African fintech companies to adopt blockchain technology in coming years, here’s why

The African startup industry has grown tremendously over the years. Startup funding increased by an incredible 2,600% between 2015 and 2022—from $185 million to $5 billion—and fintech is one of the key sectors that has led this growth.

The financial technology sector itself has received $1.9 billion of the $5 billion raised by African startups in 2022. Furthermore, fintech companies accounted for almost half of all startups in Africa in 2020-2021.

From payments to lending and remittances, these startups are among the most well-known and respected in Africa. And while their success is proof of innovation and growth, there are obstacles that could hinder further growth.

McKinsey estimates that the revenues generated by African fintech companies could grow by up to eightfold, but that depends on the penetration of digital payments. McKinsey’s research also shows that 90% of transactions on the continent still rely on cash, meaning fintechs have a lot of room to grow.

This growth is being hampered by security, regulatory, and infrastructure challenges. For example, security has eluded fintech companies and even traditional financial institutions in Africa.

This security challenge has forced one of Africa’s most promising fintech companies, Union54, to temporarily close virtual card services — This unfortunate incident, resulting in a $1.2 billion fraud, affected around 100 fintech companies.

Following the temporary closure, the CEO of a Zambian startup admitted that TechCrunch that they are the main challenges standing in the way of fintech development in Africa.

Meanwhile, these challenges also come in the form of regulation. It is known that technological innovations often develop faster than regulations, and this fact also applies to fintechs.

In some cases, regulation has stifled the growth of innovative fintech companies because there are no clear rules and regulations to guide the activities of such startups. For example, regulation is one of the issues that has forced Nigerian fintech companies, Thepeer, off the market.

Complex licensing and compliance procedures also hold back the growth of fintechs. Given their size and financial capabilities, some fintechs may not even make it onto the African financial market before they fail.

Infrastructure challenges also stand in the way of African fintechs growing their revenues eight-fold, McKinsey predicts. While existing financial infrastructures have significantly improved digital payments in Africa, 90% of transactions still rely on cash.

Moving cash transactions to a digital system will require a scalable infrastructure.

ANDThree out of ten digital payments in Africa already fail. These failures contribute to an estimated $14 billion in lost recurring revenue for digital businesses across the continent each year.

As a result, moving 90% of cash transactions to digital will increase the failure rate, which in turn will lead to increased revenue losses.

Nigeria witnessed this phenomenon when it faced a severe cash shortage in 2023led to the rise of digital payments, which in turn led to failed digital transactions.

Clearly, the current infrastructure needs major improvement, and it seems that blockchain technology can help with that.

Although popularized by cryptocurrencies, blockchain has many applications. For example, the American multinational technology company IBM has built blockchain solutions in various industries including logistics, healthcare and even management.

In its simplest form, blockchain is a decentralized way of storing data. Decentralization is the key word, meaning that the data is transparent and accessible to all required parties in real time.

The concept of decentralization also makes breaches nearly impossible, as data is stored on different nodes. This means that attacks must occur on thousands of nodes simultaneously to be effective.

Interestingly, although blockchain technology is relatively new, we can already see its significant application in the global financial sector.

One such use case is Ripple, a blockchain payment solution that is used for cross-border transactions by over 100 global banks. Ripple’s main selling point is the speed and cost of cross-border transactions.

Despite the growth and innovation that has come to global finance, cross-border transactions are still slow and expensive. Transactions through the Society for Worldwide Interbank Financial Telecommunications (SWIFT), the traditional standard for cross-border transactions, can take from three to five daysand cost from $22 to $27.

However, fees on the Ripple platform are just $0.0002, regardless of the number of transactions on the network.

In Africa, blockchain adoption by fintechs is gradually taking shape. M-PESA, which is arguably the most successful mobile money service in Africa, Stellar integrated blockchain to enable cross-border transactions.

In Nigeria, Zone, Africa’s fastest growing payment infrastructure company, has built a regulated blockchain infrastructure which can help existing financial institutionseliminate problems like chargeback fraud, which is a thorn in the side of fintech companies like Union54.

The blockchain network infrastructure enables real-time monitoring and communication between member institutions, which is why leading Nigerian banks and The Nigerian Interbank Settlement System (NIBSS) has adopted this solution.

From cross-border payments to chargeback fraud and scalability, blockchain technology seems to be the solution that African fintech companies should implement.

However, it is not without its challenges. Being a relatively new technology, it is bound to encounter regulatory and compliance issues. Ripple recently settled a four-year lawsuit with the US SEC, and such issues could arise as African fintechs adopt blockchain.

In addition, there is a talent shortage when it comes to building blockchain solutions. According to blockchain recruiting agency, Blockchain Staffing Ninja, “there are few experienced professionals available for employment due to the novelty of blockchain technology.”

Ultimately, while blockchain technology has shown early signs in theory and practice of its ability to advance financial technology development in Africa, we must wait and see whether it will deliver on its promises in the long term.