At the recently ended International Conference for Responsible and Inclusive Finance (ICRIF), I was privileged to organize and moderate a fantastic panel discussion, "The Business of Fintech in Africa", focusing on the opportunities and challenges in the sector. The session was designed as an introduction to the audience, primarily microfinance institutions and Savings and Credit Cooperative Organizations (SACCOs), emphasizing strategies that ensure clients are protected from potential abuse and risks.

Representing the Fintech Sector

The Fintech businesses represented on the panel brought product and geographic diversity, highlighting the vast business portfolio across the continent, a variety of challenges addressed in different contexts as well as a range of business models and operating constraints.

• Oradian, represented by Vedran Lesca, is a cloud-based software provider, enabling microfinance institutions in Africa and Asia to reach unbanked populations. They provide necessary support in getting microfinance clients up and running in the shortest possible time.
• SureRemit is a Nigerian blockchain international (inbound) remittance payments system that recently closed an Initial Coin Offering (ICO) of USD 7 million. SureRemit is an evolution of SureGifts, the retail P2P gifting business, offering a lower-cost and innovative cross-border remittance system. Olaoluwa Samuel-Biyi represented SureRemit on the panel.
• Tala is a data science company in the business of lending. Tala provides credit scoring and micro-credit services in Kenya and some Asian markets using artificial intelligence and machine learning technologies. With a total loan book of about USD 247 million, Tala loans range between USD 10 and USD 300. The panel hosted Kevin Kaburu from Tala.
• MTN Mobile Money, Rwanda, represented by Norman Munyampundu, is building a mobile money ecosystem through the provision of a portfolio of mobile financial services (P2P payments, bank-wallet transfers, international remittances, salary payments, etc.) to its customer base in Rwanda. With 1.5 million (over a 30-day period) active customers, MTN processes about 14 million monthly transactions.

Key Highlights

The audience shared diverse perspectives on Fintech, but the most commonly-accepted theme was their ability to disrupt the market. The following takeaways from the discussion provide insights into the present and future of the business of Fintech on the African continent.

• Opportunities abound: from payments to investments, the need for financial services will continue to grow. Telecom penetration along with the growing population and promising economic potential showcases a steady demand for financial services to support all forms of economic activity. The evolution of digital transactions goes hand in hand with this transformation, although cash transactions will not be eliminated.
• Nascent and evolving: The scale of this opportunity spurs innovative solutions from all corners of Africa. This was demonstrated on the panel as each FinTech business is only less than a decade old. Launched in 2009, MTN Mobile Money is the oldest, illustrative of the nascent nature of Fintech businesses.
• Addressing needs: Either directly or indirectly, each of the new products is trying to reach customers typically excluded from the formal financial system.
• Innovative tech: From blockchain to artificial intelligence and cloud computing, each of these businesses is capitalizing on innovative technologies to address real needs.
• Youthfulness: The age group of the majority of Fintech customers is between 18 and 35, encompassing primarily youth that are more comfortable and conversant with digital products.
• Self-regulation: Some of these businesses are operating in a space not yet regulated by government authorities. As an institution not taking deposits, Tala lends its own (privately-sourced) funds and is thus not subject to any regulation by Kenyan regulatory authorities. Likewise, SureRemit in Nigeria facilitates non-cash cross-border remittances that are easily redeemable at pre-set merchant locations. Thus, due diligence on part of these entities and governance structures requiring compliance are necessary. Unfortunately, the absence of regulation will not mandate transparency and openness of reporting service failures. While only MTN and SureRemit manage pooled funds (e-float balances and remittances), MTN deposits are distributed across banks and reported and validated by regulators. On the other hand, SureRemit is responsible for managing remittance values in trust until the vouchers are cashed.
• Feasibility of regulation: Despite the need to regulate Fintech companies, we need to ask if regulators can bear the additional burden. There is a general perception that regulatory authorities are designed to cater to large scale businesses, communities or use cases. This creates a regulatory gap for emergent innovative start-ups operating on different business models, i.e. providing financial services but not operating as financial institutions. With an increasing demand for regulation, financial services regulators will either increase their supervisory and oversight capacity or adopt regulatory technology (RegTech) solutions to ease the oversight and compliance burden for regulators and Fintech companies respectively.
• Crypto-averse: the cautious response to technological innovations, especially cryptocurrencies such as Bitcoin, typically align with the dominant regulatory school of thought to prohibit when there is little or no understanding of a technology. However, use cases like SureRemit seek to change perceptions of cryptocurrencies and demonstrate non-nefarious uses. The truth of the matter is that we cannot continue to avoid blockchain for much longer. Denouncing it will not make it disappear. For countries such as Kenya that have established a blockchain taskforce to study the opportunities and challenges of blockchain technologies; this is just the beginning.
• Risks galore: across all business segments exist diverse risk categories, but the most prevalent arise from internal fraud against clients by Oradian microfinance bank staff, mobile money agents representing MTN or even SureRemit merchants. Although, Tala has a loan default rate of only 8 percent, a significant amount of human resources (50 percent of staff strength) are devoted to collections. Other risks that warrant mitigation strategies on part of the consumers, providers and regulators are those associated with phone loss and SIM swaps. For example, how do consumers cancel mobile-based services when devices are lost? In what time-frame will such instructions be implemented? What regulatory mechanisms will ensure the enforcement to prevent financial loss?
• Nature of business in Africa: Our only B2B provider, Oradian, could not help but remind us of some of the constraints of doing business in Africa with respect to product sales. These include but are not limited to capital inadequacy of some financial institutions, corruption and policy enforcement. Limited capitalization levels of the microfinance institutions vis-à-vis their lending activities inhibits business sustainability. Fraudulent internal practices such as the provision of suspicious credit facilities are common causes of corruption. Finally, weak audit and compliance frameworks within microfinance institutions, manual regulatory and supervisory practices and ill-equipped law enforcement systems impede policy enforcement.

The second blog in this series focuses on client protection principles for Fintech companies in Africa. (#ICRIF2018.)

Olayinka David-West is an information systems (IS) professional with over two decades experience in the Nigerian IT industry. With a passion for the effective use of IT in business , David-West not only makes IT understandable, but assists organizations seeking business value from information and related technologies through systematic decision making and managerial processes. She is the lead of the Sustainable and Inclusive Digital Financial Services Initiative that focuses on providing evidence-based research to support DFS operations market-enabling policy development in Nigeria. Since 2015, the project has published 2 State of the Market Reports on DFS in Nigeria.