Understanding the Nigerian Fintech Evolution

One of my favorite past times is studying history – Roman History to be specific. I’ve read about everything; from the founding of the Roman Republic to the conquests of Julius Caesar in Gaul, the crossing of the Rubicon, to the first and second triumvirates to the rise of Augustus Caesar. I sometimes go deeper in time to study the conquests of Alexander the Great, his battles and victories in Persia, and how a single man was able to conquer much of what was then the known world. Beyond the knowledge value of history, I also believe that as a Christian, a deep understanding of history helps give biblical stories better context for much better comprehension.

If there’s one thing you’ll learn from history – it’s that while history rarely ever repeats itself, it always rhymes, and therefore a firm understanding of history helps give a clear picture of what the future could hold.

Understanding Fintech

The terminology fintech is a very broad and all-encompassing term that could refer to payment tech, wealth tech, insurtech, credit tech, or even crypto. For the purpose of this piece, brevity (and to avoid unnecessary banter), my definition of fintech will be largely streamlined to companies offering payment solutions.

ARE THERE TOO MANY FINTECHS?

There’s been some debate online in recent months on whether there are too many fintechs, and if fintechs are largely utilizing a red ocean strategy, serving the same or largely similar customer demographic with products with very little or no differentiation at all.

While there are definitely lots of firms doing very similar things with little or no product differentiation i.e mobile payment applications, it is however important for us to consider two key things when we think about fintech in Nigeria:

Market Size/Opportunity: Nigeria has a population of 200million people (for context purposes, this is more than 3x the population of the UK), the African continent by extension is at 1billion. At the topmost layer, all fintech companies are really competing with cash, before second layer competition with companies offering similar propositions. All fintechs are really trying to “digitize cash” and build products around the possibilities this creates. You (unfortunately) cannot put N1,000 notes on the screen of your laptop to pay for goods at an eCommerce store, so payment companies “digitize cash” to make this possible. While you already transact in cash, the more digital your cash is, the more likely you are to get credit, insurance, a mortgage, anything, because a digital record of your transactions exists on a database that can be validated.

I’ve heard multiple times from research firms that regardless of the progress we have seen in the digital payments space to date, more than 80% of transactions in Nigeria still happen in cash. According to data from CBN, around N3.3trn (US$7.9billion) in cash was in circulation in 2021 alone, for context purposes, this is almost 3x the GDP of Seychelles and The Gambia combined. So while there are many players, the market is still a relatively big one.

Infrastructure: Finance is the backbone infrastructure for all economic activities. When the financial markets feel a squeeze, everyone feels it. There are a host of products that exist today because of fintech players providing the infrastructure to collect and disburse digital payments. JumiaFoods (one of the most popular food ordering apps in Nigeria) partly exists because there is an Interswitch payment gateway making it possible for people to pay for food online and have it delivered to their houses. The founders of PiggyVest (also a fintech), have in multiple instances alluded to the fact that Paystack’s ability to receive and disburse payments made it possible for Piggyvest to exist in the first place.

As long as the market continues to expand (and the disparity between cash and digital transactions continues to increase), and firms need financial infrastructure they can plug their businesses into (as against building themselves), there will always be an opportunity for fintech businesses to thrive.

THE FINTECH EVOLUTION

In this piece, I will go through the Nigerian fintech evolution from a payments perspective starting from the Fintech 1.0 players, down to my definition of Fintech 3.0. The goal of this piece isn’t to argue, so if for some reason I missed your firm, there’s no need to throw a stone in my direction or throw a tantrum (no seriously, don’t do this).

FINTECH 1.0

The earliest evolution of fintech in Nigeria started with the regulatory framework that made companies like NIBSS exist. NIBSS (Nigeria Inter-Bank Settlement System), founded in 1993 and owned by all licensed banks including the Central Bank of Nigeria (although a payment system regulator in its own right) is a key stakeholder in the Nigerian payment landscape. NIP (NIBSS Instant Payment) which is an online real-time Inter-bank payment solution and NAPS (NIBSS Automated Payment Services) has made it possible for financial transactions in both P2P and P2B settings to exist.

NIP is possibly one of the most efficient payment infrastructures in the world with a 99% success rate (or possibly more). NIP is so reliable that the general idea behind direct bank payments (EFT) disrupting cards at merchant locations is somewhat hinged directly on the reliability of NIP.

However, NIBSS is more of a regulated entity owned by the Banks, and while there are a plethora of Fintech companies (who were really more of IT companies in those days as using the name Fintech probably wasn’t as sexy as it is today) that constitute this era, my focus would largely be on four players – Interswitch, SystemSpecs (Remita), UPSL, and eTranzact.

Interswitch

Interswitch was founded in 2002 to solve a real problem – the lack of proper infrastructure to power digital payments, particularly cards. Before Interswitch, debit card transactions were possibly non-existent in Nigeria, in fact, before Interswitch, a debit card from any bank globally was practically useless in Nigeria. Interswitch provided one of the first card switches to power ATM transactions on a nationwide basis, and this became game-changing for the finance ecosystem at the time. Interswitch also made it possible for merchants to receive digital payments from their customers online via a payments gateway.

SystemSpecs (Remita)

SystemSpecs (Remita) – while Remita was recently spun off as a single company under SystemSpecs Holdings, Remita is a pioneering Nigerian fintech responsibly for a host of innovative payments solutions, most notably is its use as the key payment gateway powering the Federal Government TSA initiative which saves the Nigerian Government N540 billion (US$1.2billion) annually (about US$148,800 every hour).

According to 2019 data made publicly available by the Central Bank of Nigeria, Remita processed about N20.9 trillion (US$46billion) in transactions in 2019 alone. Remita also has key infrastructure across all major banks in Nigeria (that no other fintech has) that allows it to perform direct account-to-account payment transaction authorizations in Nigeria. A multibank mobile payments application that allows you profile multiple bank accounts and transact with all via a single interface. Remita is also responsible for a host of innovative payment solutions in the Nigerian fintech space.

UPSL

Unified Payment Services Limited is another pioneering Fintech 1.0 player founded in 1997 by a consortium of leading Nigerian banks. While UPSL is relatively unknown to outside observers, UPSL is a key player in Nigeria’s fintech space. Similar to Remita (however not as extensive), UPSL also has infrastructure across major Nigerian banks that allows it perform some level of debit and credit transactions.

UPSL is also one of the major switches powering the majority of POS Terminals in Nigeria. According to data from NIBSS, more than N6.43trn (US$15.5 billion) transactions were posted via POS terminals in Nigeria, I assume UPSL has a 40 – 60% market share (or even more) of transaction switching in this market. UPSL is also responsible for a couple of innovative solutions in the Nigerian fintech space i.e pioneering the issuance of Naira cards that are globally accepted.

Note: Worthy to note is that transaction switching in Nigeria which is largely card-dominated is majorly controlled by two players – Interswitch (owns the majority of ATM transactions and a cut on POS Transactions), and UPSL (A good majority of POS transactions in Nigeria). Non-card transaction switching from a USSD point of view (Pay with USSD on payment gateways) is where firms like CoralPay play. Most of the other players with a card-focused switching strategy control a very little share of the market. In fact, 3line, a possible Fintech 1.0 player dropped its transaction switching license in 2020 because it didn’t make any sense to run a business they couldn’t profitably compete in when they could partner with an already existing player (and like their CEO clearly pointed out, they weren’t really using their switching license to do anything in the first place).

To be clear, this doesn’t necessarily mean acquiring a switching license (especially from a card perspective) is a waste of resources, ideally, a company could switch its own transactions as a means to cut down on paying a third party if the payment volume it processes and the maths make sense.

Etranzact

Etranzact founded in 2003, is another core Fintech 1.0 player. Similar to other Fintech 1.0 players, Etranzact offers Transaction Switching and Payment Processing services and is a leading TPP (Third Party Processor) for MasterCard in Africa. Worthy to note is that Etranzact is the first and probably only (last time I checked) Nigerian fintech company listed on the NSE (Nigerian Stock Exchange).

Fintech 1.0 players entered the market at a time when the problems to be solved were clear and the banks didn’t necessarily see these IT firms (possibly what they were referred to then) as competition but more as enablers. This explains the advantages, integrations, and infrastructure these early players were able to build with the banks in those days that would be almost impossible for any new age fintech to try to build today.

FINTECH 2.0

While there are many players who characterize Fintech 2.0, especially from a payments perspective in Nigeria, I consider two companies to be the poster children for Nigeria’s Fintech 2.0 – Paystack and Flutterwave.

While Fintech 1.0 made a lot of things possible, Fintech 2.0 improved on and made a lot of things ACCESSIBLE. The first line of innovation is usually about making things possible, albeit to a select category of people who are able to afford it – when cars were made, they were only for rich people, the normal folks could manage the horses (or their legs) when commercial airlines were made the same thing, and even with mobile phones – my late grandfather (I am told) was wealthy, characteristic of that wealth – he drove a Mercedes V-Boot and had a landline which was possibly an ostensible sign of wealth in those days (those days being when people sent letters over long distances to communicate and waited for weeks to get responses).

The second line of innovation is about democratization (making technology accessible to the largest number of market players). Side note: this is key to how Transsion Holdings controls a strong market share in Nigeria’s mobile and smartphone space. For more on that, you can read my 2020 piece on that here.

Fintech 2.0 players made payment solutions easily accessible to those who were previously ostracized (for either lack of clear technical capabilities to execute or even basic awareness). Fintech 1.0 players were content with serving largely bigger players which made sense considering payments is largely a scale business with 1.5% being the standard MSC (Merchant Service Charge) price for collections in Nigeria. The Math makes sense if you look at it – it’s way more economically sound to serve a customer processing N200,000 (US$482.71) in average transaction amount who pushes 10,000 transactions monthly capped at N2000 (US$4.83), than to serve a customer who pushes N5,000 (US$12.07) in average transaction amount at 100,000 transactions monthly. Option one gives you N20million (US$48270.7) a month in gross revenues, while option 2 gives you N3.75million (US$18101.5) a month in gross revenues, a clear 150%+ difference.

Fintech 2.0 players decided to go for these smaller markets aggressively (while not completely ignoring the bigger ones). Paystack and Flutterwave targeted the SMEs and the likes and made it possible for these customer types to integrate a payment gateway on their digital touch-points and receive payments digitally.

This created a spiraling effect that brought a host of merchants online and made eCommerce a viable possibility in Nigeria. Fintech 1.0 players had a somewhat monopolistic hold of the market, which may have led to a lack of innovation or drive on their end, Fintech 2.0 players played a huge role in breaking that monopoly and putting the industry back on its feet.

Paystack renowned for its clean and developer-friendly APIs was acquired by Stripe in 2020 and reportedly has more than 60,000 merchants transacting on its platform. Flutterwave now worth US$3billion reportedly has about 290,000 merchants on its platform.

Fintech 2.0 players also have better international affiliations compared to the majority of Fintech 1.0 players considering most rely on external venture funding from largely foreign VCs to power their operations, funding doesn’t just bring money, it also brings access to a VCs skilled in-house expertise, network and possibly LP networks.

Most (not all) Fintech 1.0 players (in the early days) were largely Nigerian companies with little foreign exposure, and this meant that while most Fintech 1.0 players are probably profitable, Fintech 2.0 players with investor pressure on their necks (which is a good thing) may not be, but the chase for scale gives them a large runway to plan for profitability in the future (while having the growth metrics and projections to fuel future capital raises and power their growth/expansion initiatives).

Fintech 2.0 players also tend to have better cultures, stronger employer brands, and better compensation structures (considering the influx of foreign capital) and therefore find it easier to attract the right engineering and non-engineering talent from Banks, Fintech 1.0 players, and other adjacent industries.

However, the proliferation of Fintech 2.0 players by no means indicates the dearth, decline, or even disruption of Fintech 1.0 players. Although most Fintech 1.0 players have morphed over the years to keep up with the changing tides, most still have strongholds in the financial payments ecosystem due to their first-mover advantage and still control a significant portion of transaction volumes.

STAKEHOLDER MANAGEMENT

A key advantage Fintech 1.0 players have over (in some cases) Fintech 2.0 players is stakeholder management. I have come to realize that writing code and building products and projects (regardless of how innovative) is second-layer stuff. The real work is getting the relevant external stakeholders (regulators, banks, etc.) to agree with your thesis and be willing to play their roles in making it a reality. I have seen initiatives where the business case was clear, resources (both technical and financial) were available, strategy and use cases all clearly defined that did not (and may never) see the light of day because a bank or regulator somewhere refused to provide some APIs, or give a nod of approval.

Fintech 1.0 players (usually) have stronger and better relationships with key stakeholders considering their relative age in the game and relationship with these stakeholders. As I shared in an earlier piece, all innovation lives and dies on effective stakeholder management. Facebook’s proposed 2019 crypto project LIBRA was a phenomenal idea, but lack of relevant stakeholder support severely crippled its ability to scale.

FINTECH 3.0

Fintech 3.0 means many things to many people. Some believe digital banks (which are now sprouting up like mushrooms on compost) are the future of fintech (Note: becoming a digital bank is either intentional – Kuda, VFD, etc or largely the end result of the digital transformation of any of the over 900 Microfinance Institutions in Nigeria), some believe it is crypto (I personally struggle to understand the crypto use case for payments even from a stable coin point of view when compared to what is already obtainable on the market). I’m personally of the opinion that Open Banking and the possibilities it creates, especially from an Account to Account payment perspective is that 3.0, and I’ve written extensively on why I think so here.

The regulatory framework to make Account to Account payments exist isn’t as readily available as it is today when compared to what is obtainable in the EU and the UK where these things are already taking shape. By regulatory framework, I’m not just referring to a document (in which case the Central Bank of Nigeria) has already provided one, I’m referring to full-fledged backing from the regulator that “forces” the banks to provide, deploy and maintain APIs for these purposes.

CONCLUSION

The Nigerian payments and by extension fintech landscape has evolved significantly over the years, and with a large number of people still unbanked, and a good number of transactions still occurring in cash, the potential for digitization, value creation, and value extraction for companies able to execute at scale still looms strongly in the horizon.

Inspired By The Holy Spirit