The informal business sector is the “next great frontier of Africa and it is undergoing an economic revolution – a new world of small people doing big things, transforming the continent”, according to author GG Alcock.

South Africa’s informal market is a space that is well understood by South African fintech Lesaka Technologies, a champion of financial inclusion that is steadily building a leading position in these fast-growing, previously underserved markets.

Listed on the Nasdaq and JSE with a market capitalisation of R4.5-billion, Lesaka Technologies is 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.

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 standalone financial hubs, 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,” said Lesaka South Africa CEO Lincoln Mali.

Change, for the better

“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 matters to them such as service, products, price or convenience,” he said.

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.

“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 or insurance needs,” he said.

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 to acquire 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. Over 72 000 informal businesses now use Lesaka’s 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.”

The company provides merchants with a point-of-sale device, linked to a digital wallet from which they can pay their suppliers, sell products such as airtime and electricity, and where customers can settle municipal bills and pay via card, providing instant settlement to the merchant’s digital wallet.

They 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/month. Kazang Pay, a spinoff of Kazang, which launched in late 2021 with just 300 clients, now has over 42 000 clients.

Our focus at Lesaka is to resolve the pain points that micro, small and medium merchants experience by using fintech as an enabler

“We’re providing a complete ecosystem which merchants are quickly becoming dependant on,” said 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,” he said.

Lesaka recently released it third-quarter results for the three months ended 31 March 2023, which demonstrated a significant improvement in profitability. Operating income (before PPA amortisation) came in at R134-million for the quarter, compared to an operating loss of R147-million in the same period last year.

“With our innovative technologies, leading distribution network and relevant product set, Lesaka is well positioned to take advantage of the opportunities arising from the transformation of South Africa’s informal economy,” said Mali about the results.