Africa’s fintech industry needs more imaginative financial services for the continent’s large informal sector. As it leaves the EU, the World’s largest exporter of financial services needs a new market. This is a marriage waiting to be arranged.
A lot of fintech in Africa is long on tech, and short on fin. Apps that let my phone run my bank accounts and pay for stuff online are great, but if they’re not really helping me grow my money, or use someone else’s briefly to get stuff done, they are not solving Africa’s core financial problems. When people talk about “financial inclusion”, I hope this is what they mean. The average African is cut off from the forces that make money grow. The bank, whether it is in a building or in her phone, is useless to my cousin Maryam, because it will not give her loans.
It actually cannot give her loans. At least not responsibly. We should not expect banks to gamble with depositor money, and lending money to Maryam is like going all in on 24 Black. Before the bank hands over my life savings to her, I would hope it made sure she had:
- A way to pay the money back, with interest, gradually but predictably. A guaranteed periodic income.
- Something we can seize and sell if she refuses to pay, or loses her income. Collateral.
But Maryam has neither. Like most Africans, she belongs to the so-called “Informal Economy”, so she doesn’t have a salary. She is a farmer, relying on seasonal harvests for a payday. Or she is a trader, whose money comes in daily, unpredictable spurts. Or a real estate agent, hoping for that one big commission to wipe out 9 months of borrowing. Whichever she is, she has no payslips to show the bank. And since most Africans live below the poverty line, and most land in Africa does not have solid legal title, collateral is out of the question.
So, give Maryam all the apps you want. Put as many banking agents (also part of the informal sector, living on their unpredictable commissions) in her neighborhood as you can hire. Maryam does not need you, because you cannot lend to, or invest in her. Not with the way the financial system is built. Not with the products the African financial services industry, among the smallest in the World, is equipped to provide.
So who can build the financial services Maryam and a billion
other Africans need? Other Africans, of course. But they are going to need
partnership from the people who built the financial system.
Luckily, thanks to a looming divorce from Europe, those guys are looking for partners.
The United Kingdom boasts the World’s second largest
financial services hub, the City Of London. The City exported over 90 billion
pounds in financial services in 2017. Almost half of that went to the European
Union, her largest trade partner. But the UK has voted to leave the E.U., and
as she decides on how best to do this, Frankfurt, Milan, and Paris are
measuring the drapes in the City of London’s corner office.
A financial services powerhouse about to need a new market,
a growing fintech community that needs more fin for its tech, and a billion
Maryams who need to grow their money. Serendipity.
But right now, the UK is only dipping her toe in the water. Prime Minister Theresa May announced the UK-Africa Fintech Partnership, through which the UK will pump investment into African startups. But money is not the City’s value proposition in Africa. American Venture Capital and Chinese financing will outspend the UK here any day. If the City truly wants to make Africa the methadone to its European heroin, it needs to sell Africa what Africa will not get elsewhere: new financial products and services built for the informal economy.
Theresa May has to find a way for Maryam to get loans.
I believe the City Of London is maybe not uniquely, but at least especially, equipped for this challenge. Here’s why.
FRAGMENTATION
Africa is not, we always insist, a country. Its 54 nations have very different financial and tech rules. For a fintech to start in one of them, and grow into the others, would be miraculous, because of the effort needed to adapt its functioning business model to 53 completely different business environments. Or even 5. This is bad, because financial services need scale. The larger and more varied the pool of investors/depositors/policyholders, the more stable the revenue. The AfCFTA is meant to defragment the financial market, but until we can prove that it actually will work, Africa needs cross-border aggregators. London is in a good position to provide them.
INSURANCE
Africa is one of the riskiest places to lend money. The City has both the deep pockets to cover a pan-African risk pools, and the sophistication to design and perform the new types of underwriting that insurance in predominantly informal economies will require.
SECURITIZATION
If you want to make money in African fintech, make yourself the adapter that lets the informal sector plug into the formal. One way to do that is to turn Maryam’s scattershot revenue from her trading and farming, into a predictable, regular paychecks.
There are many more areas in which the City’s centuries of experience can provide lucrative solutions in Africa. If it is ready, the fintech players in Nigeria and Kenya are waiting. The City’s major players should perhaps be thinking about how to build a layer of Financial Services As A Service (FSaaS), that the African tech ecosystem can tap into, and deliver value to Maryam that most banks simply cannot right now.