The rise and disruption of fintech start-ups
The mushrooming of new fintech companies on the African continent can be directly linked to innovations that meet the needs of historically under-serviced market - the unbanked. This has seen fintech itself become a facilitator of economic growth in Africa.
This is according to Dominique Collett, senior investment executive at Rand Merchant Investment Holdings and head of AlphaCode, who explains the rise of fintech companies in the African continent is lowering the barriers to entry for consumers by playing a development role and helping to reduce financial exclusion.
"Financial inclusion combined with a strong financial sector is the backbone of any thriving economy.
"Africa is fertile ground for new fintech services which are leveraging the power of communities and social media to make financial services more relevant, while using data to deliver more meaningful financial services on an ongoing basis," asserts Collett.
Fintech is disrupting the way ordinary Africans manage and use money. Fintech players are standing up to traditional financial institutions as a force to be reckoned with, she points out.
Reshaad Sha, chief strategy officer at Dark Fibre Africa, says mobile banking is quickly becoming Africa's bank of the future. With its largely untapped possibility, the platform has the capacity to enable people to make instant payments, transact directly, transfer money internationally, and manage savings in real time.
"As a mobile-centric hub, Africa has the capability to approach banking in a whole new manner. Today very few Africans have access to traditional banking accounts. The issue that arises is a lack of infrastructure to support the all-encompassing digital bank of the future," observes Sha.
According to an Ericsson Mobility report, Africa is expected to reach 100% mobile penetration by 2021 and is, therefore, one of the largest markets for mobile subscriptions.
Due to this growing rate of mobile penetration in Africa, Sha asserts mobile banking will be the ideal solution to reach the unbanked market within the fourth industrial revolution.
"The Groupe Speciale Mobile Association says 52% of all mobile money services are in Sub-Saharan Africa, making it the leading region worldwide.
"Already almost half (19 million) of Kenya's 44 million population subscribe to M-Pesa mobile money services, and the rest of Africa seems to be on a similar trajectory," reveals Sha.
IT lecturer Dr Irving Wladawsky-Berger explains in his blog that over 70% of fintech start-ups have been aimed at individuals and small and medium enterprises, segments which account for about half of banking's profit pool.
"Although FinTech companies have the advantage of new innovation, incumbent financial institutions still have the upper hand in terms of scale and have not yet reached the tipping point of digital disruption.
"Given the growth in FinTech investment, this isn't likely to continue for long," explains Wladawsky.
Sha says the traditional "brick-and-mortar" branch model of African banks poses a challenge when attempting to reach large populations in geographically dispersed towns and villages in Africa.
"Reaching the un-banked through the traditional model presents logistic, infrastructure, and distribution challenges, which raises the cost of banking services that are intended for a price-sensitive market.
"Africa has responded to this challenge by leveraging mobile penetration to put the bank in the user's hand. Add to that the enhanced user benefits of increased convenience, i.e. the ability to bank and transact anytime from anywhere, he observes.
According to a report by CB insights, fintech investments increased more than 10 times in the past five years globally. Investments have risen "from $1.8 billion in 2010 to $19 billion in 2015 globally".
The majority of this investment has also been concentrated in the payments area and this is where banks are seeing the most competition with new entrants, says the report.
Accenture estimates that over one-third of mainstream financial services' revenue is at risk due to disruption in the industry from fintech.
The report further found the risk for banks is that competitors from other industries will consign them to a limited role as utilities, just as industry profitability stagnates and customer loyalty becomes more tenuous.
Competition from digital players could erode as much as one-third of traditional retail bank revenues by 2020, says Accenture.