Positive disruption: An eager market looks to financial technology to boost growth


Boasting Africa’s largest economy and population, but facing a number of structural constraints, Nigeria is a market ripe for digital disruption. It benefits from a high level of internet and mobile penetration. It also skews young: by 2020, roughly half of the country’s population will be under the age of 25.

A number of start-ups have gained traction over the past decade, from retailers like Jumia, an e-commerce website, to streaming platforms such as iRoko. One of the start-up sectors that is currently attracting a significant amount of interest in Nigeria is financial technology (fintech). According to KPMG, investments in the space exceeded 0m in the two years to November 2016. (idigtexas.com) This marks Nigeria out as one of the top-three recipients of fintech investment on the continent, along with South Africa and Egypt.

Factors For Growth

Given that fintech ventures are typically focused on customer-centric services and broadening access to underserved populations, Nigeria’s success in supporting fintech solutions is not surprising. The West African nation offers perhaps the most compelling market on the continent. Fewer than 50m Nigerians have a bank account, even though the population exceeds 180m, and internet penetration in the country stands at 53%, compared to an African average of just 18%. There are 115m Nigerians under the age of 35, which provides a technologically able and hungry market to fintech providers.

The country’s high mobile penetration rate of 81% also helps enable fintech uptake. Disruption in other sectors of the economy has been driven by mobile technologies and shows no signs of abating. Between 2014 and 2016, for example, smartphone purchases increased by 394%, according to Jumia.

Disruptive Impact

The rapid adoption of fintech products could prove transformative for the local market. According to a 2016 report on digital finance by McKinsey, the sector has the potential to create 3m jobs and boost GDP in Nigeria by 12.4% by 2025. Furthermore, increased access to digital financial services could create $2bn in public sector savings and generate $4.6m in credit to the small and medium-sized enterprise (SME) segment.

“The greatest innovation for the banking sector can come with enhancing inclusion: the current number of people participating in the formal financial sector is still grossly inadequate, and that is where fintech services can play their part,” Abubakar Jimoh, CEO of Coronation Merchant Bank, told OBG.

This in turn would have a sizeable impact on financial service providers themselves. A 2017 survey conducted by PwC of 49 senior executives in Nigeria’s financial services sector found that the most likely segments to experience disruption by fintech providers were retail banking, and transfer and payment services – two areas where Nigeria’s fintech sector has already made inroads. Digital-only retail lender, SunTrust Bank, for example, recently announced a profit for its first full year in operation. “The retail banking, funds transfer and payment segments will be the most impacted in the next two to three years,” Jimoh told OBG. “The financial services sector will continue to see the deployment of new digital applications that facilitate easier payments and the seamless execution of customers’ transactions in a cost-effective manner.”

This is forcing existing financial institutions to adapt to the new era accordingly. “In order to reach new customers, banks increasingly must look to capitalise on fintech services. In the next two to three years we will start to see these providers having a significant impact on the sector,” Jimoh told OBG.

Operational Hurdles

All of this makes for a bullish outlook. The potential for scaling up fintech ventures, given the market’s promise, and the accompanying scope for disruption are both large in Nigeria.

However, the penetration of early fintech services and products has faced some stumbling blocks. For example, while mobile money, which at its most basic level allows for cashless transactions and transfers, has been growing in the country in recent years, it has, up to now, had far less success in Nigeria than in Kenya.

For example, in the last quarter of 2015 one of the most successful Nigerian mobile money firms, Paga, had a network of 8800 agents to complete transfer and deposit transactions, and 3.4m customers. This compared to an agent network of 83,000 and 20m customers for Kenyan telecoms operator Safaricom. “Mobile payment services are still mainly utilised by the banked population with penetration mostly limited to the urban areas. Penetration levels among the unbanked and those living in the rural areas are zero or very low,” Umar Danbata, executive vice-chairman of the Nigerian Communications Commission told a telecoms conference in Lagos in late 2016.

This is not to say that the initiative has been unsuccessful. Monthly transaction values for mobile money alone increased from an average of $5m in 2011 to $142.8m in 2016. However, one of the main reasons for the more modest growth seen by mobile money providers in Nigeria is the way the service is regulated and developed. “In Kenya, mobile banking is telecoms-led,” Omokehinde Adebanjo, country manager for West Africa at MasterCard, told OBG. “In Nigeria it is led by the banks. We have two different approaches between the two markets.” Commercial banks and financial services firms do not have the same retail networks and branding operations as mobile operators, and have less incentive to offer these services in rural areas.

 Institutional Roles

This highlights a specificity of Nigeria’s market: the involvement of existing financial institutions is crucial for the development and deployment of new fintech platforms. The situation should help create a different dynamic than has previously been seen in East Africa. “You are seeing a lot of new products coming from the start-up segment,” Adebanjo told OBG. “But there is also collaboration and cooperation with banks. There is investment from both sides.”

Indeed, a number of institutions, including First Bank and United Bank for Africa (UBA), are actively partnering with fintech providers. “The banking segment is already investing in this segment. We have financial institutions proactively engaging technology hubs,” Gbolabo Awelewa, CIO at Coronation Merchant Bank, told OBG. Local lender UBA, for example, has partnered with Piggybank.ng, a fintech venture that allows debit card holders to save money, and which recently won seed funding from US-based Village Capital.

New Opportunities

Activity in the sector is likely to continue to grow across a wide array of segments ranging from insurance to lending services, and even to capital markets. “People are coming to terms with the fact that they can do more with their money and that they need to invest. The participation level of retail investors in Nigerian capital markets is less than 2%,” Simeon Balogun, strategy officer at Coronation Merchant Bank, told OBG. “So we are looking at how we can drive participation in this segment.”

As such, there is likely to be strong growth in the asset management segment of the market. Robo-advisors have already led to a shake-up of fee structures at brokerages elsewhere in the world, and Nigeria is unlikely to be an exception, particularly given the Nigerian Stock Exchange’s push to expand retail investment. Jimoh told OBG that Coronation Merchant was looking at fintech opportunities within the investment and wealth management segment.

As this suggests, there are a range of activities where fintech can play a role, beyond just payment services. SME lending is another example. “Traditional financial institutions are somewhat hesitant to lend to SMEs in Nigeria,” Muneeb Ahmed, investment officer at Lidya, a new online finance firm, told OBG. Ahmed estimates that the lender’s default rate is currently below 1%.

As a result, fintech providers have moved in. In September 2016 Lidya launched its financial services platform offering small loans to SMEs. By March 2017, 20,000 businesses had registered on the platform, and by the end of July 2017 the company had originated over 1000 loans in Nigeria. “There is significant market potential here, given that SMEs make up 96% of all businesses in Nigeria, yet only account for a marginal amount of bank funding. It is largely a risk management issue,” Gbolabo told OBG.

While there are challenges, the Nigerian market has both the underlying structural traits and the institutional support and innovation to encourage rapid fintech development. “The country is going to be one of the leading markets,” Ahmed told OBG. “There is a huge and growing population, Nigerians are technologically savvy, and incomes per capita are going to grow.” Jimoh said that the evidence of this is already clear, with benefits to both customers and financial institutions. “Fintech is gaining significant momentum and causing disruption to the traditional financial services value chain in Nigeria,” he noted. “Organisations are gaining increased revenue through the deployment of alternate digital channels to customers while providing best-in-class financial services in a cost-effective manner.”