Fintechs in Nigeria where the main source of revenue is transaction fees will fade within 3 years. We will move towards a perfect digital market where marginal cost is absolute zero. The new phase of opportunity will be monetizing data for lending, wealth management, etc and not “taxing” citizens with fees.
Paytech startups built on transaction fee-based revenue will struggle as new business models evolve where transactions can be efficiently processed at absolute zero transaction cost and distribution cost. My state of Nigerian fintech shows a shift in the equilibrium on the points where startups make money from users. This will simply become the new normal.
Consider the possibility that OPay has bank accounts in all banks in Nigeria. If a customer ( paying for DStv) pays through it, it will simply receive money from the customer to the specific corresponding bank account it maintains in the customer originating bank. At the same time, it will pay the merchant to the merchant’s bank account using its (OPay) funds in the same bank as the merchant’s. Because wallet-to-wallet transfer in Nigeria does not attract a fee, this two-sided intra-bank transaction (inflow and outflow) does not cost OPay and its customers any transaction fee.OPay, relying on bank APIs, automates this protocol. This is Option 1. There are other options on how to execute this including having a holding quasi-entity.
Do not be confused on this – we will leapfrog London and New York in this domain. The architecture of our banking system makes this possible. I do not expect it to be changed!
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Updated after Flutterwave $35 million Raise
Comment: I remember an old post of yours where you spelt doom for payment outfits like flutterwave where you mentioned they couldn’t just thrive on payment charges. May I ask what you now see differently.
My Response: Share the link please. I would be interesting to actually use that to teach. My position has been this: any fintech that competes for checkout pay by sending code will fade.But those that help clients to improve their businesses will win checkout pages and thrive with the clients. But share the link. Flutterwave has subject matter experts in education, trading, agro, etc that help their clients before they work on those checkout pages. That is the Silicon Valley Bank model which I have advocated for them.
Plus – doing that is one way of dealing with decreasing percentage on transaction fees which have dropped from 6% (when BankAmericard was unveiled in U.S.) to now about 1.4% on average. It will get to near zero one day. We have 0.99% on fees in most platforms. So, if you do not help clients, fees would not do it!
Comment: Well you just answered the question already. Sharing the link won’t matter then. Thank you sir.
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You are absolutely right!!! In China, Alipay and Tenpay began charging customers after about 10 years in business. Their initial No-Charge business model helped scale their businesses. Using economics of scale, they offered value FIRST before they started charging fees. when the customers saw that their lives revolved around those payment platforms, they would not see the need to complain/object to the new development. But in Nigeria, it is the opposite. i may be bold to say that aside failing transactions due to network downtimes, experienced in the gateways and online fraud, one of the main reasons why e-payment has not been able to scale massively in Nigeria is because of these transaction charges. it is left for Fintech companies to innovate and use their payment platforms to offer more services, thereby earning commission from those services, while charging nothing for e-payments. FREEMIUM still remains the best business model, anywhere in the world, for any startup to build huge userbase. Thanks for this post.
Customers want value and are open to pay fees. When new banks introduced COT but cut bank hall time from 4 hours to 15 mins in Nigeria, people went with them.
The truth is that users of payment platforms have been beating to a pulp for a long period of time, even when there is no justification for the continuous pillaging…
The only explanation is that our entrepreneurs love easy ways of making money, so once you discover one, you rarely let go, even when there is no need for it. Take for instance a payment platform that charges 1% or 1.5% on transactions; now ask yourself what additional resources does the platform expend when you transfer N100k that is different from when you transfer N200k? But on fees, you are paying double for the latter, and this has been going on for so long.
Ordinarily it would have made some business sense for payment platform just starting out to charge a fee, as a way of managing operational costs, but how do you justify same for those that have attained breakeven point and now declaring huge profits? It’s simply because no one has challenged the immoral fees, and many have come to accept them.
MTN came here and told us how ‘impossible’ per second billing was, that was in addition to selling SIM card as high N30k; until Glo came and upended the myths, suddenly MTN found a way to do same…
Yes, paytech can do without fees and still remain profitable.
“MTN came here and told us how ‘impossible’ per second billing” a long time indeed. Those days – really those days.
There is still a N50 stamp duty fee payable for ETF to current accounts, except its a savings account even if its intra bank transaction.
The Opay model describe doesn’t take into account regulation that only allows 1 settlement bank for all payment transactions on the wallet system. They can have multiple collections account but all funds in the collection account has to be swept into settlement account so that the balance on the wallet system balance is equal to the settlement account. The Opay model described above requires multiple integration to banks and there’s currently restriction on that for payment platforms