etween 2020 and 2021, the number of tech start-ups in Africa tripled to around 5,200 companies. Just under half of these are fintechs, which are making it their business to disrupt and augment traditional financial services.1 McKinsey analysis shows that African fintechs have already made significant inroads into the market, with estimated revenues of around $4 billion to $6 billion in 2020 and average penetration levels of between 3 and 5 percent (excluding South Africa). These figures are in line with global market leaders.
One industry leader we spoke with said that rather than a “fintech disruption,” the continent is experiencing a “fintech eruption,” and local and international investors are taking notice. African fintech is emerging as a hotbed for investment, with average deal sizes growing and the proportion of fintech funding in Africa increasing over the past year, bringing jobs and growth to African economies. And the story is only just beginning. As fintech matures, financial services on the continent are at an inflection point, and several African countries have a significant opportunity to capitalize on the momentum of recent years to unlock further potential in the sector.
Despite a slow down in funding in line with global trends, we expect significant growth and value creation to lie ahead for the fintech industry in Africa. Cash is still used in around 90 percent of transactions in Africa, which means that fintech revenues have huge potential to grow. If the sector overall can reach similar levels of penetration to those seen in Kenya, a country with one of the highest levels of fintech penetration in the world, we estimate that African fintech revenues could reach eight times their current value by 2025.
African financial services are undergoing a structural shift
McKinsey analysis estimates that Africa’s financial-services market could grow at about 10 percent per annum, reaching about $230 billion in revenues by 2025 ($150 billion excluding South Africa, which is the largest and most mature market on the continent) (Exhibit 2). Nimble fintech players have wasted no time carving out a share of this expanding market. As the fastest-growing start-up industry in Africa, the success of fintech companies is being fueled by several trends, including increasing smartphone ownership, declining internet costs, and expanded network coverage, as well as a young, fast-growing, and rapidly urbanizing population.4 The COVID-19 pandemic has accelerated existing trends toward digitalization and created a fertile environment for new technology players, even as it caused significant hardship and disrupted lives and livelihoods across the continent.
Our analysis shows that fintech players are delivering significant value to their customers. Their transactional solutions can be up to 80 percent cheaper and interest on savings up to three times higher than those provided by traditional players, while the cost of remittances may be up to six times cheaper.
Taken together with an influx of funding and increasingly supportive regulatory frameworks, these factors could signify that African fintech markets are at the beginning of a period of exponential growth if, as expected, they follow the trajectory of more mature markets such as Vietnam, Indonesia, and India.
However, growth in financial services across Africa’s 54 countries will not be uniform. While the lion’s share of value in the market (approximately 40 percent of revenues) is currently concentrated in South Africa, which has the most mature banking system in the continent, Ghana and francophone West Africa are expected to show the fastest growth, at 15 percent and 13 percent per annum respectively, until 2025. Nigeria and Egypt follow, each with an expected growth rate of 12 percent per annum over the same period. Overall, we anticipate that the growth opportunity in fintech is likely to be concentrated in 11 key markets: Cameroon, Côte d’Ivoire, Egypt, Ghana, Kenya, Morocco, Nigeria, Senegal, South Africa, Tanzania, and Uganda, which together account for 70 percent of Africa’s GDP and half of its population.
Given the varying levels of digital maturity across these countries, the opportunities in each market will be different. Economies with more mature financial systems and digital infrastructure, such as South Africa and Nigeria, are likely to see more innovation in advanced financial services, including business-to-business (B2B) liquidity and regulatory technology such as anti–money laundering and know-your-customer (KYC) compliance. Markets where financial systems and infrastructure are still growing, such as Egypt, are likely to see advances in financial services such as underwriting, servicing, claims, and assessments in insurance; banking-as-service and embedded finance in operations and infrastructure; and buy now, pay later services in retail and small and medium-size enterprise (SME) lending.
With digital becoming a way of life in Africa, the stage is set for the next phase of fintech growth. African fintechs and other stakeholders, including governments and investors, have an opportunity to consider how the sector can achieve sustainability over the long term. Despite all the activity seen on the continent, Africa has only produced a handful of unicorns—start-ups with a $1 billion valuation—and the profitability of many ventures is precarious. This suggests that much work remains to create the necessary conditions to unlock the sector’s potential.
Growing African fintechs may face four challenges
The African fintech space is growing exponentially, but the development of the fintech ecosystem is still in the early stages. While fintechs have made significant inroads in Africa—notably in wallets, payments, and distribution—there is still plenty of room for expansion. As the market matures, unique white spaces are identifiable in almost all areas of financial services (Exhibit 3).
