The fate of digital finance in Nigeria’s fintech sector

This article was submitted to TechCabal by Nicolas Teisserenc. Nicolas runs Poinciana, a communications consultancy specializing in Africa

Over the past decade, fintech has become perhaps the most exciting industry in Nigeria. Hundreds of companies have emerged, attracting up to two-thirds of all local start-up funding in recent years. In 2021 alone, the sector handled close to $700 million in digital transactions. However, recent developments, including a decline in enthusiasm for digital finance fueled by the crypto crash, a series of scandals, an ailing global economy and an oversaturated industry have left Nigerian fintech looking a little worse for wear.

Nevertheless, these can be seen as mere growing pains for a sector that is still far from reaching its ceiling. As telcos begin to foray into the digital finance game, competition in the sector promises to increase. So where does that leave the traditional banking sector? After spending decades building the continent’s financial infrastructure, are African banks at risk of becoming obsolete in the wake of digital disruption? Or will they adapt to the digital path and turn their perceived weakness into a strength?

The past few years have been very kind to the Nigerian fintech industry. With 150 to 200 fintech startups calling Nigeria home, the country seemed poised to become the undisputed African leader in the industry. The sector raised around $440 million in investment in 2020, and more than $600 million in 2021, accounting for nearly a quarter of the total funds attracted by African tech startups. This figure rises to almost two-thirds in the case of Nigeria.

The growth of Nigerian fintech is a perfect proof of the untapped potential of African economies. Fintech startups have enjoyed success and growth in Nigeria due to certain factors, including low banking penetration, a youthful population making good use of an explosion in smartphone ownership, and recent regulatory changes that have increased the number of cashless transactions.

But 2022 brought a series of challenges for fintech providers, both in Nigeria and across the world. Although the COVID-19 pandemic has not damaged the fintech industry to the same extent as it has affected other sectors, even strengthening its position somewhat through increased digitization, there is no hiding the global economic slowdown. The industry has also been affected by the cryptocurrency crash of 2022, which has cast doubt on the viability of all digital financial services in the public eye.

But perhaps oversaturation could be the most damaging factor for the Nigerian fintech sector. Allowing consumers to choose between 200 different companies that all offer similar services is far from viable, even for a growing market. Given the sector’s current challenges, it is difficult to see a future for even half of these companies.

But even under these adverse auspices, the fintech sector will continue to thrive both in Nigeria and across the world. As with many new technologies that offer great leaps in convenience, it will prove impossible to put the genie back in the bottle.

The next few years are likely to be a sink-or-swim moment for Nigerian fintech. The industry may see increased market consolidation and hopefully more sophisticated consumer expectations. Some fintech investors may even realize that exiting by selling the company to a larger competitor is a desirable business outcome.

To weather this storm, major players in the Nigerian fintech sector may need to come together and develop a common strategy to fend off competition from outside the sector. Telecom companies, with their large and established user bases, are rapidly making inroads into the world of digital finance. Fintech may have opened the door to new arenas of financial services for more than a hundred million unbanked people in Nigeria, but now everyone is taking notice and rushing to accommodate them.

Within this chaotic but remarkably lucrative context, traditional banks must step up their game to remain at the forefront of financial services. With both fintech and telecom in full swing to attract users, traditional financial institutions must seize this window of opportunity and position themselves as the top choice in this three-way race.

The fintech industry has done remarkable work in providing financial services to youth, the age demographic least likely to have a traditional bank account. However, this could lead to an entire generation of Nigerians seeing fintech as the most obvious, or even the only viable option for their banking needs, while rejecting traditional banks as slow and outdated institutions.

For banks to thrive in the 21st century, they must adapt to these new customer expectations, shedding their suit-and-tie, bricks-and-mortar reputation for a friendlier, more accessible approach. The digitization of financial services is not going anywhere, and the banks will do well to embrace digital services and build user-friendly platforms for their customers.

When trying to attract the inhabitants of rural or isolated communities, which are the groups most likely to remain completely unbanked, building digital infrastructure will prove to be faster and less expensive than the physical one. Banks should be able to turn weaknesses into strengths, using their traditional and established model as an anchor and a safe haven in economically unstable times.

The coming competition between fintech and telecom is likely to further expand the number of people using an online banking service for the first time. Instead of finding themselves on one side of a technological divide between digital haves and have-nots, banks must bridge the gap between traditional and digital banking. With the digital revolution in Africa in full swing, the traditional financial sector simply cannot afford to be left behind.