Analysing BNPL Fintech in Africa.

This is a three-part blog post on my recent research foray into the Fintech industry in Africa, some of the top verticals with a focus on the Buy-Now-Pay-Later (BNPL) vertical. I examine the risks and opportunities in the sector and notable startups solving this problem in Africa. My conclusion is an investment memo on one startup I believe is the best bet from an investment perspective.

The financial technology sector in Africa has been growing remarkably in the past 5 years and shows no immediate sign of slowing down any time soon. Just last year, of the over $4 billion disclosed funding invested in the African tech ecosystem, over 60% of this figure went to startups in the Fintech space. The numbers of startups springing up and investment rounds being closed in the sector do not seem to be slowing down, and it may be wise to take advantage of this as well.

Several sectors exist within the fintech space and in fact, areas like payments and personal finance have seen a lot of growth in the last five years. There are however new areas developing and newer innovations in some other sectors as well. I will be focusing on five of those verticals that I believe have the potential for exponential future growth and should be focused on for 2022. And I will provide some reasoning for my choices.

My top 5 recommended verticals:

1. Embedded Finance
2. Banking as a Service (Infrastructure Tech)
3. BNPL – Buy Now Pay Later
4. Insuretech / Mircoinsurance
5. Crypto

The WHY?

• The ease and convenience of use they promise. We can see this under the BNPL model and embedded finance. These verticals aim to make consumers’ lives easy by providing a platform that means the major needs of a consumer in one place.
• The promise of increased financial inclusion is a major point as well. Again what embedded finance promises from embedded lending to credit, insurance, payments etc is the offer for the unbanked population to still be able to enjoy financial services and products, only offered by the non-financial services they already trust and make use of. This could increase the level of financial inclusion across the continent.
• As the young population becomes more computer literate and tech-savvy, there is a growing market for more complicated fintech offerings such as in the crypto and blockchain space and open banking.
• The increase in funding in the Fintech sector also spurs the innovation being birthed by the sector and vice versa. 

A Deep Dive into the Verticals

1. Embedded Finance

Embedded finance is the integration of financial tools or services into non-financial services or products. It allows users to store, spend and access money from non-financial products/ service providers. The embedded finance industry in Africa is expected to grow by over 45% this year alone, and revenues are projected to go from over 10.3 billion dollars to 39.8 billion dollars by 2029. Embedded finance makes such a good idea because it:

• Promises ease of use for consumers
• Provides tools and valuable data for service providers to understand their consumers better, their spending habits and needs. 
• Embedded finance also allows businesses to provide new product and service offerings to their consumers, thus increasing revenue.

It is also an exciting industry because of the various use cases it offers, from embedded lending solutions to insurance, payments and investments.

2. Banking as a Service (Infrastructure Tech)

Banking as a service is a model that allows financial institutions to partner with fintech or non-financial institutions to provide banking services or infrastructure through APIs to the partner’s customer base. The services offered here range from account opening and management to compliance, fraud management, lending services etc.

BaaS allows both partners to reach many customers at a lower cost. The nonbanks get to offer financial products leading to more revenue and can deepen their relationships with their customers.

3. BNPL – Buy Now Pay Later

The Buy Now Pay Later sector is an extended and more flexible development of the digital lending sector that came before. Unlike digital lending which entails nonbanks using expansive data, sophisticated algorithms and information sources to determine credit risks and provide new product offerings to borrowers, BNPL, on the other hand, lowers the barrier to entry by allowing consumers to obtain goods immediately while paying for them over time in instalments.

The obvious benefits of this include accessibility for customers to goods that would have been otherwise unaffordable and an increase in the number of customers as well as average order value for merchants.

4. Insuretech / Mircoinsurance

Insurance in Africa is still a largely untapped opportunity with the level of penetration across the continent equalling half the world’s average. However, it is for this exact reason that the sector promises much growth and expansion. A 2020 report by McKinsey projected a compound annual growth rate (CAGR) of 7% per annum between 2020 and 2025, better than the projected rates of North America, Europe, and Asia.

There is much promise in this area from sectors such as agriculture, transportation, health, auto, life, and retail insurance, for those who can leverage technology to provide affordable premiums, enhance insurance distribution, and create differentiated pricing based on customer data.  

A mix between this vertical and embedded finance also exists in the form of embedded insurance. Embedded insurance allows Insurtechs to partner with service providers to sell insurance that is personalised and relevant to the needs of their partner customers at the point of sale.

5. Crypto

According to media reports, Africa is one of the world’s fastest-growing markets for cryptocurrency adoption. This is even more so because of the multiple use cases for crypto in Africa, from infrastructure to crypto exchange and trading, to remittances made easy, wealth preservation and payments, among others.

In my next piece, I analyse the nascent BNPL sector in Africa and its major players and some challenges and threats to growth faced by the sector.