In recent years, FinTech has made remarkable strides in the Nigerian economy. The FinTech landscape has witnessed a phenomenal surge in startups, products, funding, and operational activities, diversifying into various subsectors despite facing challenges.
As per the Nigeria Startup Funding Report (Q3 2018), the total investment in technology companies in Nigeria from the first to the third quarter of 2018 reached a staggering $118,463,785. Remarkably, 73% of this sum entered the FinTech domain. The driving forces behind this upward trend include the quality of companies and founders in the FinTech sector, the booming e-commerce industry, and the widespread adoption of smartphones.
The Nigerian Communications Commission (“NCC”) reports over 162 million mobile subscribers and approximately 104.6 million internet users as of August 2018. With an 84% internet penetration rate, a burgeoning young population and a robust talent pool, the stage is set for FinTech to reshape consumer experiences across various financial services – from insurance and payments to banking, lending, and wealth management.
Despite the strides in banking, gaps still exist in delivering maximum consumer satisfaction. Many remain underserved in rural and urban areas, facing hurdles in accessing financial services such as loans due to stringent banking regulations. The existing poor user experience further compounds these challenges.
FinTech companies in Nigeria are rising to the occasion, aiming to fill these gaps by developing innovative financial tools and services. While the FinTech sector is still in its infancy, it has already introduced groundbreaking ideas, addressing issues like inflexible savings, quick loan strategies, investments, and seamless online payment gateways.
What is FinTech?
Financial technology, also known as FinTech, is an industry of different companies that utilize advanced technology to increase the efficiency and effectiveness of financial services.
Let’s see it this way- FinTech is simply a technical tool that supports financial services and makes delivering such services easier.
FinTech companies are businesses that provide financial services to the public using software. Unlike the traditional banking system, these companies are not hindered by factors like legacy operating systems.
FinTech businesses are agile and flexible, can bring up innovative ideas and work with experts in the information and technology sphere.
FinTechs in Nigeria
Banking in Nigeria has improved over the years. Competition amongst the individual banks has made for more improvements as they try to offer their customers the best service.
However, if we are frank, we’d see that gaps are still filled. Much must be done to offer consumers maximum satisfaction with financial service delivery.
A majority of banking service consumers in Nigeria are underserved. For instance, when you get to the rural areas, there is a lack of access to services; even those living in the urban areas can’t access some financial services, such as loans, because of certain rules guiding the banking sector.
Poor user experience has frustrated many people using the banks’ financial services in the country.
These and more have created gaps that FinTech companies in Nigeria now seek to fill. The top FinTech companies in Nigeria have taken advantage of the openings to develop better financial tools and services for the masses.
The Fintech sector in Nigeria is still young. However, so far, they have brought up some innovative ideas that have benefited the public, such as addressing issues of unflexible savings, quick loan strategies and investments, and providing an online payment gateway and seamless payments.
Major FinTech Trends in Nigeria
Pioneering Payments: The Rise of P2P Transactions
Nigeria has witnessed substantial growth in mobile payment solutions over the past decade, encompassing point-of-sale (“POS”) transactions, online purchases, and peer-to-peer (“P2P”) transactions. While Nigerian Banks dominate mobile payments, FinTech companies are pivotal partners, especially in P2P payment platforms.
FinTech has catalyzed alternative lenders’ growth, offering investors higher yields and providing faster, cheaper, and more convenient loans than traditional banks. Noteworthy are the innovations brought forth by Nigerian FinTech startups, incorporating technology, algorithms, and machine learning to revolutionize credit risk assessment, credit disbursement, and customer banking.
The Central Bank of Nigeria (CBN) has taken strategic steps in the regulatory arena, such as issuing the Regulation for Bill Payments in February 2018. This regulation covers bill payments across various channels and mandates entities operating bill payment platforms to obtain a license or integrate with licensed Payment Service Providers (“PSPs”). Anticipating more trends in 2019, these regulations, including those from the CBN and the Nigerian Communications Commission (“NCC”), shape the evolving FinTech landscape in Nigeria.
Crowdfunding
Crowdfunding, a dynamic online funding method, taps into the power of collective support to finance cultural, social, or commercial ventures. Small amounts from a vast network of individuals converge on crowdfunding platforms, facilitated through social media, to connect investors and entrepreneurs.
Communication between funders and entrepreneurs unfolds online, with crowdfunding platforms acting as intermediaries, earning fees calculated as a percentage of the raised amount. Funders receive monetary compensations, such as profit sharing in equity-based crowdfunding or non-monetary returns like products or services. Despite the ban on equity crowdfunding by the Securities and Exchange Commission (“SEC”) in 2016, donation and reward-based crowdfunding remains legal. The potential for crowdfunding in Nigeria remains untapped, awaiting a favourable regulatory framework.
Anticipating change, recent amendments to the Investment and Securities Act (“ISA”) include provisions enabling crowdfunding. Startups are already diversifying crowd-lending and crowd-investing services, particularly in sectors like agriculture. As the potential unfolds, 2019 holds promise for crowdfunding to flourish within the Nigerian FinTech landscape.
Cryptocurrency
Cryptocurrencies, secure digital currencies built on cryptographic protocols, have transformed online transactions. Despite the Central Bank of Nigeria’s cautionary stance, the rise of virtual currencies prompts a reevaluation of regulatory frameworks.
Currently not protected by Nigerian laws, cryptocurrency dealers and investors lack legal recourse in case of exchange failures. The emergence of Virtual Currencies Payment Products and Services (“VCPPS”) and their interaction with New Payment Products and Services (“NPPS”) necessitates clear regulatory guidelines. Notable successes, like SureRemit’s $7 million funding through an Initial Coin Offering (“ICO”) in 2018, underscore the potential for innovative blockchain solutions in Nigeria.
InsurTech
The FinTech wave extends to the Nigerian insurance sector, where InsurTech holds the key to growth and increased accessibility. With only 1% of Nigerians holding insurance policies, the industry’s digital transformation is crucial.
We foresee traditional insurance companies embracing digital technology across their operations, fostering collaborations with, investments in, and acquisitions of InsurTech startups. This integration aims to accelerate innovation and digital evolution, positioning traditional insurers as the future digital leaders. While current InsurTechs focus on solving operational inefficiencies, we anticipate a shift towards more aggressive strategies, potentially challenging and displacing traditional insurers. The rise of Peer-to-Peer (P2P) insurance models adds another layer of intrigue to the evolving InsurTech landscape in Nigeria.
Payment Service Banks
Nigeria’s FinTech sphere has witnessed a vibrant evolution, with Payment Service Providers (“PSPs”), Mobile Money Operators (“MMOs”), Software Application Providers (“SAPs”), and Payment Infrastructure Service Providers (“PISPs”) playing pivotal roles. Adding to this array are the recent entrants, Payment Service Banks (“PSBs”). In October 2018, the Central Bank of Nigeria (“CBN”) introduced the Guidelines for Licensing and Regulation of Payment Service Banks. Designed to boost financial inclusion, the PSB Guidelines aim to provide deposit products and payment services to underserved entities through secure, technology-driven transactions.
Promoters seeking a PSB license must adhere to a robust framework, including a ₦500,000 non-refundable application fee, a ₦2 billion non-refundable licensing fee, and a minimum capital base of ₦5 billion. Eligible promoters encompass various entities, from banking agents to telecom companies, retail chains, and FinTech companies. While the guidelines offer innovation prospects, the capital requirements present challenges for potential entrants. 2019 holds anticipation for how eligible promoters navigate this landscape.
Cybersecurity
The synergy between financial institutions and FinTech firms, as outlined in PwC’s Global FinTech Report 2017, is likely to increase in the coming years. However, this collaborative trend brings forth cybersecurity challenges. Integrating systems across different entities heightens cyber vulnerabilities, necessitating thorough testing, data integration, and clear delineation of responsibilities.
In the regulatory realm, the Cybercrime (Prohibition, Prevention, etc.) Act 2015 serves as a commendable foundation. However, its scope may not fully address FinTech-specific cybersecurity threats. In response, the CBN released the Exposure Draft of the Risk-Based Cyber Security Framework and Guidelines in June 2018. Set to standardize cybersecurity governance, risk management, and resilience assessment, these guidelines are poised to curb cyber threats. As they come into effect in 2019, scrutiny will focus on how Deposit Money Banks (DMOs) and Payment Service Providers (PSPs) align with these stringent cybersecurity measures.
Data Privacy
Heightened data collection and privacy concerns underscore the significance of protecting customer information within the FinTech landscape. FinTech companies often collect extensive customer data and require a robust data protection framework.
Existing regulations, such as Section 37 of the 1999 Constitution and the Cybercrime (Prohibition, Prevention, etc.) Act 2015 provides a foundation for privacy rights. In January 2019, the National Information Technology Development Agency (“NITDA”) introduced the Nigeria Data Protection Regulation (“NDPR”), mirroring the EU General Data Protection Regulation (“GDPR”). Organizations, including FinTech firms, must publish data protection policies within three months, followed by a comprehensive audit of privacy practices within six months.
Though met with reservations, the Federal Competition and Consumer Protection Act 2019 aims to uphold consumer rights. The Data Protection Bill and the Digital Rights and Freedom Bill, currently under consideration, could further fortify Nigeria’s data protection and privacy landscape.
As enforcements gain momentum, the Nigerian FinTech sector anticipates evolving regulations that balance innovation with consumer protection and data privacy. The dynamic interplay between technology, finance, and regulation sets the stage for a transformative journey in the Nigerian FinTech landscape.
Artificial Intelligence in FinTech
Artificial Intelligence (AI) is gradually making its mark in the Nigerian financial industry. Traditional banks and FinTech startups leverage AI to streamline processes and enhance customer experiences. The potential of AI in FinTech is immense, with expectations of increased adoption in 2019.
Conclusion
In conclusion, Nigeria’s FinTech journey is marked by innovation, challenges, and immense potential. As the sector evolves, collaborations, regulatory clarity, and a keen focus on cybersecurity and data privacy will be instrumental in shaping a robust and inclusive FinTech ecosystem.
FAQs – Fintechs in Nigeria
- Are traditional banks losing ground to FinTech in Nigeria?
- Traditional banks remain significant, but FinTech is reshaping the financial landscape, introducing innovative solutions and challenging traditional banking models.
- How are regulatory changes impacting the growth of FinTech in Nigeria?
- Regulatory changes, like the PSB Guidelines and NDPR, signal a positive shift, offering an innovation-friendly environment while safeguarding consumer interests.
- What role does data privacy play in FinTech development?
- Data privacy is crucial in FinTech, with regulations like the NDPR requiring organizations to uphold stringent privacy practices to protect consumers.
- Is cryptocurrency widely accepted in Nigeria?
- Cryptocurrency acceptance is cautious due to regulatory warnings, but startups like SureRemit are leveraging blockchain for non-cash remittance services.
- How is AI expected to impact FinTech in the coming years?
- AI is set to revolutionize FinTech by reducing manual intervention, minimizing errors, and enhancing overall efficiency, offering a promising future for the industry.
