Kenyan-based FinTechs raised $204 million between 2010 and 2017 leading the pack of East Africa countries, a study has unveiled.
A study into the Investment opportunities in FinTech in East Africa” compiled by the East Africa Venture Capital Association (EAVCA), Intellecap, Financial Sector Deepening-Africa and FMO, and UKAid, says that with the increased success financial technology (FinTech) players in East Africa, investors are keen to understand the opportunities available for capital deployment in East Africa’s FinTech space.
Some of the FinTechs in the region include M-Kopa and Azuri, Tala, Branch, Shika among others.
According to the report, total regional investment in FinTech companies in east Africa between 2010 — 2017 now stands at $202.1 million.
The amount raised contributed to 28% of all the investments to FinTechs in the period.
“Most East Africa focused funds have their head office in the country. The local presence makes them feel comfortable investing in where they have a physical presence as they have local expertise in deploying capital. Kenyan entrepreneurs have a more approachable nature as opposed to the rest of the countries.,” the report reads in part.
The study reveals that lending FinTechs have seen increased interest by funders in the past three years; raising about $390 million.
“In order for FinTechs to grow and scale, they require a good balance of equity and debt financing. However, access to debt financing locally has been a challenge resulting in lack of exuberance by FinTechs. According to investors, FinTechs that raised funding between 2014 and 2015 have not demonstrated enough traction and thus most of them have not been able to raise subsequent rounds of funding resulting in a slowdown in number of investments in 2016 and 2017,” the report states.
East Africa has always been hailed as the torchbearer to the FinTech industry, driven by the same key disruptions as the global FS world – use of alternate data, peer to peer transactions, and the rise of non-traditional players offering financial services.
Here are some of the key drivers of the rise of FinTechs in the region:
The principle enabler in the region has been strong mobile and internet penetration, in the bottom of the pyramid (BoP) segments, which have driven success using basic ussd technology.
The second key enabler was the gap in the financial services landscape across all key dimensions and markets – lending, savings & payments, and personal financial management, which allowed the FinTechs to come in with a strong value proposition.
According to the report, lending FinTechs took advantage of the bank-led lending being focused on the corporate segments, and penetrated into the BoP – nano lending segments.
“There is however, still a large gap in the MSME and mid income segments such as asset backed finance, education finance etc. that FinTechs can easily tap into. Instant lending driven customer experience has also been a big customer value proposition for the FinTechs. Risk based pricing is another key value proposition that FinTechs are providing vis-à-vis the traditional lenders.” It points out.
Apart from Kenya, the deposit penetration and access to banking services in the other East Africa countries is relatively low. Therefore, mobile wallet based FinTechs allowing customers to save money that is instantly accessible and payable has emerged as a strong value proposition.
The East Africa region has experienced rapid advancement in the payments sector over the last decade. While Kenya is regarded as the most mature payments economy in the region, Tanzania is displaying faster growth, both in payments migration and transaction KPIs. Despite the advancement, the sector is challenged by technology (interoperability), regulatory and pricing constraints which present more opportunities for FinTechs.
From a PFM perspective, East Africa is a low insurance/investment focused market, and it will be tough for FinTechs to make an impact, except where the value proposition is exceptional, such as aggregation/price comparison engines, data based premium calculation etc.
Fintechs lack innovative business models
Investors note that local FinTechs lack innovative business models and thus those established outside of the East African region tend to raise more funding than their locally-established counterparts. This is despite the fact that 58% of all the FinTechs are established within the East African region. FinTechs established outside the region are able to raise much more funding than their local counterparts since most of them have the relevant international connections with international investors.