African fintech now at tipping point

Digital transformation in Africa's financial sector is bursting beyond the expectation of many. The best way to explain this phenomenon is to use Malcolm Gladwell's book Tipping Point.

The book's central thesis is that tipping points are where epidemics of any kind start to have a "stickiness factor." In other words, the magic moment when an idea passes a threshold, tips, and takes off like wildfire. Financial technology (fintech) in Africa is at the tipping point.

Gladwell says a little but precisely targeted push can result in a fashion trend, or the popularity of a new product, just as one sick person can start an epidemic of the flu. He called his approach the Law of the Few, consisting of three different groups of people who play a role in this tipping point: mavens, connectors, and salespeople.

According to Gladwell, a maven is a person who comes up with an idea, perhaps an expert who understands the industry. A connector is an individual who knows everybody across sectors.

It is the person who will tell you my uncle is a banker who can explain how lending works, and I have a brother who is a programmer who can put the banker's message into code. Finally, a salesperson will put together the previous two persons' messages and develop a marketing plan.

Africa has proudly proven products with many connectors and salespeople and brought mavens from far-flung areas like Silicon Valley to collaborate with local experts. How to use the Law of the Few to create sustainable stickiness remains.

This law and even the S-curve that explains the product life cycle don't work in some environments. McKinsey's last month's report, Fintech in Africa: The end of the beginning, says there are four main challenges, including reaching scale and profitability, navigating an uncertain regulatory environment, managing scarcity, and building robust corporate governance foundations.

These challenges come in many ways. First, the potential for fintech expansion across the African continent is substantial, infrastructure limitations in some areas hurt the total addressable market or the relevant category of feasible clients. There is also a lack of identity protection and constrained payment rails—the foundation of all digital money transfers.

Second, African countries are at different levels of development. As such, there are various regulatory regimes. While some nations are beginning to support creation of an enabling environment, others are yet to get there.

For instance, establishing fintech sandboxes, updating licensing requirements, and implementing digital KYC regulations make it challenging for fintech to ensure business continuity and compliance across markets.

Third, funding is slowing down after record-breaking investment in 2021, mainly for later-stage businesses. However, with incumbents beginning to catch up with disruptors, fintech cannot afford to stop growing.

It, therefore, implies that African fintech would probably need to make financial sacrifices to adapt to a new venture funding reality.

Further, the problem of attracting and retaining talent has reached worrying levels for fintech and the entire tech industry. An ambitious collaborative effort between industry, academia and governments is overdue.

According to some estimates, about 50 percent of Africa's software developers are in five countries (South Africa, Nigeria, Morocco, Kenya, and Egypt). Additionally, this talent concentration is in high demand in Africa and internationally.

Finally, for fintech to successfully traverse this uncharted and fragmented landscape, manage scarcity, and achieve size and profitability, it is likely essential to ensure world-class corporate governance. Even in challenging circumstances, a strong, positive corporate culture that offers consistency, clarity, and direction may develop with an efficient structure.

At least among the successful ones, the secret to success lies in six characteristics. These are: tailoring their value proposition to the target market, utilising existing physical networks or using aggressive pricing strategies to offer lower fees than rivals, having a clear monetisation strategy, using scale to lower the cost of serving customers, using strategic alliances to avoid the need for a physical branch network, and paying attention to and complying with regulations.

The fintech boom in Africa is creating an ecosystem that may positively impact society by expanding access to finance in essential industries like agriculture and healthcare and facilitating more widespread access to insurance and healthcare.