My Fintech Wishlist for 2022;
Things I'd like to see happening within the African Fintech ecosystem next year
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Across the world, Banks are facing pressure to innovate so as to remain relevant in the 21st century. The pressure to innovate is being driven by both demand and supply factors. On the demand side, there are increasingly higher demands for improved user experiences and more intuitive customer journeys including deeper personalisation from financial services providers.
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Banks have to rethink their whole approach towards such core elements in the post-covid digital era. Digital Transformation efforts are underway in most banks in the continent. As these efforts proceed, banks must be careful when rethinking their processes and not waste this golden chance. At its core, banking is all about good data management and this has to be baked into digital transformation.
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2022 Wishlist Introduction
2021 has been an amazing year for Frontier Fintech and for African Fintech in general. For Frontier Fintech, the newsletter has really grown and the friendships I have made along the way have been phenomenal.
For African Fintech, total funds raised in the first nine months of 2021 exceeded the amount raised in all of 2020. In fact, investments into African Fintechs contributed to 60% of total VC funding in Africa. What is more, 3 new African unicorns were minted this year to bring to a total of 5 African unicorns all of which are Fintechs. It’s just ground zero for African Fintech and the larger start-up ecosystem. There are a number of reasons to be sceptical about the growth story, but similarly there are a number of reasons to be optimistic. I sit firmly in the latter camp of people who have a positive outlook on the African fintech and tech ecosystem in general.
As is the nature of any ecosystem, continuous improvements need to be made so that the full potential can be achieved. These range from policy improvements to changes in the way start-ups approach problem solving in the continent. As we wind down the year, I thought it’s important that I share my wish list for 2022 and dive deep into the areas I think we should work on to achieve the full promise of the African Fintech ecosystem. This will be my last post for this year as I break for the holidays. In fact, I think most of you are also winding down and won’t be opening your Monday morning emails as regularly over the coming weeks.
To wind down the year, I’ll review 4areas that I hope to see improvements. These are my wish lists for 2022 Fintech.
More investments into Crypto and De-Fi
From my experience and as is the case with Cryptocurrencies and Decentralised Finance, the biggest hurdle is largely a story telling hurdle. Right now the conversations that occur within this space are between enthusiasts and techies. Often, these are grouped into a seemingly negative moniker of “tech bros” all with weird looking pixelated cryptopunks as their Twitter profile pictures. The focus on the “enthusiasts” often overshadows the promise of what these people are enthusiastic about. In two posts that were well received, I detailed the use cases that Decentralised Finance (De-Fi) and Cryptocurrencies can solve in Africa. You can check them out here and here.
To understand the promise of Crypto and De-Fi, more stories are useful. When analysing Crypto, I tend to focus on the concept of financial inclusion or in the case of Africa, financial exclusion. Most discussions around financial inclusion in Africa tend to be reviewed from a very “NGO-like” approach, where the focus is on giving people access to store of value accounts, mainly bank accounts or mobile money accounts. Indeed this is a very important job to be done now and in the future. Nonetheless, there’s an upper bound to the levels of meaningful financial inclusion that you can achieve. Most surveys of the “financially excluded” show that “lack of income or cash” is a key reason why many people are excluded. This will remain the case so even if you create novel ways to include people, some will remain excluded.
The type of financial inclusion I prefer to focus on is the one that enables Africans to be part of the global financial system and participate as equal members of the system. This article by Justin Norman of the Flip called “Global Fintechs are Failing Users in Africa” is a great place to start. The thrust of the article is that restrictions on money movement, particularly US$ based money movements, often brought about by KYC considerations, is making it difficult for Fintechs to serve their clients. In this case, Justin was trying to send money to a freelancer based in Ghana from South Africa. He faced issues in the form of not only a failed transaction but a closed account. In the article, he echoed similar frustrations from Jason Njoku who tweeted the below;
Ultimately, Fintechs are layering beautiful UX on top of a traditional and largely unfair global financial system. As an ex-banker, what’s going on seems very logical, simply, a compliance department somewhere has flagged this transaction and it needs to be closed. As a normal person, this is fundamentally unfair.
The ability to move money globally in a non-discriminatory way is only solved through crypto and De-Fi. It’s the most intuitive way.
A story will suffice, when in Burundi, I was told a story of the former president, the late Pierre Buyoya. Whilst studying in Switzerland in the 70s, he once sent a letter to his father, telling him how life was in Switzerland. He sent the letter and waited patiently for a reply. It was definitely going to take more than a year to get a response. Two years later, he travelled back to Burundi to visit his family and particularly his parents. To get to his home, he needed to take two buses. One that would take him from the capital city Bujumbura to his native province and another one to take him to his village. After arriving at his native province and just as he was about to board a bus that would take him to his village, someone from the bus told him “if you’re going to this specific place, you’re better off delivering this letter to a certain Mr. Buyoya who comes from this village”. Two years on, it was the same letter that he had written to his dad. It was a crazy coincidence and one that highlights how inefficient the communications system was in most African countries in the 70s.
This story was told by Mr. Buyoya to his kids in the context of how modern technology had drastically changed how people kept in touch and communicated with each other.
After hearing this story, one thing I kept asking myself was how can modern money move in the same way that modern messages do? At the end of the day, isn’t a payment a message? The only native solution with this capability is Crypto. However, how will Crypto work when it’s a currency that exists outside the control of the government. As Mayer Amschel Rothschild said “Give me control of a nation’s money and I care not who makes its laws”. It’s one thing for governments to cede control of communications, it’s another thing totally to cede control of currency.
Having said this, my general view is coalescing towards the sense that it will be easier to drive crypto adoption across the continent even if it’s largely P2P than it will be to remake the global financial system.
Recent moves such as Square renaming to Block, Stripe “getting into” Crypto, the renaming of Facebook to Meta as well as the dizzying fund raises by both Moonpay and FTX show that global smart money is betting on Crypto. As a 2022 wish, I’d like to see more investments into Crypto and De-Fi particularly the enablement of on/off ramps as well as wider use cases such as lending and borrowing.
Open Banking and Data Sharing
My first ever article for Frontier Fintech talked about the potential for open banking in Kenya. Since then, my views have evolved. Open Banking is simply the ability to share banking data to a third party in a controlled and secure manner. Further, where payment capabilities exist, open banking should also involve the ability to initiate direct account to account payments from your bank account via a third party app.
The open banking movement in Africa is still nascent with very few instances of active regulator driven implementations of open banking. In the UK where open banking arguably originated from, the presence of a concentrated banking sector with big 4 dynamics coupled with very high financial inclusion rates meant that most financial data existed within the banking system, to drive innovation and better consumer outcomes, open banking was thought of as a smart and intuitive way of achieving this. This model has been copied in continental Europe as well as markets such as Australia, Brazil and New Zealand to varying degrees of success.
The African model will be different particularly in terms of outcomes. My general view with the African model is that the biggest innovations will come in the commercial account space for both SMEs and large corporations. This view is informed by both the existing levels of financial inclusion which in most countries across the continent are below 50% as well as the median ages which tend to range from 17-25. What these figures show me is that the core demographics for consumer driven open banking use cases are largely unbanked. In a recent article on B2B payment operations, I detailed the importance of innovating around not only B2B payments, but also payment operations. B2B payment ops for me are critical not only for driving efficiency within existing companies, but critically by lowering the barriers to entry for new companies. B2B payment ops can make mundane yet intimidating tasks such as tax reconciliations easier so that a new generation of businesses can scale.
To drive the kind of innovations in B2B payment ops and business banking in general, open banking is necessary. Ultimately, given the complexity and risk involved, this type of data sharing needs to be regulator driven and guided particularly when it comes to setting standards for data sharing as well as enforcing compliance across the banking sector. A major 2022 wish is seeing more action across regulator driven open banking mandates in the continent.
I understand that both Nigeria and Kenya are soon issuing documentation around open banking. In Nigeria, I understand that it’s likely to be a specification document whereas in Kenya it may be proposed guidelines with the view of getting feedback. Either way these documents are likely to be issued soon and they’re a step in the right direction. Tanzania and South Africa have both issued payment strategy documents that have open banking or third party data sharing as hallmarks of a modern payment strategy. In Kenya, improvements to Pesalink and the Kenya Electronic Payments System (KEPSS) where both are expected to operate on ISO 20022 from Q2 onward will be important for a proper functioning of open banking.
Embedded Finance Maturing
When analysing Fintech over the course of the year, I’ve realised that for Fintech to be truly transformational, it has to align to long-term economic objectives. One key objective is to drive economic growth through enablement i.e. creating opportunities where previously they didn’t. One major factor in enablement is the ability to reduce barriers to entry. Embedded finance being the integration of financial services into everyday services is a key plank in enablement. The results so far have been encouraging. Helium Health is already a key player in embedded financing with a BNPL option for medical payments as part of their offering. Helium Health are likely to be a major force in embedded finance as they’re embedding it into health which is a major spend category with little to no price elasticity of demand. To me it’s a very interesting company. Trade Depot recently secured a US$ 110 million funding round through a mix of both equity and debt financing. A major factor in the round is their embedded finance play where they have integrated both wallets as well as credit offerings through a BNPL proposition as well. Trade Depot’s CEO Onyekachi Izukanne had this to say in a Techcrunch article;
“Merchants are able to double or triple what they normally buy just because of this access. We think that these embedded financial services will be a key part of this narrative: Supply chain on the one hand, and everything related to financial services to make these businesses work on the other,...We think they go together. And the last year and a half have been defined by us focusing on bringing more of these embedded finance products to market.”
In Kenya, Twiga Foods has partnered with Pezesha for vendor financing which for all intents and purposes is BNPL.
Earlier this year I wrote a piece on Buy Now Pay Later where one of the key points was that BNPL in Africa will roll out differently from the Western BNPL play led by the likes of Klarna, Affirm and Square (now called Block). African BNPL will embed into either agriculture, commerce, health or education which can all be wrapped together as productive economic activities. In Europe and the USA, consumption is a key driver of GDP and thus consumption led BNPL makes sense.
Back to the point around enablement; when all these trends merge i.e. open banking and data sharing, robust payment rails and embedded finance, then the opportunity is not so much with existing companies, but with the new companies that will form. Existing companies across trade, manufacturing and agriculture will naturally find it difficult to embed technology onto their existing operations, new companies will form intuitively around the tech that’s being built and will be able to disrupt the incumbents. Embedded finance will have a key role. An example could suffice, every company in Kenya has to file payroll taxes on the first week of each new month; failure to do so even if you have zero employees attracts a fine of roughly US$ 100. Such factors should be embedded into a trade platform so that a new entrepreneur doesn’t have to deal with such mundane issues but can rather focus on growing their business.
My 2022 wish is to see the embedded finance space continue to grow and mature. Could African Fintech go the same way as Chinese Fintech, where the largest players either emerged from social or commerce?
Pro-Active Regulation
Regulators in Africa particularly the Central Bank of Nigeria have come under sharp focus in 2021. The case of Nigeria has been special because if you try to piece together all the different edicts that have been issued, the foreign currency shortage seems to be the common underlying factor. Nonetheless, regulators in Africa have been playing catch up and are often miles behind the market when it comes to understanding not only new technology, but new business models.
When you speak to regulators, you quickly realise that most regulators are extremely intelligent and thoughtful people. Their incentives are vastly different from the market’s incentives and rightly so. A case in point in Africa is the attitudes towards M-Pesa by both market participants and the regulators. For many market participants, particularly start-ups, M-Pesa is a giant monopoly that stifles innovation through a walled-garden approach to product development. This has been a refrain actually across Mobile Money in the continent. However, to a regulator, M-Pesa is a key factor in driving financial inclusion and enabling payments. Regulating M-Pesa is therefore not to be taken lightly given the systemic risks that can arise from a shutdown of M-Pesa. To this end, a regulator’s perspective differs significantly from an innovator’s perspective.
Having said this, I’ve realised that regulators are ill equipped to deal with the rapid pace of innovation that will occur from now on. It will be a drag to the whole economy over the long-term, if regulators do not keep up with the pace of innovation. In my view, the only way they can do this is by staying ahead of the game through technology research institutes. The most pro-active regulators in the world such as the Monetary Authority of Singapore as well as the Reserve Bank of India both have advanced technology research institutes. MAS has done it through the Asian Institute of Digital Finance which is a collaboration between MAS, the National University of Singapore (NUS) and the National Research Foundation. The RBI did it through the Institute for Development and Research in Banking Technology (IDRBT) in Hyderabad India.
What these two institutes do for MAS and RBI respectively is to ensure that they remain at the bleeding edge of technology and can actually drive societal outcomes through guiding research efforts. For instance, the IDRBT is working on 5G use cases for finance with one of them being enabling ATM’s to become virtual assistants given that 5G has higher bandwidths. If African regulators don’t embrace research in technology, there will remain a mismatch between the speed at which financial services are changing and the speed at which regulation is evolving.
I’d love to hear what your 2021 African Fintech wish lists include? Drop an email at samora.kariuki@frontierfintech.io or comment on the article below.
As always thanks for reading and drop the comments below and let’s drive this conversation.
If you want a more detailed conversation on the above, kindly get in touch on samora.kariuki@frontierfintech.io or samora.kariuki@gmail.com
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