How Uganda’s fintechs can attract funding

African Union finance experts say mobile money penetration remains a key enabler and driver of digital innovation and adoption leading to a boost in productivity in key sectors.

 This has led to creating jobs in the digital economy with financial technology (fintech) startups in the region operating in a wide range of domains such as education, healthcare, consumer services and agriculture among others.

Fintechs have developed applications that address rural-urban supply chains and market linkages through electronic retail payment systems thus reducing fraud and enabling e-commerce growth.

Uganda’s digital payments are associated with mobile money, and bank to wallet transactions with financial technology service providers (Fintechs) bridging the gap between mobile money providers and banks.

Shamirah Kimbugwe, director at Pivot Payments, a fintech company says fintechs bridge the gap in integrating payments, but they have also accelerated their services on a higher scale to develop different products that serve different sectors.

So far, Uganda has over 150 fintech companies serving different sectors, but also at different levels in the economy. 

The e-Conomy Africa 2020 report—a unique collaboration between Google and the International Finance Corporation (IFC), shows that over the past decade, fintechs have become a significant driving force in the African Internet economy, growing in Africa, in part, to serve the population that is currently unbanked and financially excluded.

Covid- 19 effect

The business model of fintechs works primarily on transactions, with the main denominator or driver being the ability to spend.  Covid- 19 contracted spending patterns with more consumers saving for the uncertain future.

According to Peter Kawumi, the President at Financial Technology Service Providers Association of Uganda (FITSPA), this, in turn affected fintech growth, but later adjusted to develop products that were relevant for the pandemic. Kawumi points out Xente and Jumia which, for instance, allowed businesses to start selling products online.

“For Xente, it essentially allowed people to sell pineapples, mangoes, chicken and other household items. Consumers who couldn’t leave their homes, were able to buy and embed payment services such as mobile money,” Kawumi says.

Funding                                                

Fintechs have largely relied on venture capital funding to develop scalable products that can serve across many markets.

But Uganda attracts the least funding for fintechs in venture capital, with Rwanda, Kenya, Egypt, South Africa and Nigeria being the leaders in hedge funds.

The question of why Kenya and Nigeria are perceived to be thriving in fintechs, according to Kawumi is because their populations are higher and their products have the ability to scale faster.

The fintech sector is also changing with big venture capital funders focusing on flagship products which have capability of integrating many services. A major prediction for Kimbugwe is in shipping and freight services as more businesses move online.

“There a very big discussion in West Africa, perhaps that is why they have the biggest investment in hedge funds. For Uganda to position itself very well in the market to become an investment destination, the fintechs have to invest in flagship products or Minimum Viable Product (MVP),” she remarks.

Ms Kimbugwe says a Minimum Viable Product should be bankable and have the ability to attract investors. This means the product can serve a million or more people across different markets. This partly explains why Kenya and Nigeria lead in attracting funding.

 “The irony about venture capital is not simply about bidding for funding, but you need a scalable product, to attract investors. If I have a million dollars, what is my return on investment in two years?” she ponders.   

Where are the opportunities?

The prediction for fintech usage in 2021 is expected to rise as more people take on using mobile money and banking services.  Currently, Kawumi says, this is hinged upon prospects of growth in mobile money usage from the current 23 million mobile money accounts and 14 million bank accounts, which in part are expected to rise in 2021, and the subsequent years to come.

Kawumi says there is a huge young population that remains unserved, opening a huge opportunity for investors.

“We are able to reach scale very quickly because we have a very young population that is interested in technology, which means they are willing to try out new things and adapt to new technologies,” Kawumi says.

He notes that a lot of investor funding and opportunity is in Research and Development for fintech products, and once you get the product right, then, it provides opportunity for growth. 

“The beauty about a fintech product is that if it is working in Uganda, there is a possibility that it will work in several other markets across the continent,” he explains.

The e- Conomy report also projects a 35 per cent growth of the electronic payments market over the next two years as Internet subscribers’ increase.  

Kimbugwe believes beyond the normal growth in fintech usage, the entrant of new players in the market is expected to transform how fintechs operate.

 “I predict a hyper growth in fintechs and we shall observe unusual entrants joining the market. But the usual suspects in the industry will also modify from simply doing payments aggregation, to moving into other solid products,” she explains.

She adds: “We are also expecting a surprise from banks and telecoms in setting up their own fintechs, but we also expect other fintechs to make mergers and acquisitions.”  

With the opening of the African Continental Free Trade Area (AfCFTA), Fintech service providers will have a boundless digital economy to operate in and have access to a population of1.3 billion people, which, in many ways, remains a huge opportunity to exploit.  

Fintech regulation

According to the Bank of Uganda, the National Payment Systems Policy for Uganda was approved by Cabinet on the 22nd December 2017. It seeks to put in place a framework to: facilitate the enactment of a Payment System law; specify the roles and responsibilities of all the payment systems stakeholders; ensure safety of all payment systems in the country; foster consumer protection; enable increased access to electronic payment systems to reduce cash based payments; and promote innovations.