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These are interesting times in the fintech startup ecosystem in Africa. Foreign direct investment activity is increasing at a dizzying pace, as millions of dollars pour into the continent in pursuit of the next big thing. In the space of a month this March, we saw: the emergence of a second Nigerian fintech unicorn, Flutterwave; a $200 million TPG Rise Fund investment (at a $2.65 billion valuation) in Airtel Mobile Commerce BV, the holding company of Airtel Africa’s mobile money businesses; and a $25 million Series A round by Kuda, a Nigerian digital bank that had secured a $10 million seed round only four months earlier — the largest-ever seed round for a tech startup on the continent.

Nigeria, a leading destination for venture capital activity around fintech firms, had a record month in March, with over $202 million of technology investments — more than the country’s startups raised in the whole of 2020. In what is beginning to resemble the gold rush of the 19th century, these developments are generating a lot of excitement about the opportunity to create significant wealth in record time. However, it’s important to ask: What are the fundamental problems being solved by these companies that are grabbing the headlines?

Where Investors are Focusing in Africa

Payment-related challenges are a key issue getting a lot of investor attention. According to Weetracker, fintech startups in Africa raised over $1.2 billion in VC funding between 2018 and 2020. In Nigeria, a report on fintech startups concluded that the leading category of solutions offered by these startups was payments at 39%, followed by lending at 28% and savings at 11%.

Consumer spending in Africa is projected to reach $2.1 trillion by 2025 and according to Mastercard, around 95% of transactions there are in cash — hence there is a clear and large opportunity in digitizing a portion of this sum and collecting a small fee on each transaction. To do so at scale requires infrastructure, regulation, innovation and more. The race is on among tech entrepreneurs designing solutions to meet the payment needs of Africans, while regulators, mobile networks and other players continue to build and adapt the support systems that enable these innovations.

In light of this momentum, the tech ecosystem on the continent is gaining more prominence, with startups being accepted into internationally recognized incubators and accelerator programs and commanding multi-million-dollar valuations in pre-seed and pre-revenue stages. Y Combinator, the storied Silicon Valley seed funding accelerator, has been host to 47 African startups, with 10 being selected this year alone. Receiving this kind of stamp of approval and measurable valuation (Y Combinator invests $125,000 for a 7% stake) has its benefits. However, this frantic pace of investment has also led to startup asset inflation, and should perhaps be approached with caution. For the investors, other than the celebrated Paystack acquisition by Stripe, there have not been many notable exits. For the entrepreneurs, while the large dollar cash infusions are helpful to meet hiring and development obligations, they will also bring tremendous amounts of pressure to deliver returns in U.S. dollars in the next few years — a significant challenge in African economies, many of which have depreciating currencies.

Expansion across Africa: Opportunities and Challenges

The narrative surrounding these recent capital raises suggests that there is an opportunity to bring fintech-led services across Africa. This can be seen in some of the prominent investments mentioned above. For instance, when Stripe acquired the Nigerian fintech firm, Paystack, for a reported $200 million, its key goal was to expand into Africa. Similarly, Kuda Technologies’ recently concluded Series A round was led by Peter Thiel’s Valar Ventures, with the goal of providing digital-banking services to every African.

However, operating in multiple African countries is no easy feat for any business. And in financial services, the regulations vary and handling the foreign exchange implications adds a lot of complexity to operations.

There is no bank with coverage of all countries in Africa, but Ecobank (where I serve as Head of Consumer Payments) has the largest African network, with a presence in 35 African countries and a technology network connecting all its operations across the continent. In March 2021, Flutterwave announced its partnership with the bank, shortly before closing on the Series C round which confirmed its unicorn status. With more investors seeking to diversify, to avoid the risk of limiting themselves to individual countries and capture the opportunity across the continent, fintech partnerships like this (i.e., with financial institutions that have developed broad coverage networks across countries) should increase and hopefully benefit all parties involved.

For banks and fintechs, the fight for talent and customers is just beginning

For banks, which have traditionally been the go-to providers of financial services, this ongoing revolution has several implications for talent, relevance and partnership opportunities.

Banks are huge, complex organizations sitting on large cash deposits, and they operate in a very regulated industry. As a result, they tend to be more risk-averse than innovative and agile about problem-solving. That would appear to be at odds with the mindset pervading fintech firms, where quickly creating products that resolve challenges for customers is the key value driver. However, some of these investor-backed startups need experienced people who have real-life work experience in the financial services industry, and they can afford to woo high-performing bankers with guaranteed pay and attractive stock options. Who doesn’t want to be a millionaire?

The interesting thing about working in emerging markets like those in Africa is that lessons may sometimes be learned from how disruptive models have fared elsewhere. For example, the jury is still out on whether challenger banks such as Nubank (Brazil), Revolut (U.K.) or Chime (U.S.) will be able to completely replace incumbents in their markets and be profitable on a sustainable basis in the future. But what is quite clear is that these models can grow a customer base quickly, and could potentially become the main transaction platform for some customers — while traditional banks remain as a utility in the background, with a lower-margin business based on safe deposits.

Partnership is the way forward

The banks that learn to partner effectively with these fast-growing startups will likely yield significant returns on equity, as has been demonstrated in other markets. There are many problems to solve in financial services in Africa, such as expanding financial inclusion, facilitating cost-effective payments, extending credit where traditional scoring data is scarce, and a lot more. Cash remains king on the continent, and its reign appears to be very secure. There is more than enough business to capture just by working to transition individuals and businesses away from cash, which costs African governments billions of dollars annually to print, distribute and replace.

Established banks do not have the luxury of playing the valuation game which some fintech startups are involved in, as they must deliver real profits and dividends to shareholders each quarter. However, ignoring the ongoing fintech revolution is not a prudent strategy, as customer behavior is quickly changing and this can have an impact on banks’ bottom line. The financial institutions that adjust to the rapidly evolving business landscape by improving customer experience via innovation and developing stronger partnering capabilities will continue to thrive, as technological changes sweep through the industry. Time will reveal the winners and losers.

Osahon Akpata is Head of Consumer Payments at Ecobank Group.

Photo courtesy of Anna Nekrashevich.