South Africa’s informal market is a space that is well understood by South African fintech, Lesaka Technologies, a champion of financial inclusion, steadily building a leading position in these fast growing, previously underserved markets.
GG Alcock, who coined the term Kasinomics to describe the township economy, is one of the few voices giving insights into the economics that underpin the informal market in South Africa. The lack of research on the township economy estimated to employ 17% of South Africa’s population and contribute more than R300 billion to the country’s GDP is in itself an indication that an opportunity looms large.
Lesaka has leveraged disruptive technologies to establish infrastructure, products and services to build a unique dual sided ecosystem which meets the needs of merchants and consumers operating in informal markets.
Lesaka Technologies, listed on the NASDAQ and JSE with a market cap of R4 billion, is currently one of the largest technology focused companies in South Africa. The Group uses proprietary banking and payment technologies to distribute low-cost financial and value-added services to small businesses, primarily in the informal sector, as well as to consumers, the majority of whom are grant beneficiaries and have largely been excluded from financial services.
Lesaka recently released its third quarter results for the three months ended 31 March 2023 which demonstrated a significant improvement compared to last year. Operating Income, before purchase price allocation amortisation, came in at R134 million for the quarter, compared to an Operating Loss of R147 million in the same period last year. For the full year ending 30 June 2023, Lesaka’s guidance for revenue is approximately R9 billion and Group Adjusted EBITDA of approximately R500 million.
Detailed results can be accessed here.
Lesaka Group CEO Chris Meyer said - “As a result of our improved trading, cash flow and our ability to deliver against what we have promised, our funders have, in a show of confidence, extended and increased our facilities providing us with flexibility and access to resources to execute on our growth plans. Q3 represents another quarter of growth and transformation. We are excited by the Merchant Division’s outperformance and another quarter of continued improvement and profitability in the Consumer Division where we are moving strongly on to the front foot.”
More than 72 000 informal retail merchants currently use the Group’s cash management solutions, bill payment technologies, value-added services, business funding and card acquiring solutions which essentially allow individual merchants to become a stand-alone financial hub, where their value-add products and services directly drive customer growth.
On the consumer side Lesaka provides unsecured credit, transactional banking and microinsurance to 1.3 million customers through its EasyPay Everywhere brand.
“We aim to help merchants in the informal and township economy compete and grow their businesses. On the consumer side we work hard to help grant beneficiaries improve their lives, so we focus exclusively on this space. All our attention is devoted to understanding their needs and creating relevant and affordable products and distribution networks for them” - says Lincoln Mali, Lesaka SA CEO.
“Competition to serve grant beneficiaries will change the grant payment space for the better and enable individual customers to choose their bank based on factors that matter to them such as service, products, price, or convenience,” - says Mali.
South Africa’s economy is still largely cash driven, accounting for 60% of all transactions. That figure is even higher in the informal sector where around 90% of transactions are cash-based, reports Mali.
“Most of the 12 million grant beneficiaries are withdrawing their grant out in one transaction. That can’t be regarded as financial inclusion as grant beneficiaries still don’t enjoy access to the financial system for their payment, transactional, credit, savings, and insurance needs” - he says.
A fintech leader
Lesaka’s acquisition of the Connect Group has been a game changer for its merchant business. Connect Group CEO Steven Heilbron led a private consortium in 2013 in acquiring a cash solutions business, then oversaw the successful acquisition of Kazang in 2020 providing an exclusive highway into South Africa’s informal markets through which the business could deliver multiple product and service opportunities. Lesaka now has over 72,000 informal businesses using its products.
Heilbron is adamant that South Africa’s future prosperity lies with small businesses.
“Our focus at Lesaka is to resolve the pain points that micro, small and medium merchants experience by using financial technology as an enabler.” - says Steven Heilbron
The company provides merchants with a POS device linked to a digital wallet from which they can pay their suppliers, sell many products such as airtime and electricity, settle bills, and take customer payments via card providing instant settlement to the wallet. Merchants are also able to access funding and an electronic smart vault via the device. Lesaka’s smart vaults are processing and digitalising up to R10 billion per month. Kazang Pay, a spin-off of Kazang, which launched in late 2021 with just 300 clients, currently has over 42 000 clients.
“We’re providing a complete ecosystem which merchants are quickly becoming dependant on,” - says Heilbron.
Key to the success has been an obsession with innovation, disruption, and execution, and a willingness to explore potential opportunities and then quickly scale those initiatives that work. The business is obsessed with fintech, not for its own sake, but for its ability to enable financial inclusion in the informal market”, says Heilbron.
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