The fintech industry in Europe is viewed as a threat to the established order, a pesky thief with its eyes on the products and services that banks and insurance companies consider fundamental. Generally speaking, financial institutions have responded by partnering with the competition, buying it up or trying to create its own version.

In Africa, the role and perception of fintech is quite different. Whereas in Europe and the US, tech companies are offering better or cheaper versions of existing products, in Africa they are creating products that did not exist in the first place.

As of 2014, only 34 percent of adults in sub-Saharan Africa had a bank account, according to World Bank data. At the same time, 12 percent had a mobile money account, well above the global average of 2 percent. In Kenya, 58 percent of people have a mobile money account, 35 percent in Tanzania and Uganda.

Banks on the continent are reluctant lenders. The African Development Bank predicts that credit providers will need to increase their lending by at least $135 billion to meet the demands of small and medium-sized enterprises, according to a statement published to coincide with the United Nations’ SME Day.

The need to fund the tech-driven alternative lenders stepping in to this space, so that they in turn can push for greater financial inclusion, opens the door for venture capital and private equity.

“As consumers continue to rise towards the middle class, their need for financial services is profound” Gary Herbert

In Africa the distinction between a traditional corporate and a fintech firm is blurred. Some of the biggest disruptors are established mobile network operators, who are using their balance sheets to push into financial services either alone or in partnership with banks and insurance companies. The most often cited success story M-Pesa, a mobile money transfer and microfinance service, came about through a collaboration between Vodafone, Safaricom and Vodacom, the largest mobile network operators in Kenya and Tanzania. Then there are the smaller, technology-driven firms that are most in need of funding.

According to a report by the GSMA, an association of mobile phone operators, there are 314 active tech hubs in Africa cultivating many hundreds of companies, with Cape Town, Lagos and Nairobi among the most prominent. “Fintech companies in particular are attracting new entrants into the region,” EMPEA notes.

In March, TA Associates made its first foray into Africa by buying a minority stake in Interswitch, a Nigeria-headquartered, Africa-focused digital payments company, for an undisclosed amount. A relative veteran in the country’s payment industry, having been founded in 2002, Interswitch owns and operates Verve, Nigeria’s main domestic debit card scheme, and serves as a third-party transaction processor for many large banks. Africa-focused private equity firm Helios acquired a 68 percent stake in the business for $110 million in 2011, and remains a majority shareholder.

In June, impact investor Leapfrog Investments and Omidyar Network, the investment business of eBay founder Pierre Omidyar, bought an undisclosed stake in Massachusetts-based Cignifi, which uses machine learning as a tool to expand financial access in Africa.

Cignifi runs a big data platform that carries out credit scoring based on non-financial data, allowing people without bank accounts to access credit. It does this mainly by analysing mobile phone data, such as calls and texts, the amount of time a person spends at home or in work and interactions with other lenders.

“As consumers continue to rise towards the middle class, their need for financial services is profound,” says Gary Herbert, a partner with Leapfrog. “Financial services provide the critical safety nets and springboards for a generation rising out of poverty for the first time, and help ensure a continued rise into prosperity. There continue to be many mid-cap opportunities in the African financial services market, and today we have 10 financial services companies in our portfolios.

EXCEPTIONS THAT PROVE THE RULE

While the potential of fintech in Africa is clear, there are issues that any private equity investor has to carefully consider. Though potential investments number in the hundreds, most companies come up against the same obstacle: insufficient human capital, which in turn restricts their ability to secure funding.

Ross Baird, who heads emerging markets-focused venture capital group Village Capital, was given the task of examining the state of tech entrepreneurialism in East Africa and India by the Bill and Melinda Gates Foundation. He found that the problem wasn’t so much on the technical side, where the skills do exist in pockets, but in finding people with management experience.

“In East Africa, it is extremely difficult to convince candidates to leave their jobs to work for a risky start-up,” he says. “Like start-ups anywhere, DFS companies with limited capital offer equity to supplement employee-compensation packages. However, equity is not yet a widely-accepted form of compensation in East Africa because there haven’t been enough notable exits or acquisitions to prove the economic value that stock could provide.”

Another significant challenge is the dominance that mobile operators have managed to build up in a relatively short space of time. These operators control infrastructure and have ownership over the kind of customer data that companies such as Cignifi need to make their product a success. They are not inclined to make it cheap or easy for others to join in. This, and the regulatory picture, suggest that for the time being, the fate of fintech, traditional financial services and mobile operators are very much intertwined.

“Disruptors such as mobile phone operators and technology companies need to enter in partnerships with traditional banks and insurance companies for both economic and regulatory reasons,” says Christian Lim, senior manager at private equity firm AfricInvest. “They are often new to the financial sector and are sometimes new to Africa. In many cases, for instance, to be allowed to take deposits, they are also required by regulators to partner with traditional financial service providers.”