The African Financial Services Ecosystem - Is FinTech Actually Important?
If the last six months living and working in Nairobi’s financial services industry has taught me only one thing it is that the industry, the country, and the continent, are ripe with opportunity.
All of the market indicators are there:
Population Growth will reach 2.8 billion by 2060 according to The World Bank. Second only to Asia on a regional basis, and well ahead of the Americas and Europe. Within that growth rate, the youth population is growing faster than in any other region, with roughly 70% of the continent’s population being under 30 years old.
Consumer Spending is anticipated to hit $1.4 trillion by 2020, driven predominantly by a rising middle class with increasing purchasing power. GDP per capita has already climbed above the $1,000p.a. level in many countries.
Internet Penetration has increased 6,839% in the last 15 years, and is expected to hit 79% by 2020. Tech has been playing an increasingly significant role in pulling millions out of poverty and pushing up consumer spending rates. As people have been increasing their purchasing power, they have maintained this taste for technology and innovation.
Access to Finance an estimated 20% of households have access to formal or informal finance channels. This presents a tremendous need but also a once-in-a-lifetime market opportunity.
Early movers are already setting up shop as major international companies (e.g., Airbnb, Uber, Facebook, Google) have begun expanding into the continent; all betting on Africa as a significant source of future revenue growth.
This is not to say that challenges do not exist. Financial services institutions that are already present on the continent are experiencing many of the same global trends experienced by their peers in more developed markets, including:
An increasingly educated, empowered and demanding consumer base, and
Increased competition and changing market dynamics
African consumers (at the danger of over generalizing) are becoming younger and more technologically sophisticated and accustomed to end-to-end digital access and customer experience. At the same time, they are increasingly wary of financial services institutions, and the products that they sell. This presents a significant challenge for financial services institutions in reaching a major segment of the population and a significant source of future revenue. It also presents a tremendous growth opportunity however for those companies that are able to crack the youth market.
The African growth story is not a new narrative, nor are discussions of the vast untapped potential of financial services on the continent. The continent’s prolonged rapid growth amidst slowing developed economies has led to a significant increase in competition in recent years. Some of which is coming from domestic up-starts (e.g., M-Kopa, Zoona, EasyEquities, M-Pesa), some from new international entrants (e.g., Barclays, HSBC, Goldman Sachs, CitiBank, AXA, JPMorgan), and some from other sectors that are eyeing a move into financial services (e.g., Safaricom, Google, Facebook).
The result of these changes in consumer expectations and competition, coupled with the tremendous opportunity that exists, is resulting in a race to innovate, differentiate and meet this large untapped consumer market. For financial services companies in Africa, the window of opportunity to break away from the competition through superior strategy and innovation, will continue to close rapidly with new entrants entering the market on the regular. For those companies that are serious about defying the norms and breaking away from the pack, there are several options; options that are becoming increasingly popular internationally, but are still only beginning to gain traction throughout Africa.
Innovation & Growth Strategy: Introducing FinTech
It is impossible to discuss strategy and innovation within financial services, and not talk about FinTech. FinTech is playing a central role in dramatically disrupting the industry on a global scale, and it stands to do the same in Africa.
However, financial services institutions in Africa don’t necessarily need to be as threatened by the rise of FinTech as their counterparts in more developed markets may be. Here, the opportunity exists to expand market opportunities for all and to potentially bypass one, or several, steps in the market development trajectory.
FinTech actually offers the established financial services industry solutions to many of the challenges they are currently facing including engaging the youth population, reaching Base of the Pyramid (BoP) consumers in a profitable manner, and increasing market penetration outside of urban centers. The question that remains in the minds of many industry leaders, is exactly how to best engage and leverage FinTech.
Here are five strategic options that African financial services institutions have to innovate today, break-away from the competition, and set themselves up for success in tomorrow’s market:
Partner with local FinTechs to reach new markets
Partner with international FinTechs to bring global insights into process optimization and improved consumer experience
Develop (or sponsor) an external FinTech accelerator or incubator
Develop a FinTech M&A strategy to bring the latest and greatest FinTech in-house
Build innovation capabilities (e.g., Corporate Venture Capital, FinTech incubation) into Corporate Strategy Office
How can investors and start-ups take take advantage of these opportunities and partner with established African financial services leaders ? We’ll save that discussion for another day…
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