Building a New Way to Pay
Within the emerging Fintech sector in Africa, the payment industry specifically has seen exponential growth. Despite cash being the most common method of payment, Africa is becoming a global leader in the use of mobile money, with platforms like mPesa facilitating transactions and financing across East Africa. Moreover, card payments is a rapidly expanding industry, as illustrated by the chart of Sub Saharan African transactions below. This is likely reflective of technology advances that make contactless payments faster and more secure than conventional cash transactions. What this means is that more and more African businesses are starting to accept new forms of non-cash payments. In South Africa, 75% of adults own at least one credit card. In fact, there are more cards in South Africa than people. However, only 6% of retailers currently have card acceptance facilities (Yoco 2015).
There’s a reason why card acceptance hasn’t kept up with the popularity of card payments and this has to do with the cost of traditional Point of Sale (POS) systems. Traditional sale registers are expensive to finance and take long periods of time to onboard/get approved. Mobile Point of Sale (mPOS) acts as a disruptor to this traditional industry. It lowers the barriers to entry because the sophisticated and expensive hardware is now on a tablet or phone that vendors already own, or can readily afford. The decrease in the price of smart devices over the last few years, and the continuing decrease in cost and increase in accessibility to data connections, will ensure that use of mPOS systems will continue to grow across the continent and other emerging markets. Sellers can onboard to an mPOS network in minutes by downloading an app and, depending on country specific regulations, can accept payments almost instantly. Gone in the wind are traditional, expensive point of sale registers. New Mobile Point of Sale systems have made it so you can have an all-in-one POS system that can fit in your pocket. Even though cheap card readers are currently required by the apps to pair with devices, providers of these extra pieces of hardware will also be under pressure as new technologies are added to smart devices that will break down barriers to entry even further. Below, we see research from a 2018 GSMA (Global System for Mobile Communications) report about how mobile internet connectivity is expected to change in the future.
Motivated by large addressable markets, many startups have chosen to enter the mobile payment industry as it has the potential to reshape and innovate the way that we conduct business on a day to day basis. The constant battle for mobile payment customers between Africa’s fintech sector and banks has sparked innovation in the industry as a whole. In fact, the recent explosion of mobile money has led to the intersection of mobile money with other financial products and services such as remittances, insurance, credit, working capital financing and bill payments. From companies like Interswitch that are disrupting the VISA/MasterCard/Bank/retailer relationship by facilitating the electronic circulation of money to Point of Sale, the payments industry is rapidly evolving to include more fintech related companies.
And the space is attractive for these payment systems too, margins on payments in Africa remain among the highest in the world, at approximately two percent of the transaction value according to McKinsey. Beyond the cheap price of mPOS systems, the technology is also attractive to vendors because they understand the incentives of mPOS companies.
So what makes a company in this space unique? There are certainly lots of players in the Point of Sale space. But the way that a company becomes unique revolves around differentiation via integration. POS companies are realizing that they need to be able to offer some value added service to the business itself, and as a result, many have developed an “Ecosystem,” a combined suite of products which gives vendors additional features to manage their business. This added Enterprise Resource Planning (ERP) feature gives POS systems the ability to earn a greater percentage of its merchants' total operating expenses in the long term by offering additional services like employee and inventory management. Companies like Yoco in South Africa have been able to effectively implement these strategies within their existing payment solution in order to attract customers away from competitors. This is also a catalyst for mPOS companies to generate sustained high rates of revenue growth compared to payments-only competitors. As customers start using them, it incorporates the POS systems into their own businesses long-term, which leads to consistent, long-term growth.
With Fintech being a hotly discussed topic in South Africa and the rest of Africa, notwithstanding the potential of the broader sector, at HAVAÍC we’ve identified the payment space within the Fintech sector as a catalytic enabler of commerce on the continent and as an industry to keep an eye on when considering investing in startups in Africa.