Nigeria fintech growth challenges established banks

As in other African markets, the Nigerian banking and finance sector is in the midst of a period of rapid change. The digital transformation not only gives the banks opportunities to cut costs and target new customers, but also attracts new players into the industry, both when it comes to digital-first banks and telecom operators.

The more than 200 fintechs now operating in Nigeria drive innovation, either as service providers themselves or by offering the technology used by other firms. They experience very varied fortunes and for every unicorn, several other companies will disappear without a trace – but overall they are becoming an increasingly visible presence in the financial landscape.

The number of physical bank branches used to be an indication of the penetration of banking services in the wider Nigerian society. However, as more and more customers use online financial services, especially through mobile apps, this is no longer the case.

The pace of digitization has increased as a result of the Covid-19 pandemic as many customers had no choice but to use digital platforms, a large number of them for the first time. While some started using digital banks, many others made use of the digital platforms provided by their existing, established banks. As a result of this process, Nigerian banks are likely to either cut the number of physical branches they operate or at least limit the number of new ones they open.

Fintechs drive innovation

While traditional banks seek to adapt their existing architecture, fintech is driving more inherent innovation, either by offering digital-first services themselves without any legacy issues – but also without the benefits of legacy customer bases – or by providing the technology, platforms and infrastructure. which other service providers make use of.

Fintechs have many advantages but face real challenges in scaling their businesses, whether within their home markets, across Africa or internationally, so their ability to secure external funding is central to their fortunes.

The Central Bank of Nigeria (CBN) says: “Over the past ten years, Nigerian payment systems have experienced significant growth, particularly with the development of a solid regulatory and supervisory framework, robust payment infrastructure and the exponential increase in the number of fintechs operating in the country.”

Pressure from alternative financial services providers is encouraging Nigerian banks to accelerate their own digital transformation in a bid to maintain market share. To spread banking to the masses, the CBN has granted licenses to fintech companies such as Paga, Quickteller and Flutterwave, enabling them to compete with commercial banks.

Big players are emerging

Some are growing very quickly, and Flutterwave is now valued at $3 billion on the back of investments from, among others, Visa. At the same time, telecom companies are tapping into their huge customer bases to offer financial services, with Airtel launching Smartcash, MTN MoMo and Globacom Money Master. Although they are not lenders, the telecom giants offer payment and electronic wallet services.

Digital banks first rose to prominence by offering payment services, and most did not require the high minimum deposit levels required by traditional banks. Customers looking for financing can turn to a large number of loan apps, although lenders must have robust loan recovery procedures where they offer unsecured financing.

Purely digital lenders can reach loan decisions within minutes, and then process and disburse the loan in anywhere from a few minutes to a day. Most require no collateral, but access smartphone data and records to produce credit scores. There have been allegations that some are not complying with data protection regulations and are resorting to sending messages to a customer’s employers, relatives or other contacts to pressure them to pay back.

Major players include Fairmoney, which offers loans within five minutes without collateral, using repayment history and smartphone data to make decisions on sums up to N500,000 ($1,204). Palmcredit claims to be even faster, providing loans within three minutes, again unsecured but capped at N300,000 ($722). Branch appears to be the most popular lending app, with 10 million downloads by June 2022, although of course not all those who download financial apps actually use them.

App-based companies are advancing into more and more sectors, including equity investing, with fintechs Cowrywise and PiggyVest encouraging people to invest for the first time. Established banks and other financial services companies will have to respond to such products by cutting their investment fees, by making investments easier and, above all, by ensuring that people can invest even small sums.

A rapidly changing scene

While the group of the very largest commercial banks has changed relatively little in recent years, the fintech sector is far more reactive, with companies being established, merging, growing rapidly or declining at a much faster rate.

Success often results in them being taken over by others in the same ecosystem. In July, for example, fintech infrastructure provider Bloc acquired fellow Nigerian firm Orchestrate – formerly known as Getwallets – in a combined cash and stock acquisition. Orchestrate, which develops subscription management, wallets and payment systems for other fintech products, will continue to operate independently, although the two firms will share expertise and resources to some extent.

Bloc provides licenses, capital and compliance support, as well as financial infrastructure, and has processed $30 million in bill payments in its first year of operation. It recently began offering agency banking services to customers under license. Like so many in the industry, both are very new fintech companies, having been established last year.

This process of constant innovation, reinvention, mergers and acquisitions is typical of young but rapidly growing industries that are still finding their feet, but with capital quickly finding its way to the best ideas.

Bloc founder Edmund Olotu commented: “We are proud of our input in helping to shape the African fintech space and excited to welcome the Orchestrate team into the Bloc family. Part of our vision has always been to provide businesses of all sizes the opportunity to offer seamless payment solutions to their customers, which is crucial not only for the experience of the end user, but also for the sector’s growth.”

He added: “This is an exciting development for both businesses as we look to grow and build even more solutions that will ultimately support the growth of African technology businesses in the coming years.”

Outlook

Currently, Nigeria’s largest banks are holding their own against the newcomers as the growing financial services market generates growth for all. But as digital-first banks grow and become more accepted, the pressure on the established players will increase. It would be no surprise to see a more even playing field created in the longer term, with companies from diverse backgrounds offering a wide range of financial services.

This is likely to mean rapid changes in the banking sector, with banks being forced to either work with current competitors, merge with them, copy their new approach, or stand on the sidelines, especially as the implementation of the African Continental Free Trade Area (AfCFTA) threatens even more competition, with the entry of traditional banks based in other African countries into the Nigerian market.