• Karen Nadasen, CEO at PayU Africa


• 03.03.2023 09:15 am
#fintech

Over recent years, FinTech has truly demonstrated its potential in high-growth markets. As a result of the poor penetration of traditional banking and payments infrastructure, coupled with rapid growth of mobile-first services, consumers have – in many cases - leapfrogged traditional financial service offerings in favour of FinTech solutions.

Consequently, across high-growth markets such as Latin America and Africa, investment in the FinTech sector is rising. Venture Capitalists (VCs) clearly believe that pressing financial problems can be tackled with innovation spearheaded by agile FinTechs, rather than legacy firms and incumbents. 

VC financing for FinTechs in Sub-Saharan Africa grew by an eyewatering 894% year-over-year to $1.bn in 2021, accounting for 61% of all VC funding secured by African tech startups that year. By 2025, FinTechs on the continent could earn a combined revenue of up to eight times higher than 2020 figures ($4bn) to  $30.3bn, as they continue to deliver better value than incumbents at a lower cost. Furthermore, four of Africa’s FinTech firms reached or exceeded billion-dollar valuations in 2021, more than doubling Africa’s population of ‘unicorns’. While no further companies joined the list in 2022, more are expected to emerge in the coming years.

The landscape is largely similar in Latin America. The financial services industry has been reshaped by the emergence of everything from new payments providers and mobile-native digital wallets to wealth management platforms and challenger banks, and as such, investment is high. Capital infusion on the continent peaked in 2021, with companies raising a record $14bn - marking a 289% jump from the $3.6bn raised the year prior. Like Africa, the 2022 market downturn affected funding in Latin America, but in the long-term, investors remain optimistic.

So, what’s new now?

The success of FinTech companies in high-growth markets can be attributed to several trends, including increasing smartphone ownership, democratisation of internet access, and expanded network coverage. This is in addition to a young, fast-growing, and rapidly urbanising population, particularly in Africa. COVID-19 was also an important push factor, spurring outreach to the unbanked and vulnerable communities as multiple lockdowns limited the ability to conduct cash transactions. According to the World Bank, two-thirds of FinTech firms reportedly changed their global business models, reducing fees, revising criteria for loans, easing payment requirements and offering extra informational services to help support their customers.

e-commerce adoption is also driving the appeal of FinTech investment. South Africa, for instance, saw the average value of an online shopping basket increase by more than half (54%) on Black Friday, while total payment volume (TPV) also jumped by 58%. 

Other high-growth markets also enjoyed e-commerce success. Countries like Mexico witnessed exceptional growth – increasing from $6.2 billion during the pandemic to a whopping $46.5 billion in 2022. In terms of web traffic in high-growth markets, Chile had the highest share of its population shopping online, 62%. 

The future for FinTechs in high-growth markets

As technology and mobile payment capabilities continue to mature, long-lasting collaborations will enable businesses to unlock revenue streams in new markets. Systems such as M-Pesa, available in countries including Kenya, Romania, and India, provide value with reduced transaction costs and allow real-time transactions, while also contributing to an increase in financial intermediation services. With less reliance on cash for transactions, more businesses can work together to improve financial inclusion.

Reducing friction in the payments process will also remain at the forefront for businesses in high-growth markets, with FinTechs increasing access for underserved populations and sparking new innovations in local ecosystems. For example, PayU allows merchants in Ghana to offer shoppers a ‘pay by card’ option and other local mobile money methods like MTN MoMo, Vodafone Cash, and Tigo Pesa. 

High-growth markets like Africa and Latin America are reaping the benefits of e-Commerce adoption and ever-improving mobile penetration, and these are key regions to keep an eye on for businesses to expand their offerings and learn from their achievements. This is just the beginning.