Where does African fintech go from here?
By Brian Waswani Odhiambo, Director of West Africa at Novastar Ventures
When I moved to Lagos from Nairobi three years ago, I thought I knew a little about fintech in West Africa. It turned out there was more to learn.
In Kenya, innovation in financial services was led by the telcos. It was M-Pesa that provided the foundation for other fintech and embedded finance companies to build on, and Safaricom opened up its application programming interfaces (APIs) to facilitate them. Today, your M-Pesa wallet allows you to make payments, save and get credit. Over the past five years, banks in Kenya have been working to catch up, but mobile money remains the market leader.
Nigeria took a different path
In Nigeria, traditional banks are leading innovation with services such as instant interbank transfers, USSD banking and customer credit. While corporate banking became the real cash cow given the massive industry built around the oil and gas sector, retail banking in this country of 200 million+ people was a luxury only the middle and upper classes could afford. This left a massive amount of consumers and businesses out in the cold.
The Nigeria Inter-Bank Settlement System (NIBSS) was the earliest innovation led by banks and the regulator. Launched in 1993, NIBSS enabled payments across individual bank accounts (P2P) and from individuals to businesses (P2B) via cards and transfers. To date, NIBSS remains a key enabler of the fintech industry in Nigeria, although other switches built by companies such as Interswitch and TeamApt have subsequently entered the market. Remita, Transact, UP and Interswitch were also early players in the fintech game, enabling better interaction between bank customers and their bank accounts and eventually the ability to make payments via point of sale terminals.
The history of fintech in Nigeria is well documented, but the main focus was initially on deepening relationships with existing customers rather than expanding access. This first focus was too lucrative to diversify from, and the banks were then too big, too slow and too expensive for the “many”.
Enter the next generation of fintechs
These companies were nimble and well financed with the benefit of international support in terms of capital and know-how. Instead of building a challenger bank, they focused on driving specific verticals within existing banks and doing better. For example, Carbon, Lidya and FairMoney all took a laser-focused approach and became very good at evaluating borrowers quickly; lending to even the smallest businesses that banks weren’t interested in. Other companies—Paystack and Flutterwave—took on payments, specialized and scaled up, gaining significant market share.
Inevitably, the available market within specific verticals shrank with increasing competition, and now new-age fintech is the reverse evolution of where it all started – banks. Once you excel with a specific offering and have a captive audience, upselling your customers is the obvious next step, and in the last two years, more than 10 fintechs in Nigeria have obtained or acquired a microfinance banking license.
The difference this time is that fintechs are well-capitalized risk-takers interested in scale, and they can scale more cheaply since they don’t need to build expensive brick-and-mortar branches. This has been good for Nigerian micro-enterprises which were historically ignored by banks. Helping small businesses get online with an affordable one-stop shop that offers all the products they need – payments, credit, currency and business management tools – is a huge opportunity. There are 40 million micro-enterprises in Nigeria, each employing between one and five people. It is a large enough market to build quite large financial institutions.
It is a similar story with B2C
In Nigeria, and sub-Saharan Africa in general, there is no money in people’s accounts. Once paid, you withdraw the money in cash or, in the case of East African consumers, transfer it to a mobile wallet. In Nigeria, cash remains king and although transfers are becoming increasingly popular for payments, the vast majority of individuals prefer to pay or be paid in cash. This is compounded by a lack of trust in the payment and transaction infrastructure, which constantly fails or is faulty. In East Africa, however, many outlets will accept mobile money and the infrastructure works 99% of the time, so people are happy to use it. The wallet also offers additional products such as credit, savings and rewards.
Some fintech companies operating in Nigeria – Kuda, Chipper Cash, MFS Africa – have tried to go after the retail market, but the jury is still out on whether it will be profitable in the long term. Inevitably, there was a land ceiling with some companies looking to increase their top line customer numbers with the hope that at some point they could monetize them. This has not quite happened yet. Millions of downloads have not been translated into the use of other services, and even when they borrow, customers often do not pay again and it is very difficult to enforce repayment.
So what’s next?
In addition to leading Novastar’s investment in TeamApt, I also attend many fintech conferences, read many blogs and talk to entrepreneurs to identify the “next big thing”. As an investor, I naturally want to be at the forefront. To be specific, I don’t usually ask about crypto, decentralized finance or how blockchain will have new applications in fintech. I try to understand what current products, operational and business models will look like in the next three to five years. Common themes emerge:
- Product and customer service are key. While you can compete on price to create stickiness, it’s usually a race to the bottom, especially in this new world where companies are raising tens of millions of dollars in venture capital. Product and customer service are the main drivers of stickiness. For example, if you have a point-of-sale (PoS) service that fails sometimes, customers will switch to an alternative provider. The transaction costs for the customer are just too high and they are flooded with alternatives that are sometimes even cheaper.
- Fintechs must do more than just financial services. This means getting into adjacent offerings including insurance, remittance, business management tools. etc. Payments and credit are bread and butter for many fintech companies, but these are increasingly being competed against with little differentiation. Deepening the relationship with the customer (the micro-business) via additional offers is the way to stay ahead.
- Banking by the end user (B2C) will be crucial. So far, a direct-to-retail model has not proven successful for fintechs in Nigeria, but they need to find a distribution model to reach end users and generate value from them. This could mean, for example, banking of employer and employee, with benefits for both parties.
So, what is the role of investors?
The ecosystem is at a point where we have quite sophisticated fintech entrepreneurs with strong engineering backgrounds and a good understanding of the market. This is partly because most entrepreneurs today come from some of the fastest growing fintech companies on the continent. TeamApt, Flutterwave and Paystack all have alumni who have built amazing fintech companies.
Increasingly, generalist investors will not move the needle for these companies. What the market will demand is specialized expertise that may include specific fintech product knowledge, experience launching in new markets, regulatory expertise, knowledge of hiring engineering teams or exiting businesses, among others.
There is still a large funding gap on the continent and I do not mean to discourage investors from looking into these types of businesses. However, the market is maturing, and if we can learn anything from growth-stage companies, they eventually need subject matter experts to really take them to the next level.
Two things keep me optimistic
Firstly, I know that we are barely scratching the surface – not only in the range of financial products that consumers demand, but also in the geographical areas. Outside of the main markets of Nigeria, Kenya, Egypt, South Africa and Senegal, people across Africa continue to buy and sell. These individuals present an untapped market for fintech companies looking to enter or expand in Africa.
Second, fintech is an enabler. The infrastructure that many fintech companies are establishing today will unlock a lot of value for other companies to build on. For example, buy-now, pay-later – this only works if you have the infrastructure to collect digitally. Or lending to farmers – you get the credit lines working and then an agtech company can come in and embed their services. This layering is what will build a genuinely robust and resilient market, with fintech at its heart.
This article was first published by Novastar Ventures.
