How will Nigerian start-ups promote financial inclusion?

Financial technology (fintech) has been gaining momentum in Nigeria as start-ups look to create innovative solutions to fill socio-economic gaps such as exclusion from the formal banking system. An estimated 56% of Nigerian adults are unbanked and 36.8% do not have access to financial services. The country’s more than 200 fintech firms – which account for over half of all start-ups – aim to close this gap.

Segments

The focus of Nigerian fintech companies is primarily on payment and lending, geared more towards consumers and small and medium-sized enterprises (SMEs) than corporations. Payment solutions surged between 2018 and 2020, partly due to a push from the Central Bank of Nigeria (CBN) to boost financial inclusion and the rollout of favourable regulations, such as amended know-your-customer rules for lower-tier accounts. Fintech solutions granted SMEs a quicker and more effective way to make payments, which resulted in the value of SME payments growing at a compound annual growth rate of 28% between 2017 and 2020.

Fintech lending grew as a result of the ease with which firms were able to leverage data to determine risk and provide services via smartphones. For example, start-ups such as Nigerian digital bank Carbon use alternative credit-scoring algorithms to provide loans instantaneously. The bank’s lending success has allowed it to expand into other areas, such as savings, investment and payments. Carbon processed $240m worth of payments in 2020, an increase of 89% from 2019.

FDI

Investment monitor fDi Markets recorded 40 greenfield foreign direct investment (FDI) projects in the Nigerian financial services sector between 2014 and 2019, making it one of the most active sectors during that period. The amount of investment raised by the country’s fintech firms in 2020 – $160.3m – represented 24.9% of total FDI in start-ups that year, higher than any other sector and up 49.3% from 2019.

Between 2017 and 2020 investment in Nigerian fintech companies grew by 197%, largely thanks to foreign investors. In 2019 digital payments firm Interswitch became the country’s first unicorn after receiving $200m in funding from US payments group Visa, which increased the start-up’s valuation to over $1bn. In October 2020 local start-up Paystack, which was created in 2016 and facilitates payments to businesses in Africa, was acquired by global payments provider Stripe for an estimated $200m. More recently, Flutterwave, another payments start-up, achieved unicorn status after concluding a $170m Series-C funding round in March 2021. Most of the funding came from US investment firms Avenir Growth Capital and Tiger Global.

Support

While the fintech market has grown significantly in recent years, there is potential for further expansion. According to the “State of play: Fintech in Nigeria” report released in mid-2020 by the Economist Intelligence Unit, fintech revenue will reach $543m by 2022, up from $153m in 2017. As such, it will be important for regulators to respond to evolving dynamics and ensure customer protection without stifling innovation.

The government has worked to create an enabling environment for fintech companies. For example, the central bank relaxed regulations over the years to help promote the use of digital payments, which in turn facilitated more actors entering the space. In 2020 the CBN partnered with banks and non-bank payment providers to restructure transaction charges and limits to encourage online payments; enabled welfare grant payments to be made digitally; and allowed digital banks to be opened with a bank verification number or registered phone number, easing access to digital payment tools. However, more can be done to help fintech players deliver their products to the market faster, streamline administrative processes, and provide regular updates and reviews of policies. While there is currently no fintech-dedicated law, in early 2021 the CBN approved the Framework for Regulatory Sandbox Operations in Nigeria, which aims to create a controlled environment to test innovative fintech products.