FINTECH AND THE NIGERIAN CONSUMER

ABSTRACT

The rapid evolution of technology enabled businesses, the emergence of disruptive technology products and the rise of a generation of young Nigerians leading this cause has been the story of the Nigerian tech eco-system in the past decade. These factors have challenged the narrative about Nigeria being an impoverished state and established that, given the right conditions, Nigeria can compete for major honours on the global stage.

This story is more visible in the Financial Technology (“FinTech”) space given the obvious and multiple successes that have been recorded in this space. However, a closer look at the figures, regulations and consumer experiences seem to tell a different story. Is the relationship between FinTech and the Nigerian consumer more of an outwardly “God when” marriage with the reality being one of “God abeg” or is it just a case of two lovers inexperienced in meeting the demands of marriage and require the guidance of more experienced and well-meaning in-laws?

This article provides an overview on the necessity or otherwise of the adoption of FinTech for the Nigerian consumer, the spectrum of regulations in the space and the potential future of the relationship between the adoption of FinTech and the Nigerian consumer.

INTRODUCTION

Imagine, an era where foreign remittance and receipt of funds involved several levels of paperwork and security clearance to receive as little as $100 (One Hundred US Dollars) or where the purchase of foreign goods involved sending loved ones who were travelling to help purchase these goods, or interestingly, having to physically walk into a bank to make payments for all utilities and bills. That was once the state of “FinTech” in Nigeria, and these services were championed by traditional banking institutions, Western Union, MoneyGram etc.

However, with the inclusion of technology in the provision of these financial services, there has been an increased supply of innovative products in the provision of these services. Therefore, “Financial Technology (better known as fintech) is used to describe new technology that seeks to improve and automate the delivery and use of financial services. At its core, fintech is utilized to help companies, business owners, and consumers better manage their financial operations, processes, and lives. It is composed of specialized software and algorithms that are used on computers and smartphones. Fintech, the word, is a shortened combination of “financial technology.”. In some cases, “Fintech is a portmanteau for “financial technology.” It’s a catch-all term for technology used to augment, streamline, digitize or disrupt traditional financial services.”

FinTech is a broad category that encompasses many different technologies, but the primary objective is to change the way consumers and businesses access their finances and compete with traditional financial services. Some of the most active areas of FinTech innovation revolve around the following areas; Digital Lending and Credit Infrastructure, Payment Processing, Cryptocurrency, Mobile Money, Crowdfunding etc.

In keeping with the consistent aim of all FinTech product offerings i.e disruption of traditional financial services, the Nigerian FinTech space has seen the emergence of its own disruptors across the spectrum of the financial services sector. Industry giants such as Flutterwave, Paystack, Fairmoney, Kuda and Interswitch have all made rapid gains in the shortest possible time frame with valuations that will make traditional financial institutions green with envy.

A central question in every type of relationship is the question of “compatibility”. i.e are the parties a right fit for each other or is it an issue of “let’s see how it goes” without any firm commitments made. The answer to these questions is often seen in conversations revolving around Nigeria’s population and its largely consumer driven market. As of 2022, the Nigerian population is estimated to be around 218,541,212 (Two Hundred and Eighteen Million, Five Hundred and Forty-One Thousand, Two Hundred and Twelve). Therefore, the pedestrian approach of discussing the suitability of FinTech to the Nigerian consumer on the strength of its numbers alone has caused more harm than good to the FinTech business model in Nigeria. This point is strengthened by the fact that there are a lot of nuances involved in the deployment of these financial services to the consumer.

The National Financial Inclusion Strategy 2012 aimed at reducing the financial exclusion rate to 20% by 2020. In more specific terms, adult Nigerians with access to payment services was projected to increase from 21.6% in 2010 to 70% in 2020, while those with access to savings should increase from 24.0% to 60%; and Credit from 2% to 40%, Insurance from1% to 40% and Pensions from 5% to 40%, within the same period. However, as ambitious as those goals were, a 2021 report by Enhancing Financial Innovation & Access (“EFInA”) a financial sector development organisation that promotes inclusive finance in Nigeria revealed that a 45% success rate was achieved in the payments space, 32% in the savings space, 3% in Credit and 2% for Insurance. While there has been progress in some of these areas, however when compared to the amount of funding received in these sectors particularly the payments space, a clearer picture that shows that continued work is required in these areas.

Furthermore, another area which highlights the seeming incompatibility of FinTech companies with the Nigerian consumer is revealed in the absence of robust corporate governance models. There is no doubt that the presence of a robust corporate governance model will massively improve the decision making process of FinTech companies which will ultimately enhance consumer confidence in the marketed products. These corporate governance models are essential for efficient decision-making processes, as they minimize conflicts and facilitate strategic planning and execution. However, in the absence of such models, decision-making becomes inefficient and prone to conflicts, hindering the overall progress. Moreover, the lack of transparency and accountability within FinTech companies will also discourage potential investors from investing in these businesses. Consequently, the FinTech companies will face several limitations in accessing funding and other resources required for expansion. The importance of efficient corporate governance models is highlighted given recent events that have emerged in certain FinTech and tech enabled businesses.

Similarly, a weak corporate governance structure will erode consumer confidence in the adoption and usage of fintech products and services. Consumers are more likely to engage with traditional companies that exhibit a strong culture of corporate governance given that it instills a sense of reliability in such businesses. Additionally, the absence of proper oversight will compromise internal controls and risk management practices within the FinTech space and this vulnerability will leaves them susceptible to fraud, cyberattacks, and operational failures. Therefore, entrenching a sound corporate governance structure is crucial for safeguarding against these risks and ensuring the long-term success of FinTech companies in Nigeria. Afterall, one of the key things to consider in a marital relationship is the reliability of one’s partner.

The role of market forces is another largely unspoken challenge in the incompatibility between FinTech and the Nigerian consumer. As previously stated, the entry of most FinTech companies into the Nigerian market solely on the strength of a large and consumer driven population is a costly strategy. Although, the Nigerian market remains a destination for most FinTech products, there is still the need for the creation of a fit for purpose product for the market. As argued in preceding paragraphs that most FinTech companies are often found in the payments sub-space, leaving a huge gap in the credit, insurance, and other sub-spaces of the FinTech space. It is our view that sooner than later, the market will correct itself and leave a potentially catastrophic consequence. It may be argued that the demand for services in the other sub-spaces not being high may affect profitability, this view however seems to place much pressure on FinTech companies to focus on scalability as opposed to organic growth. The product offering may be disruptive, but the business model must be organic, stable, and flexible enough to respond to the demands of the market per time.

There is no denying the obvious, that there is a dearth of infrastructure across most parts of the Nigerian economy. This dearth is readily manifested in the absence of constant power supply, poor broadband internet connectivity and penetration amongst other factors. There must be as a matter of urgency, critical intervention from the regulators via a clearly defined policy path to addressing this infrastructural deficit. In the absence of massive investment in tech enabled infrastructure, the marriage between FinTech’s and the Nigerian consumer will be closely based on the romanticization of the poverty of one partner as a test of true love.

In any business venture, funding is very critical to the success or failure of such venture. Given the disruptive nature of their product offerings, FinTech’s often require huge amounts of funding to scale their products and services. This is made all the more complex given that most FinTech’s do not have sufficient assets to use to secure loans from commercial banks. The commercial banks also being highly regulated entities have to limit their risk exposures in granting loans to the FinTech startups. It is therefore suggested that there may be the need to have a cash reserve readily accessible for FinTech’s to assess for their business operations which coincidentally is one of the major introductions of the recently passed Nigerian Startup Act.

The regulatory landscape in the Nigerian FinTech space has largely been the often-knee-jerk reaction to innovation that has typified the African and by extension the Nigerian market. “Ban first, regulate later” seems to be the unspoken mantra with most Nigerian regulators. However, recent developments in the regulatory landscape, has seen a shift to a more “if you cannot beat them, join them/collaborate with them”. The issuance of regulations ranging from the Framework for Regulatory Sandbox Operations, Circular on the Regulatory Framework for the Use of Unstructured Supplementary Service Data (USSD), Regulatory Framework for Open Banking in Nigeria amongst others has shown that real progress can be made through the proper guidance of the regulators and not a “do as I say” approach, prevalent with in-laws in Nigeria.

Although, the regulatory future of cryptocurrency still lingers. The Central Bank of Nigeria (“CBN”) in its circulars of 12^th January 2017 and 27^thFebruary 2018, 5^th February 2021, and 7^th February 2021 had clearly stated that cryptocurrencies remain banned due to the fact that “the very name and nature of “cryptocurrencies” suggests that its patrons and users value anonymity, obscurity, and concealment”. An attempt at understanding the nature of Decentralised Finance (DeFi) will have prevented such largely untrue statement by the CBN. The cautious position of its sister regulatory agency, the Securities and Exchange Commission (“SEC”) is contained in its New Rules on Issuance, Offering Platforms and Custody of Digital Assets issued on 11^th May 2022. Although SEC, clarified that its position does not contradict that of the CBN, this does little in allaying the fears of prospective investors and will ultimately stifle the growth of such emerging market.

The incompatibility of Fintech in the Nigerian landscape is largely influenced by a lack of consumer trust. Trust-related challenges can be attributed to several factors. Firstly, Nigeria’s history of financial fraud and scams has instilled a deep-rooted skepticism among consumers, extending to Fintech companies perceived as unfamiliar and potentially risky. Secondly, the absence of robust regulatory frameworks and consumer protection measures further undermines trust. Concerns about data security, privacy breaches, and fraudulent activities make consumers wary of using Fintech services. The lack of clear guidelines and accountability mechanisms complicates consumer engagement with Fintech platforms.

Furthermore, the digital divide and limited financial literacy exacerbates the trust deficit. A significant portion of Nigeria’s population, particularly in rural areas, lacks reliable internet connectivity and have limited knowledge about digital financial services. This knowledge gap fuels apprehension and mistrust among potential Fintech users. Moreover, instances of Fintech platform failures, technical glitches, and inadequate customer support contribute to the lack of trust. Consumers facing difficulties accessing funds, resolving disputes, or receiving timely assistance question the reliability and credibility of Fintech providers.

To address these barriers, Fintech companies must prioritize transparency, security, and education. Building robust security protocols, adhering to regulatory standards, and effectively communicating these measures to consumers can help establish trust. Additionally, investing in financial literacy programs and expanding internet infrastructure will empower individuals to make informed decisions and embrace Fintech solutions, ultimately bridging the trust gap in the Nigerian Fintech landscape.

THE FUTURE OF FINTECH IN NIGERIA

It is unequivocally clear that the future of FinTech in Nigeria is certain and clear, this is due to the work led by young professionals who have led and continue to lead this revolution. The number of startups, unicorns and the amount of funding received in this space is sufficient proof that there is a huge prospect for growth in this space. However, just because there exists an opportunity for growth is no guarantee that the country will meet its potential in this space nor exceed its ambitious goals. There is the need for concerted efforts from all stakeholders particularly the regulators in ensuring that this growth is achieved.

There is no doubt that FinTech and the Nigerian consumer are heads over heels in love with each other, and this has largely been on the strength of its youthful population who are innovative and amenable to innovation. However, as it is often said that love is not enough to build a marriage, the FinTech service providers and the Nigerian consumer require more work in understanding and meeting their mutual needs via the laws of demand and supply. There exists more frontiers in the credit, insurance, education, and energy spaces to be conquered. Fintech companies in Nigeria have the ability to expand beyond traditional financial services. Agriculture finance is one such area where Fintech solutions may help farmers gain access to financing, insurance, and payment systems. Furthermore, the healthcare industry provides potential for Fintech innovation by providing efficient payment methods, telemedicine services, and health insurance solutions. FinTech’s can also participate in the expanding e-commerce market by offering secure payment gateways, digital wallets, and supply chain finance. Fintech technologies such as online learning platforms, student loan services, and digital credentialing systems can improve the education sector. Finally, renewable energy financing is a growing field in which FinTech’s may help clean energy solutions be adopted through novel financing models and decentralised energy payment systems.

Ironically, a significant determinant of the success or failure of this “marriage” between FinTech and the Nigerian consumer will be determined by the amount of co-operation received from the regulators who are the in-laws. It can therefore be said that the relationship between the Nigerian consumer and FinTech is largely a case of two lovers who are relatively quite inexperienced in meeting the demands of marriage and require the guidance of more experienced and well-meaning in-laws, and a commitment by both parties to understanding and meeting their mutual needs.

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