Fintech – Unlocking Africa’s Credit Potential 

Adrian Pillay, VP of Middle East & Africa at Provenir 

Fintech in Africa is coming into its own. According to KPMG data, there was a record $1.6 billion in fintech investment across the continent in 2021, across 153 deals, and at two times the value of 2020,  which hit US$800M. From East to West and North to South, countries are seeing sizable deals surpassing anything that came before, and while Nigeria, Kenya, and South Africa are leading the way,  new markets, like Egypt, are also catching up.

Africa’s financial penetration is relatively low compared to other emerging markets like Latin America.  According to The Global Economy, LatAm markets like Chile, Venezuela, and Brazil see 80-90% of their population with bank accounts. This is in stark contrast with Africa, where in 2017, only 35% of the continent’s population had access to banking services, though this figure was projected to increase to  48% in 2022 (Statista data). These metrics highlight Africa’s poor access to financial services but also reveal an opportunity.

According to data from McKinsey, consumer spending in Africa is $1.4 trillion. Africa’s population is young, fast-growing, and increasingly urbanized, while rapid technological adoption makes the region ripe for innovation. When looking at Sub-Saharan Africa, the region boasts the highest digital payment usage in the world, leapfrogging many other developing economies. This has been achieved by innovative new players in the market, like M-Pesa, completely bypassing existing payment rails and instead relying on the latest technology available to bring new services to African consumers.

All this presents an opportunity for the same to be achieved in the credit space in the world’s next big growth market.

Disrupting the credit market 

The credit card industry is valued at an estimated $8 trillion worldwide, but its market share is gradually being undercut by the growth of point-of-sales financing offerings that combine installment lending with the convenience of card payments. And this is even more pronounced in the African continent. Despite being a relatively new concept in Africa, the advantages of Buy Now Pay Later  (BNPL) are undeniable and well-suited for the region’s consumers.

Particularly, for many consumers that are categorized as ‘thin file’, meaning they have little or no  credit history, BNPL helps them access to credit for essential items. This alternative financing offering  promises the ability to easily access sustainable credit for non-banked and underbanked consumers,  including the sought-after Gen Z population, and providers are lining up to take a bite out of the  market.

The use of alternative data is greatly enhancing the effectiveness of BNPL in Africa by providing lenders with a more comprehensive understanding of a consumer’s creditworthiness. For individuals with thin credit files or no credit history, traditional credit reports typically do not provide enough information for lenders to make informed lending decisions. Alternative data, such as mobile wallet activity, utility payment history, rental history, or social media activity, can be used to improve risk assessment and increase access to credit and underwriting for BNPL.

Unlocking opportunities 

SMEs are the engine that drives economies around the world, employing the vast majority of the population and contributing the most to GDP. However, lending to SMEs can be inherently risky and

incredibly time-consuming. Traditional financial institutions often require a paperwork-heavy application process and may find it difficult to execute credit risk decisions without human intervention. There’s also the issue of businesses not having an adequate credit history and often having to rely on the founder’s credit, leading to significant delays in the approval of funding.

All of these challenges combined can quickly be the difference between a business flourishing and floundering. So what are the options?

Increasingly, innovative lenders, including fintech and neobanks, are popping up all over the globe to help ensure that SMEs get access to credit when they need it. And in order to thrive in this competitive space, lenders in Africa need to deploy the technology and processes that support easy access to alternative data, power real-time onboarding, and give them the ability to rapidly adapt to evolving legislation.

There are three main ways that lenders can get SME approvals into the fast lane. Firstly, the application process needs to be substantially simplified and digitized. Online forms mean no office visits, no tedious phone calls, and no paperwork. Creating an online portal lets applicants conveniently track progress, submit supporting details, and access loan repayment terms. Moreover, enhancing lending decisions with automated technology pulls in the right information about applicants,  completes fraud and identity checks, and determines optimal pricing.

Secondly, lenders need to deploy real-time risk analytics. Using risk decisioning technology to access,  orchestrate and process business financial data, like accounting documents and tax returns means that lenders can stop relying on personal credit scores to decide on business loans. Real-time risk analytics can offer lenders an immediate, accurate view of business health so they can take an application from data to the decision in under a second.

And finally, lenders need to lower the cost of approvals. Automating the application process and using real-time data to make instant decisions allows firms to save time and money when lending to SMEs.  This also means that teams can oversee numerous decisions at once, instead of manually processing each individual loan application.

Through alternative data sources, lenders can evaluate thin-file customers and help to create a bigger picture of an SME requesting credit. This will allow lenders to evaluate financial risk levels by applying alternative scoring for a more holistic view of a business’s ability to pay, creating a great opportunity to serve those that are left out by traditional financial institutions.

Africa offers exciting and new opportunities for fintech looking to address issues around financial inclusion and unlock new streams of revenue. Being on the brink of a fintech revolution, an influx of credit would see millions gain access to better financial services.