African fintech remains buoyant in face of global economic slowdown

With the world economy battling rising inflation and interest rates, global markets under pressure and a potential recession looming, Africa’s fintech start-up market remains a shining light for investors worldwide. 

Last year African fintechs attracted the eye of international investors and saw the emergence of a number of exciting new companies, such as Moove, MNT Halan and Paymob. Most of the funding raised for fintechs now goes to companies with operations in Nigeria, Kenya, Egypt or SA.

Reports compiled by Partech Africa estimate that cumulative African venture capital deals hit $6.5bn in 2022, an increase of 8% from 2021’s total fundraising of $6bn. As per Disrupt Africa, African tech start-ups raised about $649m in the first quarter of this year, and though down from the corresponding previous period are still attracting strong interest compared to other markets worldwide.

But why the interest in a continent not traditionally known for technology or finance? When it comes to financial inclusion Africa trails far behind the rest of the world, despite being home to more than 1.4-billion people. A report released by McKinsey, “Fintech in Africa: The end of the beginning”, estimates that the medium of exchange in 90% of all transactions in Africa is still cash.

This large addressable market, combined with potential for strong profitability, has attracted numerous fintech start-ups as well as global investors such as Sequoia Capital, Tiger Global, Apis Partners and Accel Partners, which see vast opportunities in the eventual move away from cash.

Another factor is improved connectivity. An increase in the number of undersea cables landing on our shores has improved the continent’s internet connectivity with the world. 

The rise and now prevalence of smartphone usage in Africa, along with cheaper and faster connectivity, is also an enabler for fintech solutions on the continent. These factors provide a strong catalyst for growth in the African fintech market despite the economic environment.

Africa is now home to nine fintech “unicorns” — companies with a valuation of more than $1bn. They include KuCoin, Chipper Cash, Flutterwave, OPay and Wave. KuCoin is a leading African cryptocurrency exchange platform, Chipper Cash and Flutterwave are digital payment platforms, and OPay is a mobile payment and financial services platform. 

Africa is not only attracting fresh capital for investment but is also starting to develop a notable track record. However, overall market conditions the world over are challenging. 

Central banks are raising interest rates aggressively, which has caused a decline in valuations. Start-up fintechs that are unprofitable have been hard hit given that the higher rates, the lower the present value of future earnings streams. The rising risks of a global recession and continued geopolitical uncertainties have weighed on growth expectations. 

Valuations for global listed fintech companies took a sharp decline in the second half of 2022, and so far this year these valuations have remained flat. On average the share prices of the major fintech businesses are down 63% through 2022, as per the non-profitable technology index. 

But investors are focusing on companies that have strong unit economics, in effect companies that have strong value drivers per customer and the ability to scale to profitability quickly. With capital becoming scarce, fintechs will need to prove they can become one of the winners in their spaces through differentiated products and the ability to scale. 

After attracting record capital in 2022, African fintech companies continue to attract global capital despite worsening economic conditions. The question is whether they will be able to continue that streak into 2023 and beyond. 

• The authors are with Dealmakers at RMB.