July 19, 2024

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Venture Capitalists are entering Africa’s digital payments market, but there is more to financial inclusion

By Sakhile Dube

Johannesburg, South Africa. Recent years have seen a rush to fund digital payment start-ups to accelerate financial inclusion in Africa. The influx of foreign investors is particularly from the US, Europe and Latin America entering the digital payments market with promising investments. This opportunity has been exacerbated by the Covid-19 pandemic and its restrictions on movements and an increased wariness of handling cash.

Africa’s economic prospects show a high demand for digital payment solutions, and opportunities. According to a recent report by Disrupt Africa, a tech-focused research and news organisation, African fintech startups raised $330 million in the first half of 2021, more than double the 2020 figure. Well, this means that the continent is well-positioned to innovate and to become more established in this space. For example, we see the success of various fintech startups such as M-Pesa, Flutterwave and Yoco amongst others. While this ecosystem is ripe for innovation this is not a walk in the park, there is more to financial inclusion.

“Financial inclusion extends well beyond simple access to financial services or having a bank account. People need more than just access; they need tools to grow their businesses and they need banks and financial institutions that are willing to partner with them on their journey and provide them with the tools that they need along the way. Whether this takes the form of capital business tools, or simply just the ability to accept payments” said Samantha Fuller, Yoco’s Head of Communications.

Over 100 million small businesses lack access to digital payments across Africa, despite three-quarters of adult consumers having a card. Fuller stated that when Yoco started to plunge deeper into the problem, they found that traditional banks made it challenging and a privilege for businesses to get a card machine. Traditional Point of Sale (POS) systems come with high monthly and transaction fees and appeal to mainly the established business operation. This is a gap that needs to be covered and presents a huge opportunity to provide merchants with the tools to run and grow their businesses. 

Further, Fuller states that there is also a lot of red tape surrounding product structures that prevent many merchants from accessing credit and needs to be urgently reviewed by industry role players. Lowering barriers to entry for small businesses, increasing access to financial tools and the normalization of alternative credit scoring are just some of the issues that affect small businesses.

The lack of access and the technical infrastructure through which financial services are being made available has a ripple effect in the lives of millions of people impacting financial inclusion. Addressing these teething challenges could potentially further poverty alleviation objectives and possibly halve the jobless rate given that 16 million young Africans are facing unemployment. 

The success of startups in the digital payments ecosystem in Latin America is a perfect example that Africa could learn from but could avoid replicating what is being done in that region. To do that, Fuller highlighted that startups need to evolve beyond traditional methods of payment and to revolutionise approaches to solving financial inclusion so that merchants can play an active role in the economy. Further, there is a need for a fully integrated financial ecosystem for small businesses, including online and offline payments, in-store payments, business software and capital

There is a need for like-minded investors and startups who believe in responsible innovation which is the key to ensuring that everyone involved wins. According to Fuller, the principle of responsible innovation entails that fintech startups must work within the law while also encouraging, where necessary, regulators to update existing regulations and introducing new future regulations that are more reflective of the African contexts.

The sector can take advantage of the burgeoning population growth with almost 60% of Africa’s population under the age of 25 – Generation Z who gravitate to various digital channels. With the rising use of mobile phones and internet penetration, there is even an opportunity to service the under-banked rural population that is slowly adopting digital payments.

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