As a listed Pan-African equities portfolio manager, I am fascinated by the enormous amount of private capital that African financial inclusion (fintech) companies have attracted over the last five years. Venture investors have, mostly, paid no heed to the most common risks cited by South African institutional investors such as currency stability and/or availability.
Fintech companies in Nigeria, Kenya and Egypt alone, for instance, have raised a cumulative $1.2 billion in the last five years – almost 1.5 times what listed equity funds have invested in those same markets over that period, suggesting greater optimism about the subsector than broader markets.
The performance of the very few listed payments companies on the continent has also mirrored this cheery consensus about the economic potential of electronic payments. Fawry, a leading digital transformation and e-Payment platform in Egypt, has outperformed the MSCI Africa benchmark by a factor of five times since it listed in 2019. Hightech Payments Systems in Morocco has outperformed the same benchmark by an extraordinary 13 times in the last five years.
It is well-known how mobile network providers such as MTN and Vodacom are participating in this R350 billion African fintech value pool. MTN’s leadership, for example, sized it in their Capital Markets Day in June this year. Perhaps it is less appreciated how banks in Africa can benefit from the trend. For instance, commercial banks in Kenya that partnered early with Safaricom as it digitised physical cash using its M-Pesa mobile money platform, increased deposit market share dramatically as M-Pesa became ubiquitous, leapfrogging the legacy model of distribution through brick and mortar bank branches.
Another strategy that banks can employ involves spinning off payments infrastructure (and the value of payment flows they enable) embedded within banks themselves. For instance, what Emerati bank, Emerates NBD, did with its merchant acquiring and issuer processing payments solution which later became Network International Holdings Plc listed in London. Or what the Royal Bank of Scotland did with its UK and international merchant acquiring division, which became Worldpay.
Guaranty Trust Bank of Nigeria, the first-in-class commercial bank in that country, recently restructured to become a holding company with a ring-fenced payments business as part of its new stable of subsidiaries. Also in Nigeria, Access Bank is in the process of doing the same.
The most under-the-radar case of such a spin-off may be Ecobank Transnational Incorporated (20% owned by Nedbank).
Applying the same valuation multiple that MTN and Airtel Africa used for their payments platforms that led to valuations of $5.5 billion and $2.7 billion respectively, ETI’s own payments spin-off could conservatively be worth $1 billion, a unicorn hidden in a banking group with a current market cap of only $300 million.
What the above illustrates is that in Africa, right now, there are plenty of exciting developments and wealth to be created by tech savvy founders, Silicon Valley venture capitalists, incubators and accelerators and the prophetic or lucky stock market investor. But what about the man and woman on the street across our vast continent? What part do mobile money and payments platforms play, if any, in getting Africa closer to the only economic goal that really matters – creating 15 million jobs every year to absorb African youth entering the labour market?
On the plus side, studies have shown that access to Kenya’s M-Pesa has enabled over 200 000 families or 2% of households to move out of poverty over the past decade due to the increased consumption over digital platforms. Women have benefited more than men by moving out of rural agricultural subsistence into urban self-employment. These platforms have also provided a more efficient channel for remittance to rural populations, which increases their income and resilience in a time of crisis.
Mobile money increased food security by 45% for rural households with no access to a bank branch in Uganda.
On the other hand, over the same period that M-Pesa enabled 200 000 households to emerge out of poverty, about three million individuals entered the labour force. In Nigeria, for example, that number was closer to 10 million. Still, job creation from mobile money is happening, but it doesn’t appear to be moving the needle just yet and is unlikely to, in our view.
Some economists have argued that we tend to overestimate the productivity (economic growth) impact of modern communications technology such as the internet or, in this case, payments. Older technologies increased growth, created more jobs, albeit fewer billionaires, and even advanced communication time more than the internet.
The telegraph increased the speed at which a message crossed the Atlantic by 2 000 times. Then the fax machine improved that by a factor of 40 times, and then email by a factor of only 15 times. Electricity is the big example. It was the phase shift that moved capitalism into high gear in direct ways such as mass production, but also unpredictable ways downstream. For example, electricity to the home eventually led to the widespread use of washing machines, which meant that rather than spending their time washing clothes, people could go out and do more productive activities that transformed the US and world economy.
In summary, fintech, mobile money and payments is an exciting and welcomed evolution within African financial ecosystems. However, Africa’s population will grow by almost one billion in the next generation and the stakes could not be higher. What Africa needs more of, is the same enthusiasm seen in tech investment and for innovation to be dialled up to a frenzy for investment in the kinds of areas that accelerated the first industrial revolution not the fourth, particularly in the fields of agriculture and land reform, electricity, manufacturing and capabilities that cannot be leapfrogged, such as sanitation for the fast-growing urban poor.
Apps are nice, but jobs are better.
Godfrey Mwanza, Head: Absa Africa Equity Franchise