Is Africa's FinTech Sector In A Bubble?

Africa's fintech sector has been seeing incredible growth over the last two years. Last year alone, $1.4 billion worth of investments was put into African fintech startups, most of this coming from US venture capital firms. The World Bank's private sector arm, the  International Finance Corporation, has also put in over $200 million into the sector. Fintech in Africa currently boasts three of the continent's four unicorns—companies valued at over $1 billion. These are Nigeria's Interswitch and Flutterwave as well as Egypt's Fawry

Despite this impressive growth of the sector, some experts have noted with concern the sector's bubble-like characteristics, specifically the ballooning valuations of startups. With over 66% of Africans unbanked and 80% of transactions being made in cash, there is no denying the vast potential market for fintech solutions. Improvement in the continent's internet connectivity through initiatives like Liquid Intelligent Technologies and Facebook's proposed fibre network, SpaceX's StarLink as well as Google & Facebook's undersea cable network look set to also provide an enabling environment for fintech to prosper.

However, the ability of the continent's socio-economic issues to slow down or undo its fintech sector prosperity should not be underestimated. As much as optimism is great, so also is realism. To start with, Africa's stringent regulatory bodies can prove to be a hurdle in innovators' paths. Just yesterday in Nigeria, which is the continent's fintech poster child, the central bank froze the bank accounts of four fintech platforms. That is just how unpredictable doing business in Africa is and that can and will prove to be a serious challenge for fintech startups to traverse.

Then there is the issue of the continent's dire economic state. A population that is outpacing GDP growth, wayward inflation, as well as high poverty rates mean that Africa's fintech market might not be as big as estimates make it out to be. Considering the fact that this market is normally a significant driver of valuations and future startup growth projections, these misinformed estimates can prove to be a problem.

The fintech space's lack of African investors who are well-versed in the continent's unique challenges is another challenge. As aforementioned, most of the fintech funding comes from American VC firms who, through their optimistic valuations, may be unintentionally inflating the actual worth of the continent's fintech industry.

So what can be done to ensure that Africa's fintech sector grows in a sustainable way? First off is addressing the regulatory environment issue. The sector's players must come together, through associations and other ways, to ensure that government regulatory frameworks which are meant to enable innovation in the sector do exactly that instead of stifling innovation they were created to enable. This will ensure that innovators innovate freely without having to look over their shoulders at every turn or worry about all their work being undone by one government press release. 

Startups can also look into diversifying their operations so that whenever governments decide to wield their bureaucracy sword, they are still able to operate from their other bases. The wide adoption of cryptocurrencies by both the startups and their customer bases is also another way in which the sector can try to bypass the continent's unstable regulatory environment.

The presence of African investors in the sector will also be vital in order to ensure that valuations and growth projections are realistic. The continent is littered with a couple of high net worth individuals who, through venture funds, can help in ensuring that Africans are a part of the continent's fintech. As much as international investments are welcome and appreciated, I believe that investment by Africans in African ideas built by Africans is key.

There is no denying not only the growth potential of fintech in Africa but also its ability to add so much convenience to the continent's people and improve quality of life. However, growth driven by speculation and a lack of understanding of important market fundamentals creates and inflates bubbles. In the long run, it will benefit only a privileged few who manage to exit before the bubble eventually pops. A burst bubble will erase market trust in fintech products by both customers and potential investors which means that great innovations which would have transformed the continent would never see the light of day. That would be a real shame.