Bulls n Bears Entrepreneurship Zone :: Ameya Upadhyay: Fintech investing in Africa – beyond retail payments and nano-credit

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More than 70% of fintech venture funding in Africa has gone to retail
payment and consumer credit startups. This is nothing new: payments are
ubiquitous and digitising them clearly saves time and money. In turn,
payments startups become attractive to venture funds looking for businesses
that solve a real problem and can scale. Consumer credit, particularly
small-dollar or “nano-credit”, is a natural adjacency for payment companies
and investors. Loans can be disbursed and repaid digitally, payment data can
be used for underwriting, and interest rate spreads are higher than
transaction commissions.

While payments startups are easy to start, the market is driven by network
effects, and therefore tends to move toward oligopolies. Alipay and WeChat’s
duopoly in China, and M-Pesa’s monopoly in Kenya, are two examples. Further,
both payments and nano-credit are easily commoditised. When compared to
products likes savings, insurance, and pensions, they are more transactional
in nature, requiring a relatively low level of trust and engagement between
providers and consumers. This makes them easier to sell but harder to
differentiate. We call these products “fast money”.

Many markets in Africa are maturing and large players are establishing
dominant positions in the fast money segment. But investors seeking
high-potential startups should look beyond retail payments and nano-credit,
to innovators building high-engagement or “slow money” products, such as
micro, small, and medium enterprises (MSME) credit, savings, investments,
insurance, and pensions.


The cone of opportunity


The very nature of payments make the market prone to network effects. The
natural owners of payment products are companies with established brands, a
captive customer base, and another core service into which they can embed
payments. Globally, technology platforms like WhatsApp and WeChat have
started offering payments. In Africa, mobile network operators (MNO) have
successfully embedded payments for their telephony customers. For these
incumbents, payments are a marginal cost business, and acquisition costs are
much lower, given their readily accessible customer base.

Digital nano-credit has also expanded fast on the back of retail payments.
While not dependent on network effects, this market is prone to be captured
by a combination of banks, which have access to cheap deposit capital on the
back end, and large consumer companies (MNOs and internet giants for
example) that have captive customers on the front-end. We are already seeing
this play out in Africa with M-Shwari, M-Pawa, and similar services.



As these markets mature, the potential for pure-play payments or
nano-credit startups to scale and generate returns diminishes. Of course,
this is a sweeping generalisation, particularly for a continent with the
dizzying diversity of Africa. There are and will be exceptions: Branch and
Tala for example, have shown initial traction in Kenyan nano-credit market.
However, due to the reasons mentioned above, it seems unlikely that these
exceptions become the norm.


Invest selectively in payments and credit infrastructure


While the direct-to-consumer space in payments and nano-credit is maturing,
the infrastructure supporting these businesses is broken. Take payment
infrastructure for example. Less than 5% of mobile payments are made to
merchants because most merchants lack the means to accept digital payments.
Person-to-person (P2P) interoperability is limited to a few markets.
Cash-in/cash-out infrastructure is underdeveloped, particularly in rural
areas. To address these systemic issues, we invested in companies like Paga,
Zoona, and FlutterWave, and continue to look for game changers.

Analogous problems plague the credit ecosystem. Access to wholesale
financing is severely limited as banks are reluctant to lend to smaller
lenders and debt capital markets are virtually non-existent. We invested in
Lendable to address some of these gaps, and have our eye out for other
infrastructure players.


Focus on slow money products: Savings, investments, insurance, pensions


Unlike fast money offerings, many slow money products require customers to
pay upfront and promise returns later. As such, they are harder to sell.
Above all, they depend on a high degree of trust between the consumer and
provider.

At the same time, slow money products tend to have a deeper impact on an
individual’s life. This is obvious when comparing a pension product with a
$50 loan. These are the same reasons that make slow money products stickier
and more defensible.

While the uptake of insurance, pensions, investments, and savings has
lagged behind, that is likely to change. Innovations in product design and
distribution based on behavioural insights can help drive mass market
adoption. For example, startups like PiggyBank and CowryWise in Lagos are
automating regular savings transfers for their customers. Pula offers free
crop insurance to farmers. Premiums are paid by seed and fertiliser
companies to gain a competitive advantage in a crowded market. Effectively,
Pula converts intangible insurance premiums to a more “present” spend: seed
purchase.

Due to the complexity in product design, we think that “co-opetition”
between incumbents and startups will be the norm in this space. Large
consumer platforms may prefer to distribute products designed by innovative
startups. Many examples exist already, particularly in the insurance space:
Telcos distribute micro-insurance products designed by innovative companies
like MicroEnsure and BIMA, while insurance companies carry the risk.

These are just a few examples of the kinds of businesses that we believe
present the highest potential for combining impact with returns.

Ameya Upadhyay is an investments principal at Omidyar Network.—
Howwemadeitinafrica 



Ameya Upadhyay

 

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