Why Africa’s Electronic Payments Market is Booming

A successful exit from electronic payments company Emerging Markets Payments shows profitable deals are there to be found.

Sub-Saharan Africa skipped landlines and went directly to mobile phones, allowing Africans to leapfrog into the digital age. Now, the same thing is happening with commerce—Africans are skipping the checkbook and going straight into various forms of electronic payments.

And there is plenty of room for growth. Only about 20 percent of the African population has a bank account, according to a World Bank survey, and 98 percent of all transactions in Nigeria—Africa’s largest economy—are in cash, according to MasterCard Advisors.

“In a generation’s time people will still be talking about the growth opportunities in payments,” says Rick Phillips, a partner at London-based Actis Capital.

Another positive indicator is the continent’s youth; a third of all Africans are 14 years of age or younger. “So you have a strong secular drive of demand, apart from the ups and downs of the macro economy, GDP and oil prices,” Phillips says. “The next generation wants to have a phone, they want to be on the Internet, they want to be in the banking system. They don’t want to walk around with cash that can get stolen or lost.”

In March, Actis, which invests heavily in financial services in Africa, sold electronic payments company Emerging Markets Payments (EMP) to payments-solutions conglomerate Network International for $340M, exiting its original investment of $90M.

The deal could serve a playbook for investing in electronic payments. From the start, it intended to create a payments platform that adheres to international standards and has sufficient scale and management talent to make it attractive to potential buyers. Actis built EMP’s continent-wide platform by acquiring a number of regional companies. With its buy-and-build strategy, Actis constructed an electronic payments platform with the largest footprint in the region. It delivers services to more than 130 banks, 35,000 retailers, governments, and consumer finance institutions across 45 countries in the Middle East and Africa.

“The trick was not reading the market, because we knew the demand would be there,” Phillips says. “The challenge was making a series of acquisitions and stitching together a business that had coherence across different geographies and payment disciplines.”

Of course, investing in the African payments space is not a slam dunk. “Challenges for private equity investment in Africa include negative perceptions about investing in Africa, an information gap about the opportunities available on the continent, regulatory constraints, and a shortage of talent in this field,” according to a KPMG report.

What’s more, the value of private equity deals in Africa fell by 69 percent in 2015, to $2.5B, according to the African Private Equity and Venture Capital Association, and some observers worry it will take years for Africa-focused funds to find a home for the money they’ve raised, given the relative scarcity of strong companies in which to invest.

Still, Phillips believes that the payments market in Africa has some very attractive characteristics. “You have high growth, secular demand, high margins, stickiness, and resiliency to economic shocks,” he says. “For instance, in the middle of our venture, the Arab Spring happened, but we still managed to grow through it all.”

Mobile payments are also a growth story in Africa. Kenya, for instance, has one of the most advanced mobile payments systems on the planet. For example, M-Pesa, the country’s largest mobile-network operator, boasts more than 19 million subscribers, and processes about a quarter of Kenya’s gross national product. “So there are huge examples of the population leapfrogging ahead of where most western markets are,” Phillips says.

But he predicts it might be a few more years before the mobile payments space becomes a true bonanza for private equity investors on the continent. “Many deals still lend themselves more to the venture capital market than to traditional private equity,” he says. “That’s because the assets themselves are not hugely high scale.”