When Nigeria’s Central Bank introduced its cashless policy in 2012, it envisioned a high level of financial inclusion and an economy with reduced reliance on cash. Driving this policy was the development of various payment infrastructure and the rise of innovative firms leveraging technology -- fintechs.
In 2011, a consortium of Nigerian banks formed the NIBSS Instant Payment (NIP) scheme, an account number-based, online-real-time Inter-Bank payment solution, to provide instant value to customers engaging in financial transactions. Following this closely was the rise of a new generation of fintech firms in Nigeria.
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Noted for their innovative qualities in providing personalised financial services, in recent years, fintech firms have attracted the attention of regulators and investors alike. According to Statista, global fintech investments reached $111.8 billion in 2018.
According to Techpoint’s Nigerian Startup Funding Report for 2018 and 2019, fintech firms received the lion share of funding, a trend that continued in Q1 2020 when fintech firms raised about 82.2% of the total funding for the quarter.
As PricewaterhouseCoopers (PwC) states in its report on Fintech and the Banking sector in Nigeria, “the astronomical growth of fintech startups has been driven by the increasing digitisation of financial services, relatively low cost of operations, rising global regulatory structures and the upgrade of fintech services to include lending insurance, investments, personal finance management among others.”
As stated in an earlier article, beyond mobile banking, deposits and withdrawals, such services constitute the full range of financial services that drive financial inclusion.
Challenges of fintechs in Nigeria
So far, fintechs have experienced a number of challenges such as cyberattacks and fraud, difficulty in accessing customer data from traditional banks, and limited critical infrastructures such as broadband, cloud computing, data centres, and power supply.
Currently, most local fintech entrepreneurs face fundraising challenges as most of the funds raised by fintech firms are from foreign investors, with little participation from local investors.
Techpoint’s latest startup funding report reveals that in Q1 2019, foreign funders were responsible for 68.6% of the total amount raised by startups, but the figure went up to 99.8% in Q1 2020.
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Presently, Nigeria does not have appropriate fintech-specific regulations and there is no specific body that governs fintechs.
- The CBN offers general oversight on fintech service offerings.
- The Nigerian Communications Commission (NCC) regulates fintech service offerings that leverage telecom infrastructures such as USSD and mobile money.
- The Securities and Exchange Commission (SEC) regulates offerings in asset management.
- The National Information Technology Development Agency (NITDA) regulates issues on data privacy.
While a fintech regulation bill was proposed by Nigeria’s previous parliament, not much has been done since then. For now, most fintech companies make use of licences such as the microfinance bank licence, where a lot of the regulations are implied rather than specific.
Fintechs that will likely survive the pandemic
As stated, VC deals across all sectors in Africa are expected to drop by about $1 billion in 2020. Despite their dominance in the funding space, fintech companies globally might not be spared during this decline.
According to Finch Capital, there has been a drop in corporate VC-led investments, with global fintech funding said to have dropped to about $6 billion in Q1 2020.
Despite these bleak projections, some startups stand to benefit from the effects of the pandemic.
According to PwC, consumer platforms, SME-lending platforms, and fintech platforms that adopt artificial intelligence (AI), blockchain, Internet of Things (IoT), Big Data and open banking are best positioned to benefit from the effects of the pandemic.
On the other hand, the professional services firm believes that due to de-risking by clients, reduced transaction activity, and lower expected activities post-pandemic, traditional banks with a weak digital presence as well as wealth management and foreign exchange-focused platforms will experience significant pressure.
PwC expects more capital inflows for lending, mortgage, and property technology (proptech), and lower investments in insurance technology (insurtech), payments, and wealth management fintechs.
In Nigeria, fintech investments in Q1 2020 were a bit rosy as it quadrupled those for Q1 2019. Though Nigeria recorded its first coronavirus case in late February, the sector is feeling the effects of the pandemic.
Between 2011 and 2018, PwC puts fintech funding in Nigeria at $204 million. In 2018 alone, fintech firms secured $103.4 million, about 58% of the total start-up funding for the period under review.
According to PwC, payment, savings/investments, and insurance fintech companies will be the most impacted by COVID-19. Considering that most Nigerian companies operate in either the payments or digital lending space, PwC expects these sectors to be the most vulnerable.
For payment startups, the report insists that the decline in global fintech investments could hinder the capital required for the physical upgrade or expansion of digital infrastructure or services.
As for digital lending platforms, the impact of the lockdown measures on business activities, employers, and entrepreneurs, and the lay-offs of some employees could affect the ability of borrowers to meet their short-term loan obligations as and when due.
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Since the enforcement of the lockdown, several people have adopted digital channels as some banks have been forced to close down some of their branches.
Though most banks have been taking strides towards digitising their services, the large crowds that followed the partial lifting of the lockdown last week in Lagos, highlighted the low-levels of digital adoption for most traditional banks in Nigeria.
This could, however, present an opportunity for most fintechs to scale-up their services and capture the market. This could lead to fierce competition and possibly, a collaboration between banks and fintechs that will only benefit the customer.
Also, as predicted by PwC globally, emerging technologies such as Artificial Intelligence, blockchain, and others will be the defining technologies in the future of financial services in Nigeria.
For PwC, a tougher fight against cyber-crime, the development of robust fintech specific regulations, critical infrastructure, and easy access to capital raising platforms (easier access to the country’s capital markets) could provide much-needed succour in the post-pandemic era.