In October, the US-based startup Stripe announced that it would be acquiring Paystack, a Nigerian payments platform. Everything about the transaction checked appropriate “synergy” boxes. Earlier in the year, Stripe had received an additional $600 million in funding, with an eye towards international expansion. Paystack has been dubbed the “Stripe of Africa,” due to its focus on simplifying the online and offline payments experience for consumers in the region.
On the face of it, one could say this was just another day in fintech deal-making, right?
Not so fast.
Stripe’s acquisition of Paystack underscores the increasing attractiveness of emerging markets, particularly those in Africa, for growth. This region has long been on the radar of public and private investors alike, however volatility, political instability, and under-developed infrastructure have been proven to be formidable foes in the journey towards consistent outperformance.
Recently, the tide has shifted. Paystack is not the only African startup that has caught the eye of foreign investors. Chipper Cash – a San Francisco-based startup that offers mobile-based P2P payments in 7 African countries – raised a $30 million Series B round from Ribbit Capital and Bezos Expeditions. WorldRemit, a UK-based cross-border payments platform, announced the $500 million acquisition of Sendwave, a digital remittance service provider concentrated on East Africa, in August of this year.
When analyzed as a cohort, these transactions highlight three points. First, the rise of “mobile money” and its importance in constructing a digital banking infrastructure. Second, the upheaval due to COVID-19 of people’s habits. And third, how this activity in 2020 was the culmination of a decades-long journey.
What is mobile money?
Simply put, “mobile money” refers to digital payments. Unlike an app like Venmo, no bank account is required to facilitate the transaction; a telecom provider performs this function instead. According to the Wall Street Journal, “nearly half of 1.04 billion registered mobile money accounts world-wide are in sub-Saharan Africa.”
Mobile money accounts are prevalent in emerging markets for a reason. One McKinsey study estimated that, “two billion individuals and 200 million small businesses in emerging economies today lack access to formal savings and credit.” The implications of non-participation in the formal economy are huge. The same report cites that, “…widespread adoption and use of digital finance could increase the GDPs of all emerging economies by 6 percent, or a total of $3.7 trillion, by 2025. This is the equivalent of adding to the world an economy the size of Germany.”
COVID-19 has accelerated adoption
While these challenges were readily apparent pre-COVID, the pandemic has accelerated the pace of adoption significantly. African governments have also played a large role – many have reduced barriers to sign up, in an effort to stimulate the economy. Before the lockdown in Rwanda, for instance, the central bank instructed telecoms to ease up on restrictions.
The result was a huge increase in the number of transactions, “…the number of mobile-money transfers doubled in the week after a lockdown was imposed in March…by late April users were making 3m transactions a week, five times the pre-pandemic norm.” Other African governments, from Kenya to Zambia, followed suit in easing restrictions and waiving transaction fees.
Hiding in plain sight
Mobile money is nothing new. Even before the pandemic, African countries were trailblazers in the industry. Per McKinsey, “Just over half of the 282 mobile money services operating worldwide are located in Sub-Saharan Africa.” Today, it is not uncommon for more citizens to have access to mobile money than a traditional bank account, as the graphic below illustrates:
What’s even more impressive is that there is still ample room for growth. Per the Wall Street Journal, only 45% of the African population has an active cell phone. To put this into perspective, in Europe, that figure hovers well above 80%. How these figures will be affected by the pandemic is anyone’s guess.
COVID-19 may have served as a catalyst for increased mobile money adoption, however, it has also left a trail of financial destruction in its wake. As the Economist writes, “… the crisis has also made people poorer. In Kenya, where mobile money is well established, the central bank reports a 10% rise in the number of daily transactions but a 5% fall in their total value.” The same article notes that these effects are expected to be temporary and that, “…habits formed during a crisis can sometimes outlast it.”
Now that telecoms providers have tapped into a larger consumer base, the playing field is open to the introduction of other banking products, such as saving and lending offers. As Amanda Wilson, creator of the finance YouTube channel We Think Finance states, “The continent of Africa not only has an abundance of natural resources, but also an abundance of talent. And with the current tech startup scene not only in Nigeria, but in South Africa, Egypt and even Kenya, seeing this activity helps to show the world what is happening on the continent and I think in turn this will fuel more innovation.”
The wealth of resources created by this digital infrastructure is undeniable. The race to best harness these accounts and assets is on.