[Column] Kim Humby: Fintech innovators reveal four core challenges for Africa
At the inaugural African Fintech Unconference, organised by Nomanini and the Bankable Frontiers Association with the support of the Mastercard Foundation, a cross-section of professionals from the local and global fintech sectors gathered for two days to discuss key opportunities and challenges for fintech in Africa.
More than 40 African fintechs participated, sharing insights into the challenges currently facing them. As an Unconference, the event gave participants the space to drive the agenda, bringing to the fore the realities, challenges, and discussions most significant to them.
Developing partnerships with banks
In recent years, we have seen a shift in the relationship between fintech innovators and traditional banks, with both parties becoming more willing to work together. There is a growing understanding of the advantages each brings to improving customer experiences and increasing financial inclusion
However, there remains a sense of mistrust on both sides that proves challenging when looking to partner. Fintech companies are afraid of losing their identity and autonomy within the landscape of a larger organisation while banks seem fearful of doing business with innovators as they seemingly have more to lose - particularly regarding their reputation. As a result, lengthy due diligence processes are followed and the advantage of agility that innovators bring to the partnership can easily be lost. This is not to say that valuable checks and balances should be ignored - rather, it is important for both parties to understand the value each brings and determine how a partnership would be mutually beneficial.
Fintech innovators also need to gain a deeper understanding of how banks operate to make them feel secure in the partnership. According to Vahid Monadjem, CEO of Nomanini, this includes fintech innovators learning to speak the same language as banks. This enables fintech innovators to demonstrate an understanding of the market in which they want to operate and to effectively articulate their value proposition.
Reaching the unbanked
While there has been vast fintech innovation over the past five years, the focus has remained largely on consumers in mature economies. The resulting efficiency and security benefits have largely bypassed the 2 billion consumers in the developing world who lack formal banking services altogether.
Innovative fintech companies have been quick to leverage the opportunity provided by the rapid expansion of global connectivity to advance financial inclusion in developing economies. Over 200 fintech innovators are currently active in Africa alone, according to a recent report by Disrupt Africa.
However, as Otim Gerald from Ensibuuko points out, fintech innovators need to consolidate and scale in order to bring affordable financial services to disadvantaged and low-income groups. And without the same capital, infrastructure and brand credibility as banks, fintech innovators are faced with the challenge of reaching the unbanked profitably.
Fintechs seem unsure where to start - with urban, peri-urban or rural areas - and question whether targeting the unbanked at the outset is too risky. Many try to replicate the telecom operators’ model of launching in difficult markets in order to build a use case and identify barriers. Understandably, this can be risky for early-stage innovators who lack the resources and security of established telecom operators.
Creating consumer trust in digital financial services
A huge barrier to establishing and scaling a fintech company focused on servicing the previously unbanked market, is the lack of consumer trust in financial service providers and often financial technology itself.
Maelis Carraro from the BFA (Bankable Frontier Associates) Catalyst fund says that their research shows three key stages at which customer trust can be built, or alternatively lost: acquisition, activation and retention.
At the acquisition phase, having a relationship with established businesses or brands allows newer fintechs to leverage the trust these businesses already have with customers. This is a good starting point as achieving this organically is usually more difficult. It is also worth noting that trust building can begin long before customer onboarding. More often than not, a company’s reputation precedes its first interactions with potential customers, and fintech innovators should focus on building a credible brand image through channels trusted by their customers.
Trust at the activation stage is built by ensuring the process is fast, easy, and always fulfills promises. The reality of implementing this, however, can be a challenge, especially when it comes to fulfilling promises.
The bulk of the work to create trust is done through customer retention. Transparency in general is very important, but fintech innovators need to go one step further. They need to be transparent about what they can and can’t control, and communicate openly with their customers.
In the highly competitive market in which we find ourselves, fintech innovators need to focus on trust creation from the outset and work hard to retain trust throughout the customer lifecycle to ensure longevity and success.
Globally, funding has become an increasing problem for new fintech companies as traditional sources of capital such as venture capitalists (VCs) are no longer interested in investing in financial technology. After the record-setting global funding to fintech companies at the start of 2015 ($46.7 billion), the fintech startup sector saw a reduction in VC funding in the fourth quarter of the year according to CB Insights.
Additionally, The Pulse of Fintech, the quarterly global report on fintech VC trends published jointly by CB Insights and KPMG International, reports that investment to VC-backed fintech startups reduced by 49 percent in 2016.
Interestingly, Africa is not named under the report’s ‘key regions’ which included North America, Asia and Europe, suggesting this region is widely overlooked by potential investors. Disrupt Africa’s African Tech Startups Funding Report also indicates that African fintech attracted an investment of only $31.4 million in 2016, just a fraction of global investment.
A noteworthy challenge specifically facing African fintech innovators is the lack of investor understanding about local markets. Often linked to this is a lack of local capital, leaving innovators with good ideas but insufficient or no funding, and unable to turn their ideas into reality.
To help combat this, the Mastercard Foundation hosted a session on funding, discussing how donors and investor can better meet the needs of fintech innovators.
While these challenges are significant, African fintechs have shown great resilience and drive to ensure they are leaders in the next wave of fintech innovation.
The next African Fintech Unconference will be held in March 2018, where representatives from all players in the fintech ecosystem will join forces to uncover the latest insights, opportunities and challenges in African fintech.
Kim Humby is Head of Communications at Nomanini, a South African-based payments platform provider that enables transactions in the cash-based informal retail sector.