Report Examines Key Trends in Nigeria's Fintech Sector

"Nigeria, Africa's largest country by GDP and population, is among the continent's fintech leaders with a lively crop of start-ups and a growing suite of digital offerings from mainstream banks," says a report produced by The Economist Intelligence Unit (The EIU). "Fintech revenues are forecast to reach an estimated US$543m by 2022, driven by increasing smartphone penetration and its unbanked population."

Sponsored by Mastercard, an American multinational financial services corporation, and MTN Group, an African mobile network operator, State of play: Fintech in Nigeria examines key trends in the fintech sector in Nigeria and assesses both industry drivers and impediments to further growth.

The EIU report addresses the following questions:

• What solutions are Nigerian fintech providers focusing on?
• How healthy is the broader ecosystem in terms of venture capital investment, skills and the regulatory environment?
• What are the key challenges and bottlenecks facing the country as its fintech sector matures?

Moreover, "This report, based on desk research, data analysis and expert interviews, traces the evolution of fintech in Nigeria."

Below are the key findings of the report:

• Nigerian fintechs are branching out from payments into lending, micro-investment, wealth management, peer-to-peer transfers and insurance. Payments and remittances are the most developed sub-sector to date. The country has seen a surge of new and simplified apps to help merchants, businesses and consumers. Mainstream banks, initially slow to react to the digital era, have quickly adapted to offer apps and tools in areas like loans, while non-traditional players—including telecom companies and retailers such as supermarkets—are entering the finance space.
• Nigeria's regulatory environment balances innovation and consumer protection but must continually evolve to respond to market dynamics. The Central Bank of Nigeria has passed laws and regulations to promote digital payments and allow more actors to enter the space, boosting competitiveness and consumer choice. But it is balancing these with consumer protections through its cybersecurity framework and data protection regulation. Recent reforms, such as easing entry of start-ups into the capital markets and the creation of a fintech sandbox, could also lead to an enrichment of the ecosystem. While there is no fintech-specific law as yet, a sector roadmap provides overarching direction to the industry. A legal framework may prove necessary to manage the emergence of new types of fintech and accelerate fintech solutions for "insurtech" and wealth management.
• To develop and flourish, Nigerian fintech needs to address shortcomings in the broader ecosystem. While venture capital investment is forthcoming, the majority comes from abroad with Nigerian investors currently playing a small role. As the sector matures, skills gaps are emerging outside of product development in areas such as business management and marketing. Given the challenges that fintechs in all markets are facing in terms of profitability, expertise in business management and corporate governance is needed. Some experts question whether fintech has truly moved the needle on financial inclusion, believing that it is easing financial transactions for those already in the system. But the jury is still out. Although a causal link with the rise of fintech is unclear, surveys conducted by Enhancing Financial Innovation and Access, a financial sector development organisation, reveal that the percentage of financially-excluded adults in Nigeria reduced from 41.6% in 2016 to 36.8% in 2018.

Having followed the fintech industry in over the past several years, I appreciate the report's assertion that "Globally, the fintech sector is among the most appealing for investors looking for the next wave of disruptive innovation. Digital 'neo-banks' are expanding their market share, especially among younger consumers, while bespoke apps and platforms are taking once-elite financial services, such as stock market investing, into the mainstream."

Referencing a report produced by KPMG, a global audit, tax and advisory services firm, "Total investment activity globally—combining venture capital, private equity and merger and acquisitions—reached a peak of US$120bn in 2018, up from US$51bn in 2017."

What is more, "Africa can lay claim to having laid the foundations of fintech with the mobile money revolution springing out of Kenya back in 2007. Today, it remains a front-runner in financial innovation: The number of fintech companies in Africa grew at an annual rate of 24% between 2009 and 2019, fueled mostly by Nigeria, Kenya and South Africa."

The EIU encouragingly notes that "Nigeria's massive population, entrepreneurial workforce and crop of successful fintech startups could well place it at the leading edge of Africa's financial innovation story. The venture community has validated the local talent pool and fintechs are proving that they are fit for market through year-on-year usage increases. Mainstream banks are also quickening their pace to fend off the threat of disruption by innovating their own products or partnering with start-ups and financial SMEs."

Are you planning to invest or otherwise support Nigeria's fintech sector? If so, what risks and opportunities have you identified?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of Solutions for a Sustainable World.