While 2019 saw a few acquisitions involving fintech startups (Carbon acquired Amplify) in Nigeria, there are indications that 2020 the downward slide in treasury bill rates may see more founders take this option to survive.
The treasury bill rates which used to be a major source of revenue for most of the startups have been on a freefall recently.
“So much flux in the Nigerian fixed income market that has repercussions for lending and savings FinTech companies,” said Chijioke Dozie, co-founder and CEO of Carbon. “With Treasury bills way below 10 percent per annum, can FinTech companies offer a 10 percent savings rate in the long term? Could this trigger mergers in the local FinTech scene?”
Continuing from its drop in November, the primary market auction rates on the 91-day, 182-day and 364-day bills compressed to 4 percent, 5 percent and 5.4950 respectively in December.
The treasury bill drop is attributed to the deposit money banks (DMBs) struggle to meet the Central Bank of Nigeria’s 65 percent minimum lending to deposit (LDR) ratio by December 31, which is likely to go up to 70 percent in 2020. By comparison, South Africa has an LDR of 90 percent and Kenya has about 76 percent.
Read also Fintech firms face grim 2020 amid single-digit treasury bill rate, banks LDR target
Banks like Ecobank and Sterling bank claim to have given out 68 and 79 percent respectively and are therefore not worried about the CBN target.
The falling rates also coincide with the CBN’s policy which disallows local firms and individuals from investing in the primary and secondary Open Market Operations (OMO) auctions.
OMOs are issued by the CBN for monetary policy management to control liquidity. The apex bank in recent times had opened the market to foreign investors to generate foreign exchange to maintain the value of the naira, but now, only foreign traders are allowed to hold OMOs.
Following the CBN push, some banks have started to adjust downward their average monthly deposit rates from 4 to 3 percent.
Standard Chartered Bank Nigeria in a notice to its customers in December, informed them that “following current market realities, please note that effective December 27, 2019, interest rate on our E-saver account would be adjusted as follows: 4.5 percent placement on N10, 000,000 and above; 4.25 percent for between N1,000,000 and N9,999,999; and 4.05 percent for savings between N1 and N999,999.”
Experts say deposit rates are going on the decline because banks are reluctant to retain expensive deposits. The CBN’s minimum LDR policy also means that banks are not enthusiastic about sourcing deposits, resulting in a significant decline in deposit rates.
With banks taking the adjustment option, many say it is only a matter of time before fintech firms put the cap on their rates amongst other cost-cutting measures.
Startups like Cowrywise, Carbon, and Piggyvest have promised their users at least 10 percent on fixed investments.
“Who would have imagined that a few months ago rates would be this low,” Ngozi Dozie, cofounder of Carbon noted in a Twitter post. “At Carbon, we are actually about to reduce the rates we give for fixed investments. Unheard of, but if this continues we can bring down the cost of borrowing.”
While mergers and acquisitions are a possibility, some experts say the option of banks acquiring fintechs may not be on the table anytime soon. Banks are likely going to ride it alone for now.
“I do think it’s bleak for a lot of the independent wealth techs as I don’t think the banks will buy them, they are or have already built their own wealth management platforms and would rather see them crash, based on conversations I’ve had with some executives at the banks,” Rahmon Ojukotola, founder of StartCredits and a financial advisor, told BusinessDay.
He explained that the synergies from a merger with two digital-only wealth management platforms is marginal. The cost of merging both platforms can outweigh the benefits.
“That’s one of the reasons the banks won’t buy them as they would rather see them fail and then take their customers,” said Ojukotola.
But experts have long seen mergers and acquisitions as the most viable way that fintech companies in Nigeria and Africa can compete with established traditional financial institutions and big tech organisations looking to invest in fintech.
Iyinoluwa Aboyeji, co-founder of Andela and Flutterwave said the merger is an important way tech entrepreneurs can aggregate the capital and human resources required to take advantage of the present chaos to flush out the old and build the new.
“My wish for 2020 is that young Nigerian mission-driven entrepreneurs do more mergers and acquisitions to build bigger companies that can challenge Nigeria LLC,” he said.
