Wednesday, January 19

Fintech investment in Africa: an overview


As a publicly traded pan-African equity portfolio manager, I am fascinated by the sheer amount of private equity that African financial inclusion (fintech) companies have attracted over the past five years. Venture investors, for the most part, have not paid attention to the most common risks cited by South African institutional investors, such as currency stability and / or availability.

Fintech companies in Nigeria, Kenya, and Egypt, for example, have raised a cumulative $ 1.2 billion in the past five years, nearly 1.5 times what exchange-traded funds have invested in those same markets during that time. period, which suggests greater optimism about the subsector than in general. markets.

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The performance of the few publicly traded payment companies on the continent has also reflected this cheerful consensus on the economic potential of electronic payments. Fawry, a leading digital transformation and electronic payment platform in Egypt, has outperformed the MSCI Africa benchmark by a factor of five since listing in 2019. Hightech Payments Systems in Morocco has outperformed the same benchmark in an extraordinary 13 times in the last five years.

It is well known how mobile network providers like MTN and Vodacom are participating in this R350 billion African fintech value pool. MTN’s leadership, for example, measured it on their Capital Markets Day in June of this year. It is perhaps less appreciated how African banks can benefit from the trend. For example, commercial banks in Kenya that early partnered with Safaricom while digitizing physical cash using its M-Pesa mobile money platform, dramatically increased share of the deposit market as M-Pesa became ubiquitous, surpassing the Legacy model of distribution through traditional bank branches. .

Another strategy that banks can employ involves creating payments infrastructure (and the value of the payment flows they enable) embedded within the banks themselves. For example, what Emerati bank, Emerates NBD, did with its merchant acquisition and issuer processing payments solution that later became London-listed Network International Holdings Plc. Or what the Royal Bank of Scotland did with its UK and international merchant acquisitions division, which became Worldpay.

Guaranty Trust Bank of Nigeria, the first commercial bank of its kind in Nigeria, was recently restructured to become a holding company with a limited payments business as part of its new stable of subsidiaries. Also in Nigeria, Access Bank is in the process of doing the same.

The most hidden case of such a spin-off may be Ecobank Transnational Incorporated (20% owned by Nedbank).

Applying the same valuation multiple that MTN and Airtel Africa used for their payments platforms that led to valuations of $ 5.5 billion and $ 2.7 billion respectively, ETI’s own payment spin-off could be conservatively worth $ 1 billion, a unicorn. tucked away in a banking group with a current market capitalization of just $ 300 million.

What the above illustrates is that in Africa, right now, there are many exciting developments and wealth that will be created by tech-savvy founders, Silicon Valley venture capitalists, incubators and accelerators, and the prophetic or lucky stock market investor. . But what about the man and woman on the street across our vast continent? What role, if any, do payment platforms and mobile money play in bringing Africa closer to the only economic goal that really matters: creating 15 million jobs each year to absorb young Africans entering the market? labor?

On the positive side, studies have shown that access to Kenyan M-Pesa has enabled more than 200,000 families or 2% of households to lift themselves out of poverty over the last decade due to increased consumption through platforms. digital. Women have benefited more than men from moving from rural subsistence agriculture to urban self-employment. These platforms have also provided a more efficient channel for sending remittances to rural populations, increasing their income and resilience in times of crisis.

Mobile money increased food security by 45% for rural households without access to a bank branch in Uganda.

On the other hand, during the same period that M-Pesa lifted 200,000 households out of poverty, around three million people entered the labor force. In Nigeria, for example, that number was close to 10 million. Still, job creation from mobile money is happening, but it doesn’t seem to be moving the needle at the moment and is unlikely to do so in our opinion.

Some economists have argued that we tend to overestimate the productivity (economic growth) impact of modern communications technologies like the Internet or, in this case, payments. Older technologies increased growth, created more jobs, albeit fewer billionaires, and even advanced communication time more than the Internet.

The telegraph increased 2,000 times the speed at which a message crossed the Atlantic. Then the fax machine improved that by a factor of 40 times, and then the email by a factor of only 15 times. Electricity is the great example. It was the phase shift that moved capitalism into high gear in direct ways like mass production, but also in unpredictable ways downstream. For example, electricity for the home eventually led to the widespread use of washing machines, which meant that instead of spending their time doing laundry, people were able to go out and do more productive activities that transformed the economy of the United States and the world. .

In short, financial technology, mobile money, and payments are an exciting and welcome evolution within African financial ecosystems. However, Africa’s population will grow by almost a billion in the next generation and the stakes could not be higher. What Africa needs most is the same enthusiasm seen in investing in technology and for innovation to become an investment frenzy in the kinds of areas that accelerated the first, not the fourth, industrial revolution, particularly in the fields of agriculture and land reform. , electricity, manufacturing, and capabilities that can’t be beat, like sanitation for the fast-growing urban poor.

The apps are good, but the jobs are better.

Godfrey Mwanza, Director: Absa Africa Stock Franchise


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