afn mafh webinar - impact of covid on fintech africa

Impact of COVID-19 on FinTech in Mauritius & implications for Africa

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The International Monetary Fund (IMF) notes that in the backdrop of the COVID-19 pandemic, technology is creating new opportunities for digital financial services to accelerate and enhance financial inclusion, amid social distancing and containment measures. Broadening the financial access of low-income households and small businesses could also support a more inclusive recovery.

In Africa, FinTech has overwhelmingly taken the form of mobile money — impressively cutting the cost of sending remittances by 50 percent. Mobile money originated in Kenya and is rapidly expanding to the rest of the continent. Indeed, in some African countries, the share of the adult population with mobile account is larger than the share of adults with traditional accounts. The IMF index shows that digital financial inclusion has increased significantly in recent years preceding the current crisis with FinTech also contributing toward closing financial inclusion gender gaps.

At the same time, the risks emerging prior to COVID-19, as digital financial services develop faster than ever before following the pandemic, are becoming even more relevant. The IMF report on ‘The Promise of FinTech: ­­­­Financial Inclusion in the Post COVID-19 Era’ warns that the pandemic could accelerate pre-existing risks of financial exclusion and give rise to new risks to the FinTech sector itself.

Against this backdrop of heightened opportunities and deepening challenges facing the FinTech sector in the continent, the Africa FinTech Network (AFN) held a webinar jointly with the Mauritius Africa FinTech Hub (MAFH) under the theme ‘Impact of COVID-19 on the FinTech sector in Mauritius and what it means for Africa’ on 07 July 2020.

The session was moderated by Noha Shaker, the founder and Secretary General of the Egyptian Fintech Association and the elected Vice President of both the Africa FinTech Network and the union of African FinTech associations. The panellists invited to share their expert views were:

The session was opened by Dr Segun Aina, President of the AFN, who invited all participants to the webinar as part of a recurring thought leadership series by the AFN.

“We shall now solicit expert views on the regulatory landscape in FinTech across Mauritius and Africa, the challenges and opportunities for FinTech firms in a global context, as well as the flow of investments into the FinTech sector in Mauritius and Africa,” noted Noha, handing over to Ian to provide a global overview of challenges and opportunities facing FinTech firms.

Winners and losers from the current way of doing business

Ian noted that FinTech companies can rarely operate without the support of governments, banks, big institutions, and investors.

“What COVID-19 has done is to transform FinTech innovations from nice-to-have to an absolute necessity. The days of being able to run a branch-based banking business are really gone,” he highlighted.

From his perspective, the winners in the current context would be those who are running a FinTech business in emerging markets. “Banks can’t do digital natively like we can. The winners are the digitally native – for whom the mobile experience of banking and transactions is their modus operandi,” he noted.

The other winners are FinTech companies that fit around consumer’s lives since Ian believes that FinTech solutions that are built around the consumer will do very well. Finally, nimble businesses that keep pace with the shifting customer requirements in a fast-changing world will emerge as winners in a COVID-19 context.

“When we talk about the digital revolution, we think of the products around us. More than that though, it is about a culture that is people driven. The losers will be those that have a culture not supportive of rapid evolution,” he stressed.

He commented that, in the past, FinTech companies had to plead with banks to work with them. However, banks have realised over the last few months that they can’t be nimble or fast enough. Hence, FinTech firms are seeing a lot more interest from banks to partner up with them.

On Noha’s query regarding banks having faced challenges with FinTech’s ability to meet compliance requirements, Ian replied that this is a perception issue. “At NowMoney, we have bank-grade compliance, KYC, anti-money laundering and fraud detection systems. As an entrepreneur, you have got to let the world know that compliance is important to you,” he highlighted.

Noha concluded that FinTech entrepreneurs must position themselves as more capable players as far as consumer protection and compliance are concerned. “Ticking these boxes will help FinTech firms to access the right investment and capital,” she highlighted, while turning to Nicole for the next session on investment flows to Africa and Mauritius in the FinTech space.

Investment flows to Africa and Mauritius in FinTech

Nicole noted that sustainable FinTech is an emerging term and lies between green finance, responsible finance and sustainable finance. She defined it as awakening and restructuring the investment value chain to make maximum impact.

“Sustainable FinTech is the biggest opportunity that FinTech has to offer. What Ian has touched upon in terms of financial inclusion is one impact of FinTech which is now broadening in scope to include greening of our climate and a zero-carbon emission objective over the next decade. FinTech offers the best hope for speed to execution,” she stressed.

On Noha’s query regarding whether investor attitudes are changing towards sustainable finance, Nicole noted that ESG factors have become an increasingly important criteria for institutional investors. When it comes to private markets, venture capital and private equity, however, it is a very different story.

“This is the asset class that is taking the biggest risk and is nearest to the start of the small business lifecycle. These businesses have a huge impact and are close to the heart of the community. However, the perception that investors have that this is an impact investment and will not yield high returns – that is a wrong impression,” highlighted Nicole.

She rued that much remains to be done to green the investment value chain as also to serve the small businesses and consumers across the continent. While 2018-19 was a record year for venture capital investment into the FinTech sector in Africa, seeing the highest-ever level of venture capital funding of USD 1.34 bn injected, Nicole noted that investors must equally ensure that they have a direct line on the investment and ask the right questions regarding the outcome and impact of the funding.

In response to Noha’s query on the obstacles Africa needs to overcome to increase its share of the global venture capital investment into FinTech, Nicole stated that the investment story is on a healthy trajectory although there is some predictability in terms of jurisdictions with Nigeria and Kenya enjoying the lion’s share of the venture capital going into Africa for FinTech.

“While FinTech attracts over twice the amount of venture capital invested in technology than other technology sectors combined, if you are an investor in FinTech, you need to understand the complexity of the issue. For instance, how much of your capital is going to be sunk into going from one part of the continent to the other? Also, institutional grade compliance is now an integral part of how a FinTech firm is expected to operate. FinTech has to gain the confidence of regulators and the markets it serves,” she concluded.

Noha thanked Nicole for shedding light on how investment is going in Africa and how private capital can make a real difference in FinTech. She highlighted, however, that a host of supporting regulations and policies must still be in place to ensure that FinTech firms reach the market spaces that are not being served by any financial service providers. On this note, she turned to Dovinassy Pillay, hailing from the Ministry of Financial Services and Good Governance which drives the development of FinTech in Mauritius, to provide insights into the supportive regulatory and policy environment.

The Policy Perspective

At the outset, Dovinassy noted that FinTech cannot develop in a silo. It is important that it receives due support from regulators, policy makers and banks, besides other large players in the financial services space.

She then took the audience through the various milestones that Mauritius has achieved in creating a conducive environment for FinTech.

“We initiated a National Committee to take stock of where we need to go in terms of FinTech developments. The first report was issued in May 2018, ‘The BluePrint for the FinTech sector in Mauritius’, outlining the initial steps towards creating the Mauritius FinTech Hub. All these actions were taken in the Budget for 2018,” she noted.

She went on to note that Mauritius now boasts a robust framework in terms of being one of the few countries on the continent to offer a Regulatory Sandbox Licence – an interim regulatory authority to issue the in-principle licence for FinTech firms to test their innovations in a safe environment. Then, the Financial Services Commission can issue licences such as the Digital Custodian Licence, the Payment Intermediary Licence and the Digital Asset Marketplace.

To Noha’s query on what has been the impact of all the noteworthy measures that Mauritius has taken towards offering one of the best environments for FinTech, Dovinassy stressed that while there have been many conducive budgetary measures, there have also been plenty of challenges faced along the way.

“We have really pushed the FinTech agenda to the maximum. But we also need a vibrant ecosystem for FinTech firms to tap into their potential,” she noted.

In response to Noha’s query on the specific measures put in place to support FinTech firms post COVID-19, Dovinassy emphasised that COVID-19 has been a big eye opener with respect to FinTech. Banks had to review their processes all the way through, with people opening accounts over video calling or sending documents through WhatsApp. The methods were already in place but COVID19 showed how they were really needed to facilitate things on the ground, she stressed.

On Noha’s query regarding the various regulatory aspects in which other African countries can follow in Mauritius’ footsteps, Dovinassy considered that a collaborative approach was in order. She noted that in Mauritius there is a central KYC database “so we can see African companies discover the merit in opening an account with the Bank of Mauritius. For Africa, it would mean that we have better financial inclusion, literacy and ever-growing opportunities for their innovators and start-ups.” 

She highlighted that “one of the sectors which has really been influenced by COVID-19 is the banking sector.” For instance, when the government extended the Wage Assistance Scheme, people who did not have a bank account managed to send their documents across and open accounts swiftly with all the technological tools and platforms at their disposal. “If such innovation could continue outside of a COVID-19 context, it would be a significant move indeed. We could create the synergies between the authorities to empower such initiatives,” she concluded.

Diversifying FinTech beyond payments

Next, Noha requested the panellists’ views on whether there is a concentration problem in FinTech, considering that most start-ups tackle the area of payments, even though there are many other areas in FinTech that offer space for innovation and impact.

Ian agreed with Noha’s observation and believed that the thrust on payments arose because that is “the lowest hanging fruit and the area most poorly serviced by traditional financial institutions.” He opined that once payment solutions are addressed by FinTech firms, the other ways in which people interact with money would come under the scanner.

For Nicole’s part, she outlined the findings of a recent report by McKinsey which shows the challenges and opportunities that COVID-19 poses to various sectors, with finance and insurance emerging as rife for innovation and banking highlighted as an industry with scope to shape a whole new business. She stressed that payments infrastructure is one of the top areas for FinTech innovation, with Mphasis, Wallets Africa and SmartWage being some FinTech firms to watch out for. She cautioned that “in these tough economic times, contraction of capital is a reality” but went on to note that innovation is still going to happen.

FinTech opportunities and challenges

In response to an audience question on how FinTech companies are being affected by COVID-19, the panellists noted that constrained access to capital, inability to meet investors face to face, staff redundancy, overcommitment to fixed costs, and struggling to keep up the pace and stay relevant in a changing world were some of the challenges that start-ups were facing.

Responding to the final question from the audience on the best regulatory improvement that African jurisdictions should take on board, the panellists touched upon aspects such as guarding against money laundering and fraud, fully comprehending the product or activity that a FinTech firm is seeking to undertake, and last, but not the least, inculcating and educating talent on the compliance side as an integral aspect of the innovation ecosystem.

At this point, Noha declared the webinar closed to audience questions and handed over to Dr Segun Aina for final remarks.

“We should be fast tracking digital transformation in a post-COVID scenario and should be interested in understanding how FinTechs can leverage on the US$50 bn support that the World Bank is extending to the FinTech sector in Africa. At AFN, we have 32 countries as members and are keen to get all the 54 countries in Africa on board by next year. Our aim is to have great FinTech solutions coming out of Africa that can be used across the globe. We will ensure that these sessions continue regularly so that we can understand the impact of COVID-19 across African jurisdictions and I look forward to all of you joining again for the next country session,” concluded Dr Segun Aina.

The way forward

For the time being, it may be too soon to guess when COVID-19 will abate or for how long, and what will be the duration and depth of the current economic downturn. What is abundantly clear, though, is that FinTech has entered a new, and unstoppable, phase of growth, following the pandemic.

As the crisis accelerates trends such as digitisation, market consolidation, and regional cooperation in Africa, and creates important new opportunities – for example, to boost local manufacturing, formalise small businesses, and upgrade urban infrastructure – FinTech will play an important role in providing the investment for these crucial initiatives in a new normal.