By Tilman Ehrbeck
When COVID-19 first struck a year ago, start-up entrepreneurs and early-stage investors paused briefly to assess what the pandemic might mean for the burgeoning theme of Fintech innovation. Rather than threatening new financial business models, though, the pandemic has brought the future forward, dramatically accelerating changes to customer behaviours and industry structure in Africa and beyond.
What had previously been expected to play out over years has been accomplished in months. And with new data showing that financing volumes for Fintech firms reached record highs in the first quarter of 2021, I believe we are entering an accelerated phase for innovation in finance. This has the potential to deliver better outcomes for consumers and small businesses around the world – and I expect it to be shaped by three related themes that have demonstrated their importance over the past year: platforms, plug-ins and plumbing.
These themes should be front and centre in an increasingly robust financing environment for Fintech. Investment in the sector slowed during the initial uncertainty around the pandemic, but picked up towards the end of last year and roared back in the first three months of 2021. According to CB Insights, Fintech firms globally raised nearly $23 billion of financing in the first quarter of 2021 – more than half the total funding they attracted in 2020.
Embedded finance, or the integration of traditional retail financial services into platforms that millions use on a daily basis, has gathered momentum during the pandemic. Start-up entrepreneurs and early-stage investors have redoubled their efforts in this area and – judging by the slew of recent news – later-stage investors and public stock markets have taken notice.
There are three key components to embedded finance. The first involves platforms that are relevant and helpful to people’s daily lives during the pandemic: the gig worker platform that creates earnings opportunities, the e-commerce platform that delivers goods to neighbourhood stores, the agri supply chain networks that link farm gate to food plate, and the social media platforms that help people stay connected. Platforms like these naturally integrate digital payments.
MaxAB, a Cairo-based Business-to-Business e-commerce marketplace that connects food and grocery retailers to suppliers in Egypt’s most under-served geographies, has over 20,000 active stores embedded within their network. The COVID-19 pandemic accelerated digital adoption which saw a large uptick in app usage from 20% pre-pandemic to 85% post. The firm has deployed credit through partnerships and have path to wider expansion for customers, and has also expanded their ‘retail as a service’ for business with services like data analytics which help to advise on products to sell and shelf optimization for its users.
Platforms like MaxAB have rapidly growing user numbers, often commanding strong trust and engagement. Importantly, they also generate proprietary data and insights into user needs and behaviours, allowing them to expand into financial services other than payments.
Plug-ins and plumbing
The second component of embedded finance is the plug-in products that leverage these popular platforms’ high engagement, payment transaction data and other customer insights. With these plug-ins, platforms can deliver a broader, more tailored and often cheaper set of financial services than were previously feasible for, or available from, traditional providers – especially new forms of credit or insurance.
The most visible example in Africa at present is Nairobi-based Apollo Agriculture. The firm builds credit profiles for its small-scale farmers using machine learning models. Apollo also leverages high engagement from farmers to cross sell products and offer advisory services to farmers such as soil testing, mechanized land preparation and insurance.
The third component of embedded finance is the new breed of API-based infrastructure. This ‘plumbing’ is required to connect the new generation of customer interfaces and product providers with the regulated balance sheets or capital markets that finance, aggregate and manage risks at the back end.
African startups such as Flutterwave initially focused on building payments infrastructure for merchants across East and West Africa. It is now being leveraged to further engage merchants with e-commerce. Flutterwave has also launched their ‘barter’ product to build out Business to consumer services.
Supercharged by the pandemic and lockdowns, embedded finance is changing the structure of traditional retail finance. Because of their large user bases, strong customer engagement and new data sources, platforms, product plug-ins and new plumbing together have the potential to bring financial services to far more customers, offering better services at lower costs than the traditional bricks-and-mortar banking system.
By leveraging these three elements of embedded finance, entrepreneurs, investors, incumbent banking partners and regulators in Africa have the opportunity to create a fairer and more inclusive financial system as the region begins to recover from the pandemic.
Tilman Ehrbeck is managing partner at Flourish, a global venture investment firm. He is based in Washington, D.C. Flourish has a focus on Africa and has a portfolio of nearly ten African Fintech Startups that they partner with.