When driving financial inclusion in Africa, dont ignore the B2B enabling fintechs!

In Africa, where still 90%[1] of transactions happen in cash, 5-7% of [2]$amount transacted are done through digital means: card, mobile money or wallet (compared to 90% in the UK[3] and 88% in the USA[4]]. The share of digital transactions has been growing steadily year on year [mobile money transactions volumes in Nigeria doubled to 800m in 2020 and the e-payments market is expected to grow at 20% per year to reach $40billion in 2025][5]. In addition, due to fragmentation of the payment methods, inadequate financial software infrastructure and compliance processes, still a large portion, up to 30%[6] of digital transactions, fail (estimated at $75B transaction value and expected to grow by 42 percent YoY[7]).

BCG and QED report predicts the African Fintech revenues to reach $65 billion by 2030. With the rapid growth in FinTech, cybercrime has surged, with some African nations experiencing a staggering 76% increase. Africa reportedly loses about $4 billion annually to cybercrime (Carnegie Endowment). The rise in fraud cases and adoption of new digital financial offerings (e.g., e-wallets, mobile money, bank APIs, and crypto payments) make it increasingly difficult to effectively identify and prevent fraud from happening at scale. For instance, nearly half of Kenyans surveyed had fallen victim to fraud on M-Pesa (FinAccess 2021).

But how do we accelerate digitization of financial services in Africa, where cash is king? We sometimes hear from impact-conscious investors that they don’t invest in B2B enabling models nor financial infrastructure, arguing these models don’t necessarily drive inclusion agenda. At First Circle Capital , we tend to disagree. ?

We believe that growing share of digital transactions is increasing efficiencies of cash flows, reducing costs of transacting, and enabling African customers, enterprises and SMEs to access more sophisticated financial service, grow faster, qualify for credit, manage financial risks, and eventually create more jobs and drive financial inclusion. On a macro scale, the rise of inclusive digital financial services is one big important piece of the puzzle needed to drive the economic growth on the African continent. By investing in the aka “B2B FinTech enablers”, SaaS and infrastructure solutions behind the scene, we will enable digital money flows happen seamlessly and at reduced cost and risk, increasing velocity of money in the economy and benefiting everyone.

Key B2B Fintech Enablers

As a thesis-led early-stage tech fund, we are investing in following six subsegments of FinTech: Insurtech, Fintech SaaS, RegTech, Alternative Credit Models, Climate Fintech and Financial Infrastructure. So far, we have backed 13 outstanding companies, our which 7, or >50% of our portfolio, qualify as “the invisible forces” or are often dubbed as B2B enablement in payments jargon. They play a key role in making African payments systems work, and can be grouped into following key areas: Financial infrastructure (In our world this would include all of these software infra plays: open banking, settlement and clearing, interoperability, banking as a service), CFO automation (including expense management, treasury, reconciliation software),? and Risk Management and Compliance SaaS (Fraud and Security software, models enabling digital onboarding and transaction compliance risk management).

First Circle Capital way of working typically means that once we identify the sub-segment of Fintech with significant monetization and impact potential, we tend to try and speak to every start up in this space in Africa. During that process we refine our thesis as to what models we believe will scale in the African context and then chose and back the best teams building such model. When looking at B2B enablers, we screened dozens of key players in three areas:

1.???? Financial infrastructure (In our world this would include all of this software infra plays including open banking, settlement and clearing, interoperability, banking as a service).

2.???? CFO automation (including expense management, treasury, reconciliation software)

3.???? Risk Management and Compliance SaaS (includes Fraud and Security, transaction monitoring, digital onboarding, KYC and AML etc)

Today, in Africa hundreds of millions of individuals and SMEs remain excluded and underserved. In order to build ways to serve these customers in a profitable way, we need to think holistically about how to improve financial services on the continent, using technology. Making finance more inclusive in Africa is not only about backing microfinance of services directly serving the bottom of the pyramid but also about how we make the money movements faster, cost effective, transparent, less risk prone, and by increasing the velocity of the money in the economy, we will drive inclusive economic growth. This is the role B2B enablers will play in Africa.

Agnes Aistleitner Kisuule Ming S. Kwan Robert Smith Jack K. Paola Ravacchioli Philip Walker Credrails Balad Kashier WafR Orca Fraud E-Doc Online Shawn L. B. Melanie Brown, CFA Zee de Gersigny Keziah Kibata Amos Gachuiri

[1] FT Partners Fintech Industry Research- Fintech in Africa 2024

[2] McKinsey, The Future of Payments in Africa

[3] https://www.statista.com/study/32665/digital-payment-types-in-the-united-kingdom-uk/

[4] https://www.statista.com/study/54077/cashless-payments-in-the-united-states/

[5] McKinsey & Co,The Future of Payments in Africa

[6] QED Investors

[7] https://www.accion.org/whats-next-for-inclusive-digital-payments-in-africa/

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