The digital revolution is leading to rapid change in Nigeria’s banking sector, with banks forced to either work with fintechs, copy their fresh approach, or face being sidelined.
As in other African markets, the Nigerian banking and financial services sector is in the middle of a period of rapid change. The digital transformation is not only offering banks opportunities to cut costs and target new customers but is also attracting new players into the industry, both in terms of digital-first banks and telecoms operators.
The more than 200 fintechs now operating in Nigeria are driving innovation, whether as service providers themselves or by providing the technology utilised by other firms. They experience very varied fortunes and for every unicorn, several other companies will disappear without trace – but overall they are becoming an increasingly visible presence in the financial landscape.
The number of physical bank branches used to be an indication of the penetration of banking services within wider Nigerian society. Yet as increasing numbers of customers use online financial services, particularly through mobile apps, this is no longer the case.
The pace of digitisation has speeded up as a result of the Covid-19 pandemic when many customers had no option but to use digital platforms, a large proportion of them for the first time. While some began using digital banks, many others made use of the digital platforms provided by their existing, established banks. As a result of this process, Nigerian banks are likely to either cut the number of physical branches they operate, or at least restrict the number of new ones that they open.
Fintechs drive innovation
While traditional banks are seeking to adapt their existing architecture, fintechs are driving more intrinsic innovation, whether by providing digital-first services themselves without any legacy issues – but also without the benefit of heritage customer bases – or by providing the technology, platforms and infrastructure that other service providers utilise.
Fintechs have many advantages but face real challenges in terms of scaling their businesses, whether within their home markets, across Africa or internationally, so their ability to secure external funding is central to their fortunes.
The Central Bank of Nigeria (CBN) says: “In the last ten years, Nigerian payment systems have experienced significant growth, especially with the development of a sound regulatory and supervisory framework, robust payment infrastructure, and the exponential rise in the number of fintechs operating in the country.”
Pressure from alternative financial services providers is encouraging Nigerian banks to speed up their own digital transformation in an effort to maintain market share. In order to spread banking to the masses, the CBN has provided licences to fintech companies such as Paga, Quickteller and Flutterwave, allowing them to compete with commercial banks.
Major players emerge
Some are growing very rapidly, with Flutterwave now valued at $3bn on the back of investment by Visa among others. At the same time, telecoms companies are making use of their huge customer bases to offer financial services, with Airtel launching Smartcash, MTN MoMo and Globacom Money Master. Although not lenders, the telecoms giants offer payment and electronic wallet services.
Digital banks first came to prominence by offering payment services, with most not requiring the high minimum deposit levels demanded by traditional banks. Customers looking for finance are able to turn to a huge number of loan apps, although lenders need to have robust loan recovery procedures in place where they offer finance without collateral.
Purely digital lenders can reach loan decisions within minutes, and then process and disburse the loan within anywhere from a few minutes up to a day. Most do not require any collateral but access smartphone data and records to produce credit scores. There have been allegations that some do not abide by data protection regulations and resort to messaging a customer’s employers, relatives or other contacts to pressure them into repayment.
Major players include Fairmoney, which offers loans within five minutes without collateral, using repayment history and smartphone data to make decisions on sums up to N500,000 ($1,204). Palmcredit claims to be even quicker, providing loans within three minutes, again collateral free, although with a cap of N300,000 ($722). Branch appears to be the most popular lending app, with 10m downloads by June 2022, although of course not all of those who download financial apps actually make use of them.
App-based companies are advancing into ever more sectors, including equity investment, with fintechs Cowrywise and PiggyVest encouraging people to invest for the first time. Established banks and other financial services companies are going to have to respond to such products by cutting their investment fees, by making investment easier and above all by ensuring that people can invest even small sums.
A rapidly changing scene
While the pool of the very biggest commercial banks has changed relatively little over the past few years, the fintech sector is far more reactive, with companies being established, merging, growing quickly or failing at a far greater speed.
Success often results in them being taken over by others in the same ecosystem. For instance, in July fintech infrastructure provider Bloc took over fellow Nigerian firm, Orchestrate – previously known as Getwallets – in a combined cash and equities acquisition. Orchestrate, which develops subscription management, wallets and payments systems for other fintech products, will continue to operate independently, although the two firms will share expertise and resources to some extent.
Bloc provides licences, capital and compliance support as well as financial infrastructure, and has processed $30m-worth of bill payments in its first year of operation. It recently began to offer agency banking services to customers under licence. Like so many in the industry, both are very new fintech companies, having been set up just last year.
This process of constant innovation, re-invention, mergers and acquisitions is typical of young but rapidly growing industries that are still finding their feet but with capital rapidly finding its way to the best ideas.
Bloc founder Edmund Olotu commented: “We are proud of our input in helping shape the African fintech space and excited to welcome the Orchestrate team into the Bloc family. Part of our vision has always been to empower businesses of all sizes to offer seamless payment solutions to their customers, which is essential not just to the experience of the end user but also to the sector’s growth.”
He added: “This is an exciting evolution for both businesses as we look to grow and build even more solutions that ultimately support the growth of African tech businesses in the coming years.”
At present, Nigeria’s biggest banks are holding their own against the newcomers, as the growing financial services market is generating growth for all. Yet as digital-first banks grow and become more accepted, the pressure on the established players will grow. It would be no surprise to see a more even playing field created in the longer term, with companies of various backgrounds providing a wide range of financial services.
This is likely to mean rapid change in the banking sector, with banks forced to either work with current competitors, merge with them, copy their fresh approach, or face being sidelined, particularly as the implementation of the African Continental Free Trade Area (AfCFTA) threatens yet more competition, with the entry of traditional banks based in other African countries into the Nigerian market.