Inspite of having a sophisticated banking sector as well as innovative fintech solutions on offer to the public, but cash is still king in the country, and this has defied efforts by the authorities to push for cashless economy. With the banking sector that is the most mature on the African continent and offers a wide variety of products and services and a growing fintech sector offers the unbanked, low-income earners and those seeking alternatives to the pricier banks an increasingly sophisticated set of mobile money solutions at lower cost.
Given such a fertile ecosystem, South Africa has the ingredients to create the first fully digitised financial system on the continent. So, why do South Africans still cling to cash?
We’re very passionate about moving people away from cash considering how inefficient and unsafe it can be
“Cash is flexible, but we’re very passionate about moving people away from it considering how inefficient and unsafe it can be,” said iKhokha chief product officer Graeme Cumming.
Executives in financial services and fintech polled by TechCentral said cash is understood and accepted by everyone from top CEOs to beggars in the street. If you can hold out your hand, you can accept cash. However, the exchange of digital currency presupposes the ownership of a device as a starting point. In the informal economy, where more than six million of South Africa’s unbanked require solutions, device penetration is nowhere near 100%, they say.
Katlego Maphai, CEO of fintech Yoco
Another factor that limits the fluid exchange of digital currency is the cost of transactions. Although charges have come down significantly in recent years, customer experience of high charges in the past has created a degree of mistrust in the financial system among some people.
“Many of our customers have previously been excluded from the financial services industry by design. Our challenge is in demonstrating to customers that we are on their side, and that we can be trusted,” Greg Illgner, chief strategy officer at TymeBank, told TechCentral.
Cash vs digital
Katlego Maphai, CEO of fintech Yoco, which makes smart payment terminals and solutions, urged merchants to weigh the upside of avoiding transaction fees against the potential loss in sales revenue of not having alternative payment methods.
“A switch from cash to any other payment method will incur fees, and many businesses will regard this as a major barrier to switching. But Yoco encourages business owners to accept as many payment methods as possible so that they never risk losing a sale,” he said.
Compounding South Africans’ reluctance to ditch cash for digital alternatives is the fragmentation of fintech networks in the country. Siloed solutions make it impossible for users, whether they are individuals or businesses, to handle all their money-related use cases with the same ease as cash.
Cumming said the profile of “closed-loop systems” that “exacerbate fragmentation” is going to change as the industry matures. He added that while there is “less fragmentation in the banks, there has to be interoperability between digital wallets”.
Solving these problems, and others, will not necessarily lead to the end of cash. Some people cling to cash because they do not want to declare their income to the South African Revenue Service or are afraid of failing to meet the criteria for receiving a social grant from Sassa.
cashBradwin Roper, chief financial services officer at MTN South Africa, said that if fintechs are to drive up adoption rates, they must offer more features and increased value to their customers.
“Many players offer only basic cash-in and cash-out services, which is limiting for customers. There needs to be a level of sophistication, and consumer trends indicate that the search for alternative services will only accelerate,” Roper said.
Challenges to financial digitisation are not unique to South Africa. Research by the GSMA, which represents most of the world’s mobile operators, shows that although sub-Saharan African mobile money subscriptions are on the rise – up by 17% to 163 million in 2022 — active 30-day usage remains relatively low at 29%.
Growth in Southern Africa is lower at 16%, with a 24% adoption rate, partly due to sophisticated alternatives offered by the banking sector in South Africa.
Kelechi Deca
Kelechi Deca has over two decades of media experience, he has traveled to over 77 countries reporting on multilateral development institutions, international business, trade, travels, culture, and diplomacy. He is also a petrol head with in-depth knowledge of automobiles and the auto industry
Where he was seated in his office in Cape Town, Katlego Maphai, had several things running through his mind. Peeping through his email, there were endless threads of messages sent across to investors which had not been replied. His startup company, an SMEs-focused mobile point-of-sale (mPOS) business he founded alongside Bradley Wattrus, Carl Wazen and Lungisa Matshoba, was sitting on the brink of death. Its account statements with South African banks showed they barely had a month’s working capital left. Red is the perfect description; and if none of the investors expressed interests in the coming months, the deal of death would have been certain and sealed, and Maphai would have had to go back to Delta Partners Group, where he was previously a consultant.
Katlego Maphai
But the unexpected usually happens; and so the company which is located within the Cape Town City Center, is still very much active eight years after, even announcing, most recently, a $83m Series C fund-raise.
“If I go back to this period, the 2015 period, we were just taking fund raising meetings. It was not working out,” Maphai said. “We were getting rejections. If we weren’t getting rejections, we were getting really nasty pricing on our (funding) round.”
To date the startup has raised more than $106m in funding, including from top venture capital firms such as Dragoneer Investment Group, Partech, FMO, Quona Capital, Velocity Capital Fintech Ventures, Orange Ventures, among others.
Here are a few lessons from the startup’s chequered life:
In A Highly Regulated Ecosystem, Both Investors And Regulators Are Wary Of ‘Inexperienced’ Startup Founders
Although Yoco’s early years were spent iterating and finding its footing, trust in the capacity of startup founders to execute what they say they would is a major investment variable for both investors and regulators.
To be able to provide financial services in South Africa, there is a long list of requirements. For instance, the Financial Sector Conduct Authority requires that financial services providers in South African must have key persons who are adequate, appropriate and have relevant skills, knowledge and expertise in respect of the financial services, products and functions that they perform.
And so, because Yoco’s founders came from telecommunications backgrounds, they had a hard time convincing the regulator.
“We knew shit about the payments industry when we started,” said Maphai, about this lack of experience.
But his team was able to overcome that barrier by understanding the importance of building relationships early enough with experts in the industry.
“We spent most of the early days identifying experts within the industry, finding them and taking (them for) coffee, building up those relationships,” he said.
And so when the time came to convince the regulator once again, it became relatively easy because Yoco now had an advisory board.
“There were no ways we would have gotten that license to operate without that,” he said. “They weren’t even looking at us. They were looking at our advisors and the fact that the advisors said ‘these guys know what they are doing.”
Maphai’s views about the license being instrumental to the eventual successful fundraising campaigns of the company was corroborated by another co-founder Carl Wazen, who noted the apparent difficulty the startup encountered sourcing the fintech license because there was a heavy doubt about the capacity of a team which lacks experience in the payments space.
“You really need to prove yourself,” he said, while adding, however, that they had an edge because people saw Yoco as potentially bringing innovation.
“So once we secured the license, which was about 2013 or so, we started raising some seed financing and building the platform and product,” he added.
Today, Yoco uses South Africa’s sub-acquiring license which was introduced in 2012. The license only allows Yoco to operate under a bank’s license and cater to the small business payments market, and but does not allow it to directly access the country’s national payment system.
Only Startup Founders With Heavy Pockets As Yoco’s Would Most Likely Have Replicated The Financing Drama The Startup Experienced During Its Early Days
This could be the only truth for startup founders that had navigated their first two years with funding substantially coming from their pockets.
From all ramifications, Yoco’s founders could qualify for a conventional venture capital firm given the strong financial backgrounds they came from.
At the time of the launch, Maphai was fresh out of a management consulting job, including stints as a venture builder with Rocket Internet. Bradley Wattrus, another co-founder worked with him at Rocket Internet. Carl Wazen was his former consultancy colleague, and Lungisa Matshoba studied with him.
These backgrounds therefore greatly assisted them in scavenging for funds.
“The time…was really, really tough,” Maphai admitted. “There were moments where we literally had a month of capital in our bank account. We were just raising angel and family office money to allow us to continue.”
Wazen also remembered these tough times with nostalgia. “I think that year (2015), we had on average about 60 days of runway at any given moment,” he said. “And we were a team of like 25 to 30 people. So it was a really scary time.”
Could Substantial Revenue And Traction Have Made All The Difference Raising Funds For Yoco, And At What Cost?
Yoco’s dramatic early years was also worsened by the fact the startup did not set out to generate revenue immediately; it, instead, spent time building out its products.
“We had to build in the early days,” Wazen said. “A lot of plumbing the product and licensing and stuff. 2015 is the first time we actually went live. This just means that two years into the business, we’re not (even) doing our first live transaction with a customer. So, you know, we were pretty exhausted.”
It is therefore arguable that funding would have been easier to come by if the startup had acquired more traction at the time.
“Our beta product, a Bluetooth card machine, had really simple pricing. No monthly fees, you pay one off for this card machine through our website and you get it delivered to your door the next day,” Wazen said.
He noted that the beta product which was a big change from what was out there, was liked by the startup’s first customers.
“We recruited our first customers through our networks,” he said. “However, we chose to stay in stealth until we felt like our systems and our processes could truly scale. So meaning in our case — because the type of customer we wanted to serve was very small — we needed to make sure that we didn’t need any human intervention to actually grow and reach and serve those customers.”
But going on a stealth mode was a difficult decision, Wazen noted.
“It was a difficult decision to stay quiet,” he said. “While on stealth mode, we started seeing banks and competitors launching similar offerings. That was like a craze back then, like everyone was trying to do what Square was doing; but we knew that because we were managing money, it would be a huge mistake to prematurely launch.”
It was during this stealth mode that the startup went from building its pilot product to learning all that it needed to learn.
“Once we got comfort, there were a couple of 20, 30 merchants. We next moved on to an operations pilot, which was primarily intended to test automation on all of Yoco’s ancillary components. So, can we actually scale up the distribution of these card machines? Can we provide scalable support for our merchants? Is it possible to undertake risk management and onboarding at a large scale? After that, we transitioned into commercial pilots for a few months. We put the segments and channels to the test, and so on. At each stage, there were a number of things we needed to learn and improve on a hands-on basis,” Wazen said.
When the startup eventually launched to the public, it did so with 500 merchants, which Wazen admitted was obviously a negligible figure.
“And then very quickly as it happens, we realized that it’s all good having a nice product and experience, but we needed the volume,” he said. “This is usually what happens when you realize that you have to move from being a product company to a distribution company. Like you had to really capture the right segments and communicate properly and find the right channels that could scale.”
Yoco only began to show traces of success towards the end of 2016, an outcome Wazen described as a product of “many experiments and a bit of luck.”
“So we grew from 500 to 5,000 merchants that year and were able to raise our Series A from international VCs. And since then, we’ve been more than doubling year on year. Today, we’ve got over a hundred thousand small businesses and we’re still scratching the surface,” he said.
Also standing out from Yoco’s story is the temptation for startups to suddenly go public while building in stealth in order to remain alive and beat mounting pressures. In this respect, Wazen admitted that Yoco’s decision to stick to its original master plan saved the day for them.
“At some point we started to go upmarket because it was more predictable and closer to us,” Wazen said. “But that didn’t result in the outcomes that we wanted. We weren’t growing as fast as we wanted. It was a really scary time, but we took a big step back — you can call this a pivot; it isn’t really a pivot though. I think it is going back to our roots, to what we started out wanting to do — which was to focus on the merchants who had never accepted card before. They were out there. We just needed to build distribution to get them”
Yoco in numbers. Image credits: Yoco
Strong Product Moats Have Inspired Even Bigger Ticket Sizes
Although Yoco started off building out offline and online payments for small businesses, it has also widened its collection of payments solutions. This is instrumental for the startup’s growing traction and even the larger investment ticket sizes it has raised so far.
“It’s been an interesting journey,” Wazen said. “Today, apart from offering offline and online payments for small businesses, we have also got a couple of different card machines. We let small businesses accept payments on their websites via plugins or by an API, and also send payment links and invoices and gift cards and all that. We’ve also got a pilot going on with QR. It’s really about having all payment methods possible that are relevant. And that’s really important.”
Wazen also said Yoco offers an entry-level software stacks for small businesses, which give them access to tools to manage their inventory and point of sale, business intelligence, staff management and a range of other things.
“We also offer a lending product which is growing very fast. It is also very much built on top of the payment rails and it is there to support our merchants by essentially predicting their cash flows and giving them some growth capital,” he added.
Yoco which is presently in operation across South Africa with over 150,000 B2B customers, claims to process more than $1 billion in card payments per year, and that it has processed more than $2 billion in card payments in its six years of operation. The startup also recently initiated moves to expand to the Middle East, a regional market where Wazen (Lebanese) comes from.
“The market size for payments is virtually limitless,” said Wazen. “It’s GDP. Half of the GDP is small to micro businesses; so it’s a completely underserved segment and that’s going to continue. I think we expect to be running this business for decades to come. We’re still really early in. In the beginning in order to be in a position to continue running this business for so long, we want to be IPO-ready by 2024.”
And speaking about the IPO, Wazen said Yoco intends to do this on a US exchange. He added that when it comes to geographic spread, Yoco is taking deep dives in a few markets.
“It’s not about having large footprint across multiple markets,” he said. “I don’t think that that model necessarily is the best when you’re targeting small to micro businesses.”
“We don’t benefit from being in multiple markets. It’s about going deep in a couple of big markets, including South Africa; and really being market leaders in those markets and then the region,” he added.
Wazen advised entrepreneurs in Africa to focus more on market creation.
“You have the privilege of being in a market where the majority of the population is still not consuming basic things. So turn those people into consumers and you’ll not only build a massive business, but you’ll also change lives. Don’t do the easy or the tempting thing, which is to go after the affluent or the middle-class. You might come from that background as a tech founder. But that doesn’t mean that that’s where the opportunity is,” he said.
Charles Rapulu Udoh is a Lagos-based lawyer who has advised startups across Africa on issues such as startup funding (Venture Capital, Debt financing, private equity, angel investing etc), taxation, strategies, etc. He also has special focus on the protection of business or brands’ intellectual property rights ( such as trademark, patent or design) across Africa and other foreign jurisdictions. He is well versed on issues of ESG (sustainability), media and entertainment law, corporate finance and governance. He is also an award-winning writer
