M&A Activity in the Fintech Sector | 2022

2022 proved to be a stellar year for M&A in the global fintech sector. After a nearly record-breaking 2021, deal activity and valuations remained high throughout the year despite record high inflation, geopolitical challenges, and increasing concerns of a recession. As economic and geopolitical challenges somewhat subside in 2023, we expect M&A deal activity to remain high, with investors mainly focusing on the formation of strategic partnerships and industry consolidation plays.

Key themes expected to drive higher deal volumes in 2023 include: a stronger focus on dealmaking in underdeveloped regions, ongoing strength in the payments sector, the rise of fintech super apps, and regional consolidations.

Africa’s thriving fintech industry has provided investors with countless opportunities over the past decade, showing no signs of abating anytime soon.

Africa is currently undergoing a ‘fintech eruption’, which is intensified by the use of cash in approximately 90 percent of transactions on the continent. Fintech revenues, particularly in the payments space, therefore, have considerable growth potential, and many local and international investors are taking notice.

While the opportunity for fintech growth across the African continent is significant, in certain regions, the total addressable market is limited by various constraints, most notably a lack of infrastructure. Fintech’s looking to scale across the continent may need to take this geographic variability into account and tailor their approach to each country based on its inherent characteristics, infrastructure, and varying customer needs. We therefore expect cross-border M&A deals to remain prevalent in 2023 as larger fintechs look to acquire proven business models across different geographic markets.

The ‘fintech eruption’, while posing a threat to traditional market participants, will not render them obsolete. Traditional players are expected to play an increasing role in M&A activity within the industry as they aim to meet consumer demand and protect market share. Consolidation M&A transactions are expected to become more prevalent in 2023 as financial institutions turn toward fintech acquisitions to digitise their service offerings to remain competitive.

South Africa, having the largest and most developed financial services sector in Africa, unsurprisingly has the largest fintech sector as well, accounting for approximately 40% of the continent’s fintech revenues. The country’s mature financial services sector gives market participants access to improved digital infrastructure, allowing more complex fintechs to develop and thrive, where they otherwise would not have been able to. As a result, innovative and advanced financial services such as B2B liquidity, open banking, and regulatory technology are more commonplace in the South African landscape compared to the rest of Africa (excluding Nigeria). Given the aforementioned factors, we expect South African cross-border transactions to remain attractive as international investors seek to acquire advanced fintech businesses who provide entry into the African market.

As with the rest of Africa, South Africa’s fintech sector is dominated by the Payments subsector, accounting for over 50% of the industry’s revenues, and 60% of completed M&A transactions in 2022. Regardless of the payments sector’s size and maturity, it continues to present investors with many opportunities. In South Africa, over 95% of SMEs are classified as micro enterprises operating in the informal sector. Traditional banks are limited in their ability to serve these merchants leaving a large gap in the market. Fintech solutions capable of serving this previously ‘ignored’ group, are therefore expected to attract investors’ attention.