The Evolution of Nigerian Banks to the Edges of Smiling Curve

The smiling curve is a graph that measures value against the value chain of an industry. The curve appears like a smile when value added is represented on the Y-axis and the value chain stages are represented on the X-axis. I have used it to explain competitiveness in the financial services sector.

Before 2020, most banks in Nigeria were at the center of the curve, and they captured the least value in the ecosystem even though they provided the most support. But those at the edges, usually fintech companies,  captured the most value even though they did not provide a lot of catalytic support in the ecosystem.

Fast forward today, most banks have transmuted, creating fintech units, and in the process, they are now represented at the center and the edges. As a result, these banks are now capturing great value just as the fintech firms.

Sure, there is always going to be an innovation hangover which does imply that banks may not necessarily do what fintechs do very well since they may not like to cannibalize value elsewhere.

Immediately, I knew that there was the power of monopoly in town. With PayPal, you can sign-up for free, and within minutes be getting revenue online. But yet, I do understand that Interswitch has its own cost model, running its generators and providing its security since government is largely not part of building companies in Nigeria. But was that fee appropriate just to be connected online, in Nigeria? Not really, and I felt they were making a real mistake. A big mistake because such fat profits and margins would cloud their strategies to mine all the juices with the power of monopoly and suffering later the risk of not innovating. They did not make significant efforts to expand beyond Nigeria, at scale, because they could simply charge $1,000 for integrating websites. (Sure, they did expand to Uganda, etc but generally, the pace was slow. When they started in Nigeria, they could have taken over Africa, if they had not become very comfortable in Nigeria alone.)

For example, a fintech company may wire funds from Nigeria to London for $30, and a bank’s fintech unit can match that, but because a bank’s treasury unit charges $100 for that same service, the bank may pause the launch of that product in the fintech unit. Or if they do launch it, they will modify the problem and solve something that may cost the customer $70.  This hangover is the reason upstarts can win in a world of established incumbents. Check my video on the Smiling Curve here.

The smiling curve is a graph that measures value against the value chain of an industry. The curve appears like a smile when value added is represented on the Y-axis and the value chain stages are represented on the X-axis. I have used it to explain competitiveness in the… pic.twitter.com/TeoVqdytiY

— Ndubuisi Ekekwe (@ndekekwe) May 14, 2024

Banking, Fintech and Smiling Curve: Why Where You Operate Is More Important Than Efforts You Put In

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