’s CyberSource payment gateway. This move is part of an ongoing multi-year partnership that began with the successful launch of the M-PESA GlobalPay Visa Virtual Card in June 2022. A payment facilitator (often abbreviated as PayFac) is a service provider that enables merchants—referred to as sub-merchants—to accept Visa payments under the payment facilitator's merchant account. This model simplifies the process for smaller merchants to start accepting payments without the need to establish their own direct relationship with an acquiring bank. Key services offered by a PayFac include;

1. Merchant Onboarding;

2. Transaction Processing;

3. Risk Management;

4. Settlement & Funding

The context here is that M-Pesa already has over 600,000 merchants on its books and this number is expected to grow significantly in the coming years. With this, I think the play is to enable merchants accept both off-line and on-line payments through the visa network. This will give M-Pesa wider visibility into a merchant’s entire business and cash flows and I think this is the basis for a really strong SME lending proposition. An up-coming article discusses how Mobile Money is well equipped to build world class small business banking capabilities in the continent and how this is the next billion dollar opportunity. Additionally, visa payment acceptance into the Safaricom network would be a boon to Kenyans doing global remote work.

🇪🇬 Egypt-born FlapKap raises $34 million pre-series A to scale SME financing across MENA

FlapKap, an Egypt-born and Abu Dhabi-based fintech platform, has raised $34 million in a pre-Series A funding round nearly two years after securing $3.6 million in seed funding, bringing the company’s total funding to $37.6 million. The round, which includes debt and equity financing, was led by BECO Capital and saw significant new investment from Pact VC, with follow-on contributions from A15, Nclude, QED Investors, and debt financing from Channel Capital. The fintech company will use the new investment to expand its small and medium enterprise (SME) financing services across the Middle East and North Africa (MENA) and the Gulf Cooperation Council (GCC) region.

Similarly to Paymob, Flapkap is showing the value of using Egypt as a base for expanding into the wider Middle Eastern market. Globally SMB lending is a critical vector given the over US$ 5.2 trillion SME funding gap. Different approaches will be taken. Paymob will use visibility into collections, MNT Halan will use an e-commerce wedge and Flapkap is relying primarily on advanced data analytics and especially embedded finance to approach this space. A question I keep asking myself is “can you name 5 large cap companies in each African market that have been formed over the last 10 years?”. It’s a difficult question to answer. A number of African giants were formed in the early 2000s think the current crop of Telco and Banking giants. Part of the reason is the growth of global tech solutions disintermediating traditional businesses like Media and Entertainment and Chinese exports hollowing out manufacturing. Subsequently, businesses are left to compete in services and trading where scale is difficult. When you mix in the continent’s demographics, it’s clear that most businesses that will be formed will be SMEs and stay SMEs. 

🇳🇬 🤝🏿 🇰🇪 Risevest acquires Hisa App

Nigerian fintech Risevest has finalized the acquisition of Kenyan investment startup Hisa. This acquisition will allow Risevest to enter the Kenyan market without needing new licenses. The deal is Risevest’s second acquisition within the year, following its purchase of Chaka, another Nigerian fintech company, in September 2023. Hisa will continue to operate under its current brand, retaining its staff and leadership, with Eric Jackson transitioning from CEO to Chief Technology Officer (CTO), while co-founder Eric Asuma will serve as Strategy Advisor. Leah Njoroge, Hisa’s Finance Associate, will become Head of Operations, reporting directly to Risevest CEO Eke Urum. 

The acquisition enables Rise to enter the Kenyan market without going through an arduous licensing process. Interestingly, despite the two companies launching their flagship products at around the same time, it’s Risevest which has grown to over 600,000 customers. This speaks to the size of the Nigerian market viz Kenya or it could even speak to the volatility in Nigeria viz Kenya.

The growth of Risevest and Hisa Apps have been driven by a growing demand for dollar based savings and investment opportunities given the macro-economic volatility in the continent at the moment. Key products offered by both are access to US stocks, crypto and US$ based savings options. The challenge with such businesses are three-fold;

1. Africa generally has low GPD per capita and moreover a low savings rate given the persistent current account deficits. This then raises doubts about how big an investment app can truly be;

2. If indeed these apps take off to a sizeable level, then it’s more than likely that incumbent banks or asset management companies can offer a similar proposition and ride on the trust that comes with their brands. Standard Chartered is already doing a good job at this.

3. If this happens, then naturally a point of differentiation would be customer experience and innovation at the app level. Nonetheless, how much of a differentiator is CX when it comes to investing?

🇳🇬Fincra Technologies Limited secures International Money Transfer Operator (IMTO) licence in Nigeria

Fincra, a financial technology company established in October 2021, has secured an International Money Transfer Operator (IMTO) license from the Central Bank of Nigeria (CBN). This license enables Fincra to integrate cross-border payment services into its offerings, allowing efficient management of funds transferred from overseas to Nigerian recipients. The IMTO licensing framework was introduced by the CBN to deepen the remittance market by licensing non-bank operators to offer money transfer services. The Central Bank of Nigeria updated it’s IMTO licensing framework earlier in the year. The key updates involved;

1. Increasing the capital requirements for both locally registered and foreign IMTO’s to US$ 1 million;

2. Increasing the application fee to NGN 10 million (US$ 6,000); &

3. Surprisingly, barring banks and fintechs from engaging in IMTO business;

The last restriction is interesting because how else would these services be delivered if not through some form of technology. Nonetheless, despite this restriction, Fincra still managed to get its license. An IMTO is permitted to offer remittance services for in-bound, low-value person to person transfers. Restrictions apply on business to business transfers, outbound transfers and purchasing FX for settlement locally. The restrictions are in place ostensibly to ensure participants adhere to AML regulations. Nonetheless, a large driver for this is controlling capital flows in what is effectively a managed capital account. 

Additionally, the FX margins largely accrue to the banks. Despite this, there is still a large market given that Nigeria is Africa’s largest remittance market with over US$ 20 billion in remittances. Moreover, Fincra is looking at offering this service to individuals who use their other payment services therefore it seems that this is a margin expansion product rather than a core product.

🇯🇵 Japanese banks pilot stablecoin-based cross-border payments

Japanese banks MUFG, SMBC and Mizuho are participating in a pilot using stablecoins and the Swift network for cross-border payments. The cross-border transfer market reached $182 trillion in 2022. However, the G20 has identified four critical areas — cost, speed, access, and transparency - that need improvements. The banks are working with digital asset infrastructure startup Progmat and blockchain firm Datachain to see whether stablecoins can address these issues. Project Pax's cross-border transfer platform will use stablecoins and blockchains instead of correspondent banks. However, it will also use Swift's existing API framework for banks to instruct Progmat to settle on blockchain networks.

Part of the reason why the banks are using SWIFT is due to its chops in KYC/AML and compliance. Stablecoins are becoming a major consideration for global remittances given the speed at which settlement occurs. I’m working on an up-coming article on how stablecoins can impact cross-border remittances and how banks should think of them. The money in M-Pesa is a stablecoin, they are Kenyan Shillings that are on-network i.e. exist in the M-Pesa network and are tradable 1 for 1 with cash. All the money in M-Pesa must sit with a regulated commercial bank and be held in trust. The ability of this money to sit on the network enables instant payments. Stablecoins as envisaged by the Japanese banks just take this to a cross-border perspective. I see this as a big trend in African Fintech for the coming years.

🇺🇸 Glean Raises $260 Million to Expand Work AI Platform

Glean has raised $260 million in a Series E funding round, doubling its valuation to $4.6 billion. The funding will accelerate the company's AI innovation, customer acquisition, and global expansion of its Work AI platform, which helps enterprises connect and deeply understand their data, people, processes, and context. Originally launched in 2019 as an AI-powered enterprise search engine, Glean's platform now includes an AI assistant and tools for building custom generative AI apps. Glean users can for instance query their leave days or process information on the internal AI. It also introduced Glean Assist, an embedded solution for Zendesk and Salesforce Service Cloud, aimed at improving customer support. 

The funding round was co-led by Altimeter and DST Global, with investors praising Glean's AI technology and growing customer base. Glean aims to make AI accessible to all knowledge workers by enhancing enterprise search and offering generative AI capabilities.

Glean was founded by former Rubrik Co-Founder Arvind Jain. Some key highlights;

1. Glean is proving a thesis for start-ups built on the premise of enabling companies to adopt AI. Globally different companies have different workflows, data siloes and document handling processes. Migration to AI won’t be a one-size fits all from an onboarding and utilisation perspective. There is a large white space out there for start-ups to help traditional companies become AI ready. Hebbia is another good example;

2. Arvind Jain is a former founder, particularly of a cybersecurity company. It helps when founders start companies in which they have an existing advantage. In the case of Jain, it was enterprise sales;

🇺🇸 Citi Includes ‘Flex Pay’ Option on Its Travel Booking Platform

Citi has introduced its buy now, pay later (BNPL) service, Citi Flex Pay, on its travel booking platform, Citi Travel. This allows Citi cardmembers to book travel experiences, such as flights, hotels, and car rentals, and pay for them in 12 equal instalments without fees or interest for 12 months. The service is available for purchases of $75 or more, requiring no additional application. Citi Flex Pay is part of Citi’s broader effort to offer flexible payment options, with previous integrations on platforms like Amazon Pay and Costco, making it a key component of Citi’s lending suite.

I’ve written about BNPL here before, the article is a good summary and is still relevant. Large banks continue to innovate on their product offerings and I’m always reminded that being first to a market does not necessarily mean winning in that market specifically for a “hair on fire” market like BNPL. BNPL is a different product to credit cards given that you can spread out your repayments over a long period of time and theoretically incur lower fees viz a traditional credit card. With Citi Flex pay, members continue earning rewards just as they would with their existing credit card.  An advantage that banks have in this space is distribution plus lower cost of funds meaning that they can effectively out-compete start-ups such as Affirm on price. In the context of Africa we have also seen local banks launching their own BNPL propositions. The challenge for a start-up is of course that if you’re competing on price you’d lose. You’d then end up focusing on the markets in which the bank is not focusing on such as clients who are less creditworthy leading to higher defaults.

With such dynamics, the options are either;

1. Become a bank like Klarna;

2. Run a marketplace or e-commerce storefront like Affirm; or;

3. Embed your service into a company that has distribution - think Omnibiz;

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