Embedded Finance representing the next opportunity in Africa

The Covid-19 pandemic saw a massive acceleration in the adoption digital payments systems across most industries worldwide. In droves, companies began implementing a model that embedded several product offerings on a single platform to promote a seamless user experience. Financial institutions, retail companies healthcare providers started to explore digital technologies to innovate their B2B/ B2C and other internal processes, leading to a keener interest in the potential benefits of embedded finance.

Although businesses were forced to reconsider how they conducted their daily operations when the pandemic hit, embedded financing/banking did not begin with the rise of the pandemic. In 2017, Jumia, Africa’s leading eCommerce company, launched JumiaPay, a digital payment service and its mobile money option. The intention was to provide a secure and convenient shopping experience to its customers across Jumia’s other vertical businesses, ranging from getting a refund on different in-app purchases, paying utility bills, making hotel reservations, paying phone bills and even obtaining a loan directly from Jumia. In short,

Jumia was remodelled as a Super App. By 2020, JumiaPay had a huge turnover with a 58% increase in YoY payment volume. That year, 35% of the transactions on Jumia were paid for through its JumiaPay platform.

This novel business model has since been adopted by most of the African startup ecosystem companies as they attempt to expand their market share. This model is what is referred to as Embedded finance.

An embedded finance model involves non-financial institutions offering bank or financial-like services in addition to its existing product offerings. It consists in integrating 3rd party financial products and services into a receiving company offering, while the receiving company retains complete control over the offering and customer experience. Such financial products and services include digital wallets, payments, money transfers, remittances, and debit/credit cards. In other words, processes that manage money. The aim is to simplify the financial service processes for consumers, making it easier for the public to resolve their money-related queries.

In terms of number, A Forbes report notes that the embedded finance industry in Africa and the Middle East grew annually by 45.3% to reach $10.3 billion in 2021 and is expected to grow from $10.3 billion to reach $39.8 billion by 2029. Forecasts also predict that the total market value for embedded finance will hit $7.2T by 2030, more than the current value of all fintech startups and the top 30 global banks and insurers combined. This serves as a testament to not being just a financial trend but the future of financial transactions.

Historically, financial products were typically offered by non-financial companies; now, Financial services are no longer provided as standalone products. Instead, customers are now being offered more personalised solutions by its non-financial partners. These products are directly integrated into the partner (digital) platform and allow a smooth and coherent experience.

Uber may have launched as a disruptor of the traditional mobility market. Still, it offers credit cards and instant-payment services for its drivers. For Uber, embedding financial services has provided a seamless user experience for both driver and rider. Payment after rides has been automated after customers have imputed card details. Credit rides can be made; money can be sent into the uber wallet. The drivers are more likely to stay with a company that provides financial services.

In Africa, the pioneers of embedded credit solutions have been Pay-as-you-go and off-grid solar companies. For several years, companies like M-Kopa have provided financing for solar home systems, TVs, and smartphones. However, today, the buy-now-pay-later (BNPL) craze is gaining popularity among tech-enabled businesses across industries, though unlike in developed markets, BNPL in Africa is typically for essential purchases, which are fundamental to the wellbeing of consumers and SMEs, rather than discretionary purchases.

Fintech startups like Piggyvest, Kuda, Bamboo, Flutterwave, Paystack, RiseVest, and FairMoney, are some of the non-traditional finance entities in Nigeria offering customers embedded finance services in savings loans, investment, money transfer, invoicing etc. These companies can now manage and sell innovative financial services; seamlessly integrate creative forms of payment, debit, credit, insurance or even investment into their end-user experiences.

It’s becoming increasingly clear that embedded finance represents the next leapfrog opportunity in Africa. Its impact will be nothing short of transformational, providing a considerable stimulus to both the company and the consumer.