Interswitch Should Buy Konga And Unity Bank Nigeria

Interswitch, a pioneering digital payment processing company, is one of the premier technology companies in Nigeria. At its core, it facilitates the electronic circulation of money as well as the exchange of value between individuals and firms. Founded in 2002, by Mitchell Elegbe, the company has expanded operations into other African countries.

The company provides switching infrastructure that connects banks in Nigeria and its technology powers ATM cards. In its sector, it is the Category-King with excess of 20,000 ATMs in its network.

It owns the Verve brand, a payment card in Nigeria, which once accounted for nearly 80% of the total cards in circulation. Verve is now available in Kenya. The company owns an online payment platform, Quickteller, which is integrated in websites in many Nigerian companies, and had processed billions of dollars of transactions. It also operates Retailpay, a mobile business management ecosystem, which is not really very popular, but growing. The Smartgov is used by local governments as an identity management e-payment infrastructure.

It has done deals as it pursued growth and diversification in the past. It acquired a mobile fintech company VANSO, for $50 million, which provided solutions in mobile banking, SMS and digital security thereby positioning Interswitch for digital commerce. It also bought into Bankom Uganda, and Paynet, a payment provider, operating mainly in East Africa. In 2015, it unveiled a $10m investment fund for African start-ups. ACE, a logistics firm, founded by Jumia Nigeria founders received $3m funding from this fund. SlimTrader, a mobile payment firm, also received $1m investment from Interswitch fund. About two thirds of the firm is owned by a consortium led by Helios Investment Partners. Helios had paid $96 million for a 52 percent stake in Interswitch in 2010.

In December 2010, an investor group led by Helios agreed the acquisition of a majority equity interest in Interswitch Limited (“Interswitch”), the largest payment processing service provider in Nigeria. Helios’ $96 million investment represents a 52% interest on a fully-diluted basis. Interswitch has been at the forefront of the development and growth of the e-payment sector. It also administers Verve, the leading debit card scheme in the country. The firm offers integrated message broker solutions for financial transactions, e-Commerce and e-billing solutions, telecoms value-added services and payment collections solutions.

The Valuation, IPO, Looking for Exit

Interswitch has been heralded as a future unicorn, a private technology company with valuation of at least $1 billion, by TechCrunch. Then, it was expected that Interswitch would go public in the Nigerian Stock Exchange and London Stock Exchange, in 2016. That exit, through IPO, did not happen and it would be assumed that Helios was disappointed. The more Interswitch waits, the more Nigerian market matures for foreign competitors to come. The barrier of entry in this business is largely minimal considering Paypal and Stripe global ambitions. According to Bloomberg, Interswitch did shop for buyers in leading U.S. financial instructions in the neighborhood of $1 billion, but none worked out. Network International LLC  was rumored to be interested but at the end nothing happened.

In Q1 2017, TA Associates, a leading global growth private equity firm, announced it has acquired a minority equity interest in Interswitch. Helios remains a majority owner.

By comparison, another payment processor,  eTransact, is worth about $70 million, according to Bloomberg Markets.

The Challenges

Interswitch is facing severe competitions from Visa and MasterCard. In a vertical integrated market, the options available from these alternative partners would continue to stifle its growth. In the past, most of the bank relied exclusively on Interswitch, but now, they have switched to the foreign players. This has made it possible for companies like Paystack, Flutterwave, Paga and others to build their businesses locally and Africa-wide without necessarily depending on Interswitch. One of the products Quickteller, which in 2016 had processed nearly $3 billion transaction, has major competitors in Flutterwave and Paga.

Besides, markets like Kenya and Ghana will not be easy; the local companies there are very dynamic and are increasingly seeing Nigeria, Interswitch home country, as a place to anchor future growth because Nigeria’s relative large GDP. M-PESA takes Kenya out and as it expands across East Africa, it makes succeeding there very difficult. The home country is not assured because recession has reduced purchasing power which expectedly affects abilities to spend money, which Interswitch depends for its business.

But despite these challenges, Interswitch operates in one of the best markets in Africa with lots of opportunities. As noted in a statement released during TA Associates investment:

The digital payments evolution is in the early stages of development in Nigeria, with cash used for 99% of transactions according to McKinsey & Company, versus approximately 50% for developed markets in North America and Europe. Despite the young market, the size of the Nigerian payments opportunity is underpinned by its continent-leading population and sizeable economy. Based on estimates from McKinsey & Company, Interswitch occupies a leading position in the emerging marketplace, especially in debit cards, which comprise 99% of all cards in Nigeria.

A New Strategy – Our Proposal And Why

Today, as Nigeria remains weak and economy on recession, with the acute foreign currency shortage, it will be extremely challenging for Interswitch to exit so that Helios can return money to investors. The remaining strategy that makes sense is growth,

Interswitch understands that and is already focusing on expanding partnerships. It moved trading in Nigeria to the cloud with Misys. It is also working with Ingenico to deepen multi-channel payment solutions

The goal for Interswitch is to become a leading platform for digital business in Nigeria. It must find a way to make it happen. It must work to take cut in any digital economic activity in Nigeria and pursue a sustained long-term dominant strategy. This means it must build a sustainable differentiated product. It must build up its primitives and close the flanks.

We propose for Interswitch to buy a bank and Konga. Together, both will provide growth drivers which will be catalytic. Publicly traded Unity Bank is worth about $31 million according to Bloomberg Markets. Interswitch could pay a premium and acquire it for $40 million;  Konga is worth about $34 million.

Interswitch should acquire a lending license from Unity Bank. That will help it begin to build a credit system in Nigeria in partnership with NIPSS. Post-acquisition, it will focus on digital banking, closing some branches of Unity Bank and dedicate its efforts to build Nigeria’s first internet-only bank. Through this, the bank will use the data from its ecosystems to perfect lending systems which will help drive it growth.

For Konga, Interswitch will be buying into customers. It will quickly sell any inventory and turn Konga into a pure marketplace but with warehouses to enable Konga customers to store their products which will be sold in Konga ecosystems. The investment in ACE, the logistics company will then be expanded to ensure that Konga’s marketplace is strengthened. This will provide Interswitch with customers which will be critical in its growth.

Both Konga and Unity Bank will give Interswitch paths and customers to enable it become a truly new-bread service provider which is going to be protected by scale and outreach. 

In conclusion

The future of Interswitch will be determined if it can make itself a platform- anchored payment ecosystem in Nigeria. Any plan to remain a switching firm poses existential threats as banks can easily build their own. GTBank has already done this, replacing Interswitch with GTPay in its online ecosystems. This means that they can bypass anything Interswitch offers today. So, the best strategy is to transform itself from within. Locking customers and having a platform is the only way to do this.

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