“I do not think anyone in Nigeria needs persuading of the need for urgent action on the environment. Desertification in the north, floods in ... the centre, pollution and erosion on the coast are enough evidence. For Nigeria, climate change is not about the perils of tomorrow, but what is happening today,” President Muhammadu Buhari said during the UN Climate Change Conference (COP26) in October. And today means Nigerians are finding it increasingly hard to afford basic food items.
Network, which is based in Dubai and listed in London, agreed to buy DPO for $288m in July. The price is being mostly financed through a sale of equity. DPO will keep its existing management and continue to operate under the same brand. The deal remains subject to regulatory approval and is expected to close by the end of the year.
DPO is present in 19 African countries with South Africa, Kenya and Tanzania its largest markets. Its existing plan is to expand in Africa and the Middle East over the next three to five years, says Key. The purchase will allow Network to “de-risk” DPO’s entry into markets where Network is already present, he adds.
Africa is expected to represent about 40% of Network’s revenue by 2024, versus 27% in 2019. Whether that target can be met will depend on the course of COVID-19. As McKinsey argues in analysis in June, the payments market is intrinsically linked to the underlying economy.
- The main drivers of growth, McKinsey says, are internet and mobile-phone penetration, financial inclusion, private consumption and urbanisation.
- In the short term, McKinsey says, the pandemic means lower revenues in the payments sector.
- The firm’s preliminary estimate is that payments revenue in Africa could decline by 10% to 13% percent in 2020, representing revenue loss of between $1.8b and $2.6b.
Fintech partners sought
In April, DPO said it was setting up an e-commerce store in partnership with Mastercard to help African merchants move their businesses online. The store initially targeted essential services such as supermarkets and pharmacies. Merchants get access to a web site which includes inventory and order management.
Making an acquisition and raising the funds to do it is different in 2020 from any previous year. Traditional due diligence suggests “looking people in the whites of the eyes” but Network is now mostly unable to do that, says Key. That means greater reliance on advisory businesses with a global reach, he says. “We’ve got a good understanding of DPO’s business.”
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Neither was the equity raising that was needed for the purchase obstructed by the pandemic. “The case was clearly compelling. Investors can see the case for digital payments in Africa.”
Network and DPO will be looking for fintech partnerships, especially from companies that can add value in analysing the behaviour of consumers and merchants, says Key.
- There is no mantra of “it must be built here,” he adds. “We will look for best of breed if we don’t think we can build it ourselves.”
- Key welcomes the prospect of competition with M-Pesa, which plans to expand its range of services to businesses and consumers.
- Anything that familiarises consumers with digital payments is “good for all of us,” he says. “The opportunity to grow digital payments in Africa is huge.”
- Excessive regulation of digital payments is the danger, he says. “A heavy-handed approach can inhibit competition.”
READ MORE Kenya: M-Pesa and mobile data boost Safaricom’s 2019 growth
For payments solutions providers that can weather a long recession resulting from COVID-19, the long-term future is bright. The McKinsey Banking Consumer Sentiment Survey finds that customers want to make greater use of electronic payments as a result of the crisis.
- Kenya and Ghana may see increases in mobile money use, while e-commerce sales are likely to rise in Nigeria, Egypt, and South Africa because of major city lockdowns, says McKinsey.
- After the worst is over, higher demand for online shopping will likely persist, especially for retailers that invest to support adapted business models.
- Use of digital payment platforms by governments to distribute funds will also spur adoption, says McKinsey.
African digital payments is still a growth story – but one that may unfold more slowly than expected.
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