Nigeria’s Fintech sector’s coming of age is a boon for banks
Over the last decade, fintech has become perhaps the most exciting industry in Nigeria. Hundreds of companies popped up, attracting up to two thirds of all local start-up funding in recent years and handling close to $700 million in digital transactions in 2021 alone. But oversaturation, a decrease in enthusiasm for digital finance fueled by the crypto crash, a series of scandals and an ailing global economy have left Nigerian fintech looking a little worse for wear.
by Emmanuel Onyeje
Nonetheless, these can be looked at as mere growing pains for a sector that is yet far from reaching its ceiling. Future competition announces itself to be fierce as the telecoms are beginning to enter the digital finance game. So where does that leave the traditional banking sector? After spending decades laying down the financial infrastructure of the continent, do African banks risk becoming obsolete in the face of digital disruption? Or will they adopt the newfangled digital avenue and turn their greatest weakness into their greatest strength?
The Fintech Miracle
The last few years have been very kind to the Nigerian fintech industry. With anywhere between 150 and 200 fintech startups making Nigeria their home, the country seemed poised to become the uncontested African leader in the field. The sector raised around $440 million in 2020 and more than $600 million in 2021, amounting to nearly a quarter of the total funds attracted by African tech startups. That figure rises to 63% in the case of Nigeria.
The growth of Nigerian fintech is perfect proof for the untapped potential that African economies hold. The factors making up the fertile ground for fintech companies include the low penetration of banking services, a youthful population making good use of an explosion in smartphone ownership, as well as recent regulatory changes that increased the number of cashless transactions.
But 2022 brought a number of challenges to fintech providers, both across the world and in Nigeria. While the seemingly outgoing Covid-19 pandemic hasn’t harmed fintech to the same extent that it hurt other sectors, even strengthening its position somewhat through increased digitization, there is no hiding from the global economic downturn. Fintech has also been affected by the cryptocurrency crash of 2022, which threw a shadow of doubt over the viability of all digital financial services in the eyes of the public.
The most adverse factor to Nigerian fintech is the sheer number of competing services. Even for a growing market, having consumers choose between 200 different companies that offer comparable services is far from viable. Given the hardships currently endured by the sector, it’s difficult to see how even half of those companies will continue to operate in a few years time.
Recalibration
But even under these adverse auspices, the fintech sector will continue to thrive both in Nigeria and across the globe. As with many other new technologies that offer great leaps in convenience, it will prove impossible to put the genie back in the bottle.
The following few years will probably be defined by a sink-or-swim moment for Nigerian fintech which will see increased market consolidation and more sophisticated consumer expectations. Some fintech investors might even realise that cashing out by selling your company to a larger competitor is far from the worst thing that can happen in the world of business.
The Nigerian fintech scene might even have to come together and develop a common strategy to stave off competition from outside the sector. Telecom companies, with their large and established user bases are making fast foray into the world of digital finance. Fintech might have opened the door for new venues of financial services to more than a hundred million unbanked people in Nigeria, but now everybody is taking notice.
Changing Tides
Within this chaotic, but remarkably lucrative context, traditional banks must step up their game in order to remain at the forefront of financial services. With both fintech and telecoms out in full swing to attract users, traditional financial institutions must seize this window of opportunity and position themselves as best they can in this three-way race.
The fintech industry’s role in introducing financial services to young people, the age category which is less likely to have a traditional bank account, cannot be overstated. The danger for the banks is that an entire generation of Nigerians might see fintech as the most obvious, perhaps even the only viable option for their banking needs, with an increasingly popular view of traditional banks as slow and antiquated institutions.
For banks to thrive in the 21st century they will need to adapt to these new customer expectations, shedding their suit-and-tie, brick-and-mortar reputation for a friendlier, more accessible approach. The digitization of financial services isn’t going anywhere and banks would do well to embrace digital services and easy-to-use platforms for its clients. When trying to attract the denizens of rural or isolated communities, which are the groups most likely to remain completely unbanked, building digital infrastructure will prove faster and less costly than the physical one. Banks should even be able to turn weaknesses into strengths, using their traditional and established model not as a deterrent to young people, but as a guarantee, an anchor in financially volatile times.
The upcoming competition between fintech and telecoms is likely to further expand the number of people banking for the first time using an online service. Rather than find themselves on one side of a technological rift between digital haves and have-nots, banks must bridge the gap between traditional and digital banking. With the digital revolution in Africa in full swing, the traditional financial sector simply can’t afford to be left behind.