In the developing markets of Africa, a growing wave of early-stage, high-potential tech companies are rewriting the rules of trade by digitising the continent’s vast informal financial sector.
One African-born startup at a time, investment into tech innovation is helping to solve fundamental problems faced by communities on the continent and beyond.
Over the past seven years, venture capital deals grew almost 1,000%, from US$186 million in 2015 to US$2,1 billion last year. And this year is no different - seven months in, and 2022 is already breaking records for both funds raised and deals secured. Accounting for about 50% of all funding raised are FinTech startups pioneering technologies that leap-frog the need for the lacking traditional infrastructure while addressing critical challenges for huge and largely untapped target markets.
Transforming Africa’s financial systems
Far from forcing the continent’s small, medium, and micro enterprises (SMMEs) - who deal almost exclusively in cash - to formalise their economic footprint and reform to inaccessible payment mediums, Africa’s rising FinTechs are creating innovative financial products that reflect the realities of Africa’s vast informal trade sector.
Despite the high rates of financial exclusion in sub-Saharan Africa, where up to 65% of adults are unbanked, trade thrives. But in the absence of accessible financial services, trade remains informal, transactions are conducted primarily in cash, and communities remain hindered by the limitations of these cash-fuelled economies. The unbanked have no formal access to credit and vital financial services like pensions, high-interest savings accounts, or insurance.
Despite its limitations, Africa’s informal sector is a formidable employer, says Matt Kloos from CompariSure, a HAVAÍC portfolio company. According to recent reports, a third of commercial activity and more than 85% of employment on the continent is in the informal sector, illustrating the breadth of the market opportunity at hand. These economies, adds Kloos, while informal, are quite evolved and have been built up over many years. They are trusted and understood by end customers.
The economic potential of digitisation
The digitalisation of informal SMMEs and unbanked Africans means creating a digital trail that builds a case for credit applications and other vital financial services. Access to tech, credit, and insurance is breathing life into the continent’s vital small business sector. Businesses can better collect and transform data into insights that make transactions more productive. In turn, this data-driven commercial activity breeds new avenues for unlocking economic potential.
FinTechs are leaning into the continent's high growth in mobile penetration rates to deploy decentralised financial services and increasingly digitise deeply entrenched cash transactions. Given that 50% of people in sub-Saharan Africa will subscribe to mobile services by 2025 (GMSA), mobile phones will remain key to scaling tech solutions across communities and eventually borders, with growth primarily coming from the continent's burgeoning tech-savvy young consumers.
In keeping with HAVAÍC’s investment mantra to scale with impact, the venture capital firm’s portfolio companies are wasting no time putting more power into the hands of Africans. Founded in 2018, Kenyan FinTech startup Tanda enables informal shop owners to access inventory on credit, offer digital financial services, accept utility payments, and provide banking and insurance products via both cash and digital payments. Tanda is opening up the financial ecosystem by giving unbanked Africans access to essential services and interoperable digital payments via its mobile app.
Similarly, the latest addition to HAVAÍC’s portfolio, FinAccess, is an East African-born software solution that digitises community banks and co-operatives in the region. The latter contributes over 70% of all agricultural output in East Africa, yet their operations remain outdated, manual, and very inefficient. Digitisation opens the door to partnerships with financial institutions and ultimately releases credit so co-operative farmers can increase productivity.
Talk360, another leading HAVAÍC investment, is leveraging its universal calling solution to launch a pan-African payment platform that accepts over 160 payment methods in any currency. And buoyed by HAVAÍC’s portfolio ecosystem, Talk360 is collaborating with the likes of Tanda to serve unbanked communities and accept cash for digital services through a single platform.
Talk360's Jonathan Katende further explains that the biggest opportunity for traditional businesses and tech entrepreneurs is selling to a market that has long been underserved. And what other scalable option is there than digitising these types of services, he adds.
CompariSure is also bringing cash transactions online by converting first-time online shoppers with its chatbot solutions on mobile apps like WhatsApp and Facebook. And CrowdForce, which joined forces with HAVAÍC last year, is layering digital products on familiar offline activities to bridge the gaps that keep marginalised communities offline. When their breakthrough technology launched in 2018, CrowdForce leveraged its existing data collection network to demystify its use. Today, the tech turns any merchant into a mobile bank branch that offers financial services and utility payments in underserved areas.
Scaling beyond borders
Africa is becoming increasingly interconnected, and there’s remarkable potential to grow between verticals and expand into bordering markets with a similar economic landscape. According to the UN Economic Commission for Africa, informal cross-border trade is estimated to be between 7 and 16% of the formal intra-African trade flows - held back by the lack of access to financial services.
Given that emerging FinTechs are peeling back the financial ecosystem to empower previously marginalised communities, adds HAVAÍC Managing Partner Ian Lessem, there is no limit to the trade and commerce possibilities on the continent. FinTech growth and the potential for digitised commerce in Africa is a very exciting story.