Navigating the FinTech space in Africa

The emergence of African FinTech’s is on an upward trajectory, creating what has been described as a “structural shift” in the financial services industry in Africa. Dr. Ademola Bamgbose from Hogan Lovells London and Naa Amorkor Amarteifio from AB & David Ghana highlight some of the prospects and challenges in this space.

According to McKinsey & Co’s FinTech in Africa: The end of the beginning report, between 2020 and 2021, the number of tech start-ups in Africa tripled to around 5,200 companies. Just under half of these are FinTech’s, with an estimated revenue of USD4 billion – USD6 billion in 2020.

Looking into the future, McKinsey projects a bumper harvest for investors exploring the FinTech market in Africa. They foresee that Ghana and francophone Africa will experience the fastest growth at 15 percent and 13 percent per annum respectively, with other jurisdictions like Nigeria, Egypt, Kenya, Morocco, Senegal, South Africa, Tanzania, and Uganda also experiencing growth. More developed markets, like Nigeria and South Africa, are likely to see development in B2B liquidity and regulatory technology, such as anti-money-laundering and know-your-customer compliance. Other markets are expected to experience growth in areas such as banking-as-a-service, buying-now-pay-later services in retail and medium-sized enterprise lending, underwriting, servicing, claims and assessments in insurance.

Prospects and challenges for FinTech in Africa

Many factors contribute to this growth of FinTech companies in Africa:

• A young and fast growing population: According to the United Nations (UN), sub-Saharan Africa has the youngest population in the world, with 70 percent under the age of 30. Such a high number of young people is an opportunity for the growth of African FinTech.
• Cash remains a major medium of payment for transactions: McKinsey puts the number of cash transactions in Africa at 90 percent, creating a massive opportunity for FinTech companies to expand their market and increase their profits.
• Increasing mobile penetration: GSM Association reports that by the end of 2021, 515 million people subscribed to mobile services in sub-Saharan Africa, representing 46 percent of the population, almost 20 million more than 2020. These new subscribers provide a ready market for FinTech companies. 
• A largely unbanked market: Bankers report that 40 percent of the African population remains unbanked. The statistics are high across different countries; for example, the FT reports that this rises to 73 percent in Egypt, reflecting untapped opportunities for interested investors. Stakeholders are, therefore, taking action to cater to this financially-excluded population by introducing policies designed to build an enabling ecosystem, level the playing field for FinTech innovation, and encourage the development of innovative products and solutions.
• An increasingly favourable regulatory environment: According to McKinsey, increasingly supportive regulatory frameworks, together with an influx of funding in Africa, suggest the beginning of a period of exponential growth in the industry. In Ghana, for example, in February 2023 the Bank of Ghana opened a regulatory sandbox, enabling a first cohort of FinTech start-ups and innovators to test their newly-developed technology with less regulation and supervision until they are sure of their innovations and the regulatory framework has been formulated. This initiative could solve present financial inclusion challenges.

However, as elsewhere, investing in FinTech in Africa is not without challenges:

• Infrastructure challenges, such as the shortage of stable and reliable mobile and internet connection, lack of constant electricity supply and limited payment rails, affect the efficient deployment of the technology required for FinTech.
• Lack of a centralised, reliable identity database makes it difficult to verify, track and connect consumer records. McKinsey says more than 40 percent of the population in Cote d'Ivoire, Cameroon, Tanzania, Uganda and Nigeria is technically unregistered. However, some countries are making efforts to create a centralised database. For example, in February 2014, Nigeria introduced the Bank Verification Number (BVN), a biometric identification system to uniquely identify customers of Nigerian banks, reduce fraud and improve efficiency of banking operations, and more recently, the National Identification Number (NIN), a set of numbers assigned to biometric data and other details in the National Identity Database.
• Lack of financial literacy and capability: The former Governor of the Central Bank of Nigeria, Godwin Emefiele, speaking at a ceremony to launch SabiMONI, an e-learning platform for financial literary, said that "research has shown that the absence of or low levels of financial literacy constitutes an impediment to financial inclusion. In other words, the pace of financial inclusion is directly related to the level of financial literacy and financial capability.”
• A relatively uncertain regulatory environment across the continent: McKinsey rights notes that FinTech’s in Africa have to contend with a fragmented financial regulatory framework. Different countries are evolving at different paces. Although some countries are starting to develop an enabling regulatory environment, as mentioned  above, elsewhere complex and variable regulations, including licence approval processes, make it difficult for FinTech’s to ensure business continuity and compliance across African markets. FinTech’s may find that they cannot adapt fast enough in some markets to keep up with regulations which, along with the degree of enforcement, can change quickly.

Navigating the FinTech regulatory space in Africa: Ghana as a case study

Looking specifically at Ghana as a case study, the Payment Systems and Services Act, 2019 (Act 987) is the main law regulating FinTech, and the principal regulator responsible for the sector is the Bank of Ghana. Without procuring the relevant permits from the Bank of Ghana and complying with all regulatory requirements, it is unlawful for any FinTech company to engage in business. Other regulators which play complimentary roles include the Data Protection Commission, Securities and Exchange Commission and Cybersecurity Authority.

To obtain a licence from the Bank of Ghana, FinTech’s must provide:

• An overview of the company’s profile, detailing any external auditors and bankers, including third-party service providers.
• The company’s governance structure, including the profile of its shareholders and their shareholding, shareholders’ agreement and share certificates, attestation from a notary confirming any ultimate beneficial owners, number and profile of directors, key management personnel, organisational chart and profiles of any promoters.
• A business plan detailing the business overview of the company, its market analysis, the product/services to be offered, the company’s on-boarding processes, fees/commissions to be charged and a five-year financial projection.
• Details of the FinTech company's systems and technology structure, including the ICT systems, architecture and policy framework.
• The company's enterprise risk management, including the business impact assessment, anti-money laundering/combatting financing terrorism policy.
• A consumer protection policy showing how consumers are protected by service providers. This is to be guided by the consumer recourse mechanism guidelines for financial service providers.

Other key areas of regulatory framework cover:

• Data Protection: FinTech’s collect and process data of customers and third parties so must register with the Data Protection Commission pursuant to Data Protection Act 2012 (Act 843).
• Anti-Money Laundering: FinTech companies must furnish the Bank of Ghana with an anti-money laundering policy in accordance with the Anti-Money Laundering Act 2020 (Act 1044). This policy must outline the company’s Know Your Customer processes, internal reporting procedures and measures to ensure compliance. Best practice includes providing regular training to employees to ensure understanding, monitoring compliance, and setting a timetable for regular reviews to ensure the policy continues to meet the needs of the business and aligns with best practice.
• Cybersecurity: These requirements relate to having a system to protect electronic systems, networks, servers, computers and data from malicious attacks. The Cyber Security Act, 2020 (Act 1038), seeks to regulate cybersecurity activities and prevent, manage and respond to cybersecurity threats, as well as create awareness of such threats. As part of the licencing requirement, FinTech companies must submit a cybersecurity policy in compliance with this Act, detailing key performance indicators or strategies that highlight cybersecurity consciousness. They should also have in place an ongoing programme of training, monitoring and review to ensure that the policy remains aligned and up-to-date.

It is clear that the FinTech industry in Africa offers huge returns for investors. However, like any other jurisdiction, it is not without its risks and challenges, especially as the regulatory space rapidly evolves to meet the changing face of the industry. Careful and proactive project management, market intelligence and experience of the market, is required by investors to navigate the regulatory terrains, mitigate any risk and maximise return on investments in the continent.

Authored by Dr. Ademola Bamgbose (Hogan Lovells) and Naa Amorkor Amarteifio (AB & David).