THE EMERGENCE OF TRADITIONAL BANKS IN THE FINTECH SPACE AND THE FUTURE OF FINANCIAL TECHNOLOGY IN NIGERIA
The financial services sector in Nigeria is thriving, with records to show that the there’s still a large untapped market, an indicator that there’s still room for so much growth. Over the years, financial services or better put, the way Nigerians interact with financial products and services has experienced an evolution, which is due to the advancement of innovative digital technologies. This shift has also brought about a significant change in how financial transactions are conducted in the country. Additionally, the rise of financial technology (Fintech) companies has introduced a more streamlined, user-friendly, and convenient approach to managing financial transactions for individuals, businesses, and organizations.
Conversely, traditional banks have recognized that these disruptive fintech companies have emerged as formidable rivals in terms of influence, innovation and market share in the industry. In response to this competition, these banks have started strategizing and investing heavily in new technologies to develop new products and services in order maintain their relevance in the financial industry.
This article will explore the growth of fintech companies in Nigeria, examining the gaps they have filled, the challenges they have faced and the response of traditional banks as they endeavor to assert their influence in the country’s fintech space. The article will also look at what the future holds for both traditional financial institutions and fintech companies in Nigeria.
HISTORICAL REVIEW & SIGNIFICANT MILESTONES
Over the past 5-10 years, the growth of fintech in Nigeria has been remarkable, transforming the country’s financial landscape and improving access to financial products and services. Several significant milestones have contributed to this evolution. Between 2014 and 2019, Nigeria’s bustling fintech scene raised more than $600 million in funding, attracting 25 percent ($122 million) of the $491.6 million raised by African tech startups in 2019 alone—second only to Kenya, which attracted $149 million.
As funding increased, solutions to problems got better. In commerce, users of online payment gateways like Paystack and Flutterwave have stated with extreme joy the convenience, speed and efficiency with which they have been able to carry out their transactions. This has paved the way for the growth of e-commerce and online merchants in the country. In 2021, Flutterwave launched a new product, Flutterwave Send, which processed 4,729 transactions worth $3.6 million in the first full month of operation. This product attracted customers from the US, UK & Nigeria. It is also worthy of mention that the number of transactions processed by Flutterwave as at February 2022, was about 200 million transactions with the transaction value estimated to be around $16billion.
This growth and impact, moving at breakneck speed, caught the attention of foreign investors. In October 2020, the leading Irish American financial services and software company, Stripe, announced a strategic business move to acquire Paystack, a Lagos-based Fintech firm that focuses on integrated payment services. The acquisition, which financial analysts estimated to be worth more than $200 million, caught the attention of the global business communities. FairMoney, a Fintech lending platform also experienced exponential growth in Nigeria in terms of loans disbursement. In 2020, it disbursed a total loan volume of $93 million, representing a 128% increase from 2019 and a staggering 3,189% growth rate from its first year of operation in 2018.
It is equally important to state that at the height of the Central Bank of Nigeria’s (CBN) cashless economy in February 2023, the volume of electronic payments in Nigeria shot up by 45.6%. Some of the fintech companies focused on electronic payments such as OPay, Monie Point and Palmpay leveraged the cash crunch to expand their operations. For example, Olu Akanmu, the immediate past President and Co-CEO of OPay Nigeria, recently stated in an interview that the company quickly stepped in to fill the gap left by Nigeria’s Central Bank as a result of the cash crunch. OPay has become a top choice for Nigerians and has since recorded 35 million registered app users, 500,000 agents, and a $2 billion valuation.
In light of this cash crunch, some of these fintech companies took a unique approach in customer acquisition by prioritizing phone numbers and BVNs (Bank Verification Numbers) other than the conventional methods of registering customers. Another approach they took in rendering services other than USSD (Unstructured Supplementary Service Data) codes, was to set up Point of Sale (POS) agents around the country, which enabled customers seamlessly conduct transactions without walking into a physical building. This was a suitable alternative to using mobile applications that had unstable network issues at the time. They also established a robust infrastructure capable of handling increased demand especially during the cash crunch period, ensuring smooth and efficient transaction facilitation for users. Furthermore, some of these fintech companies introduced a customer-centric initiative of offering free transactions without charges on their platform. In addition to this, they implemented a referral program that rewarded users for bringing in new customers, thereby encouraging a wider user base to sign up for their services.
HOW THESE FINTECH COMPANIES BRIDGED THE FINANCIAL SERVICES GAP
Fintech companies operating in Nigeria recognized the existing gaps posed by the traditional financial institutions and sought to address these gaps by leveraging technology to proffer innovative solutions. For example, the traditional banks always had stringent requirements for obtaining loan, making it difficult for small businesses and individuals with no proper credit history to access loans. Some of these fintech companies introduced online lending platforms which allowed people get access loans without walking into a building. These platforms introduced alternative scoring methods such as requiring customers to input phone numbers linked to their Bank Verification Number (BVN) to assess the borrower’s creditworthiness and responsibility in repaying loans obtained, making it easier for such persons to get loans, even if they do not have a lot of collateral or possess all the strict requirements possessed by the traditional banks.
Additionally, investment opportunities were often inaccessible to the average Nigerian due to high entry requirements and lack of knowledge. Fintech companies such as Chaka, Trove, PiggyVest, Risevest and Bamboo have disrupted the traditional investment landscape by making it possible for individuals to invest in small units of stocks, mutual funds, real estate and other assets. This has made investing more accessible and affordable for anyone, regardless of their financial background or knowledge.
CHALLENGES CONFRONTING FINTECH COMPANIES IN NIGERIA
In a recent interview with FairMoney’s Founder & CEO, Laurin Hainy, he highlighted a significant obstacles confronting players in the fintech industry. He pointed out that the absence of proper infrastructure poses a hindrance to the seamless delivery of financial services to Nigerians, particularly the unbanked population. Expanding on this issue, he stated that due to the low Bank Verification Number (BVN) registration rate, these companies find it challenging to onboard individuals in underserved areas as customers.
Another challenge faced by fintech companies is access to secure funding from local investors within Nigeria. Raising investments locally can be challenging for fintech companies, as they need to educate local investors about the potential benefits of fintech investments. Additionally, these companies often require significant capital to scale their operation and such huge funding is usually unavailable locally. Consequent upon the above, is a major challenge faced by fintech companies, the lack of a unified legislation. In Nigeria, there are several existing and sometimes contradictory regulations which render the operations of these companies more complex. Sometimes, these regulations and guidelines seem to significantly affect the business model of these fintech companies. As such, fintech companies run the risk of sanctions and penalties where they fail to comply with these conflicting regulations.
It is worth highlighting that the Central Bank of Nigeria (CBN) has introduced a Regulatory Sandbox Operations framework for fintech companies. This framework aims to foster collaboration between the regulatory authorities and these fintech companies, ensuring that innovative technological solutions are not being hampered by excessive regulations.
TRADITIONAL BANKS RESTRUCTURING TO PLAY ACTIVELY IN THE FINTECH SPACE
In response to the evolving fintech landscape in Nigeria, some Nigerian banks are undergoing restructuring by establishing themselves as holding companies and launching fintech entities. This strategic move empowers these banks to broaden their range of financial services beyond traditional banking, harnessing innovative technological solutions to enhance their current services. This separation into distinct legal entities dedicated to fintech operations offers a specialized environment solely focused on conceptualizing and deploying cutting-edge solutions.
Moreover, this separation facilitates improved customer experiences through streamlined processes and personalized services delivered by the dedicated fintech company. Additionally, a stand-alone fintech entity is conducive to fostering partnerships, making it an appealing prospect for investors, and external collaborators, driving mutual innovation and growth. Furthermore, considering the evolving regulatory landscape surrounding fintech companies in Nigeria, distinct compliance measures might be required for these entities compared to the core banking sector. Creating separate legal entities ensures compliance with all pertinent regulations, thus mitigating potential legal risks.
Furthermore, the fintech industry’s innovative and entrepreneurial nature often demands specialized skills not commonly found within traditional banking. An independent fintech entity can attract tech-savvy talent enticed by the sector’s dynamic innovation. As fintech ventures might involve more risks than core banking, given their association with novel and untested technologies, the separation of these entities enables banks to contain the impact of potential losses or damages.
However, it is crucial to acknowledge that restructuring a bank’s business to accommodate fintech innovation entails various legal considerations. Formulating a new corporate structure for fintech companies must align with corporate governance and regulations tailored to fintech activities. The bank’s ownership of the fintech entity necessitates determining an appropriate shareholding structure, contingent on the bank’s decisions. Despite the risk-mitigating benefits of separation, robust risk-management strategies must be in place to preempt adverse consequences on the bank. The clear separation of assets and liabilities between fintech companies and traditional banks is of paramount importance. These entities’ assets cannot be commingled to cover liabilities, emphasizing the need for distinct financial management.
Ultimately, the decision to restructure a bank to enable independent coexistence of a fintech entity is intricate and should be evaluated on a case-by-case basis.
FINTECH SUBSIDIARIES OWNED BY BANKS
It is important to acknowledge the giant strides traditional banks have made in the fintech space. For example, Squad, a payment platform launched by HabariPay, the fintech subsidiary of Guaranty Trust Holding Company Plc (GTCO) launched in June 2022 recorded N1.15 trillion in gateway and switching operations in less than one year after launch. The Company’s report also shows that it became a profitable business within one month of launch and has hit N200 billion in monthly transactions by January 2023.
ALAT, a fintech product of a traditional bank, Wema Bank, recently recorded a boom in its digital operations as it generated N6.1 billion in 2022. According to the bank, ALAT recorded a 131% increase in the number of customers onboarded in 2022. In addition, other card products offered by the bank also recorded a 98% increase in the number of new customers within the year.
In September 2022, Hydrogen Payment Services Company Limited, the fintech subsidiary of Access Holdings, successfully obtained approval from the Central Bank of Nigeria (CBN) for a license that allows it to oversee, facilitate and streamline virtually all digital transactions originating from Access Holdings’ diverse range of subsidiaries. These subsidiaries encompass various financial services, including banking, pensions, lending and insurance. This initiative aims to foster synergy among the subsidiaries resulting in improved financial operations and customer experiences.
THE FUTURE OF FINTECH: BANK-OWNED FINTECHS VS. PRIVATELY OWNED FINTECH COMPANIES
While it is too early to ascertain which entity will wield dominance in Nigeria’s financial technology space, it is important to acknowledge that these co-existing stakeholders possess distinct advantages that can potentially enhance technological innovations, facilitate more efficient and streamlined financial services, benefiting both consumers and the finance industry. Fintech companies owned by traditional banks have several advantages. First, they can leverage the financial expertise, huge customer base, and resources of their parent companies. This allows them to level the playing field with other fintech companies and provide innovative technological solutions. Furthermore, these bank-owned fintech companies benefit from the trust and credibility associated with their parent companies which are established financial institutions. Customers are more likely to trust and use new digital financial services introduced by these traditional bank-owned fintech companies even if they are new or unfamiliar.
In addition, these fintech companies have unrestricted access to the bank’s existing customer base. This gives them a huge advantage in launching new products and services. They can seamlessly offer their products and services to customers who already have a banking relationship with the parent company.
Conversely, privately owned fintech companies are not without their own advantages. One major advantage of these entities is that they operate independently, enabling them to swiftly respond to market trends and consumer demands, thereby making them flexible and innovative.
Also, they prioritize user experience and develop products around consumer needs. This approach resonates with the digital-savvy Nigerian population. Privately-owned fintech companies also focus on specific niches and underserved population. This specialization allows them to create tailored solutions that meet the unique customer requirements.
As traditional banks step into the fintech space, many are optimistic that they will not carry over the accessibility, convenience, speed, and efficiency issues that prompted customers to switch to fintech solutions. The leaders of these traditional banks should ensure that their fintech subsidiaries are driven by dynamic, vibrant, innovative and forward-thinking individuals.
Privately-owned fintech firms should also recognize that they face formidable competition from traditional banks and must step up their game. One effective way for fintech companies to maintain their reputation among investors and customers is by focusing on corporate governance. The era of a single individual reigning supreme in a fintech company is over. It is imperative for these fintech companies to establish robust corporate governance systems that include checks and balances, preventing issues like mismanagement and workplace abuse from arising. It is our advice that these fintech companies prioritize legal and regulatory compliance to stay aligned with the evolving laws and regulations in the country. Addressing these concerns, both within bank-owned fintechs and privately-owned fintech companies, will contribute to the continuous growth of the fintech sector in Nigeria.
There is great optimism that the fintech sector will continue to expand rapidly and transform the way we engage with financial products. We eagerly anticipate a future in which Nigerian fintech companies can establish subsidiaries in major global financial hubs while maintaining their headquarters in Nigeria. Our vision is for these fintech companies, whether under the ownership of traditional banks or privately held, to elevate Nigeria’s presence on the global financial stage.
This article was written by Mobolaji Oriola (Founding Partner) and Mercy Iyoha (Associate) at ALLEN & BROOKS.