Chinese investments in African tech will transform the fintech landscape

By | October 20, 2018

A recent article brought to my attention this report on the pattern of funding experienced by fintech startups in East Africa and India with rather damning results. 90 percent of the capital invested by “Silicon Valley-style” investors went to startups, technically in East Africa, with one or more North American or European founders.

These results put an entirely different spin on more recent articles on the rise of African fintech and the millions of dollars raised by startups in Africa. Village Capital, too, has been making an effort to promote their recommendations for structural change in the ecosystem in order to enable the emergence of hundreds more fintech and DFS (digital financial services) startups deemed necessary to transform the economic landscape in Africa.

But the challenge, as framed by this snippet from the report, will remain, as it “reflects deep cultural trends in American life”, of bias, stereotyping, and inbred prejudice. So called “first world” technology such as artificial intelligence is already dealing with the problem.

China’s interest in African tech, particularly trade related such as in commerce and payments, is being noticed

Simultaneously, and recently, I came across this op-ed for the WEF making the case for why the tech sector is China’s next big investment target in Africa.

Given China’s position as a leading and rapidly accelerating technological superpower in the world, making strides especially in the fields of logistics (smart cars, drones, e-commerce) and energy (solar panels, smart metering, etc), it makes sense that the most logical industry for the next stage of Sino-Africa collaboration is technology.

But that’s not fintechs and DFS startups, you say, comparing these apples to the Village Capital’s report on oranges?

Perhaps this is why Alibaba Group, the unparalleled pioneer of e-commerce and payments in China, has started to show an interest in Africa. Not only did they collaborate with UNCTAD on the eFounders programme to train over 100 African entrepreneurs in the next couple of years, they recently announced a fund of $10 million to invest on the continent over the next 10 years. Furthermore, Alibaba’s subsidiary Ant Financial has signed a partnership with the United Nations Economic Commission for Africa and the IFC to promote digital financial inclusion. While these are preliminary steps, we are hopeful for more serious commercial involvement in Africa from a company with a $500 billion market cap.

DFS, DFI, what’s the difference between digital financial services for financial inclusion and digital financial inclusion? The target is clear. And been noticed from the other side, as this rival opinion piece in the Financial Times shows, albeit with a greater sense of urgency and panic in the tone and style. It may also explain why Village Capital woke up this week to trumpet the results of their analysis on funding patterns from over a year ago. From the FT:

The Trump administration has made a perceived global rivalry with China the centre of US foreign policy. This competitive stance has coloured the view of African countries in Washington and a tale of Chinese mercantilism in the region has come to dominate the narrative, under which China greedily demands privileged access to Africa’s natural resources in exchange for no-strings-attached infrastructure financing.

But that story is outdated and fails to capture an emergent area of true competition — that among US and Chinese tech giants.

Given what we’ve seen in the Village Capital report linked in the first paragraph, will Chinese funding patterns be any different? Two key factors are being highlighted by both sides:

  1. Chinese experience with growing their domestic internet usage, ecommerce platforms, and payments, especially on the mobile platform; and,
  2. Chinese investiments in building the digital Silk Road

Taken together, we can already see signs of transformation in the Chinese approach to investing in the African tech, particularly in fintech and DFS, landscape. Cash rich companies such as Alibaba are paving the way, with founder Jack Ma’s leadership in partnering with key global institutions such as the UNCTAD and the ECA, viz.,

Chinese entrepreneurs understand how to navigate Africa’s current explosive growth in internet literacy. While Western technology companies have made some first strides on the continent, Chinese companies may have an advantage, as their domestic market experiences often closely resembles that of Africa. In the early 2000’s, when the Chinese tech giants of Alibaba Group, Tencent and Baidu were just launching, internet penetration in China was less than 1%.


In contrast, many of Alibaba’s lessons learned in China from innovations in payments to logistics can be directly applied to the African ecommerce landscape. Alibaba’s business model as a middleman between buyers and sellers is likely to translate well to the African market, where there are thousands of small, informal businesses. Ant Financial, Alibaba’s affiliate that includes Alipay, recently raised $14bn to focus on global expansion and is likely to see success in African markets where mobile banking is the norm and traditional financial institutions are limited.

Will Chinese investments change the landscape of funding for homegrown African fintech startups?

China’s greatest strength lies in its recent history of digital financial solutions (DFS) leapfrogging the need for legacy infrastructure in banking solutions already established in the United States. That, coupled with an informal economy and unbanked population, provided the testing ground for Chinese tech giants such as Alibaba, Tencent, and Baidu to introduce their solutions, and, transform the local ecosystem. From an interview with Chen Fengying, the director of the Institute of World Economic Studies at the China Institutes of Contemporary International Relations:

The reason for such rapid development of fintech in China is that the traditional banking system in the country was undeveloped. Credit cards were available to no more than 20 percent of the country’s population; at the same time, demand for banking products was great. Companies such as Alibaba saw the potential of the market and used it.

In Africa, the situation is similar. The banking sector barely interacts with the vast majority of the population. Undeveloped markets and unsatisfied demand are areas Chinese tech companies have experience in.

It will be easier for them to adapt to the African market than for European and American companies that do not always understand that the consumer preferences in developed and developing countries can sometimes differ significantly.

Clearly, the ability to assess risk and evaluate the opportunity for DFS and fintech startups is going to be wholly different for Chinese investment as compared to the “Silicon Valley-style” of VC funding. Nor is there a legacy of implicit bias embedded in the entrepreneurial culture that blurs the view of the market or the potential for returns. Regardless of their personal viewpoints, Chinese money has always taken a very businesslike view of the opportunities for returns, whether investing in India, or in Africa.

Chen Fengying notes:

“E-commerce is best developed in backward regions. Most backward regions respond best to new things. This explains, for example, the success of Ant Financial in India. These regions generally accept e-commerce and mobile payments straight away because, unlike the US, there was no era of credit cards, only a few have these products. In the US, there’s a more reliable and developed credit market, therefore, in a sense, they are more developed than we are, but this does not mean that our mobile payments are less reliable, they are simply more flexible.”

The bottomline

As China’s investment interest and capacity, led by Jack Ma, in African startups grows, we will see a transformation of the DFS landscape the likes of which have not been seen before. Money will flow to where the returns are, and where the opportunity is obvious, rather than pooling within old boy’s networks, and bottlenecks of implicit bias.

I expect the earliest signals within the coming 12 to 18 months.

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