Nigerian fintechs which raised a record sum of $799.12 million in 2021 are expected to face scrutiny and justify these investments in the coming months in terms of scale and adoption, experts say.
A total of $799. 12 million was raised by 19 fintech companies monitored by BusinessDay from January to November. This amount is larger than the $561 million the fintech companies raised in 2019 and 2020.
Several companies have been very active in the funding market. Opay became the first fintech in Africa to raise $400 million, Kuda Bank raised $55 million to push its funding haul to $80 million in one year. Others – Fairmoney, Sparkle, Mono, Payhippo, etc have also been very active in the funding scene.
Experts say in the coming months these companies would need to prove that the adoption and usage of fintech services is skyrocketing as claimed by many of the companies that closed funding.
For example, Opay which raised a record $400 million says it has 8 million active users and 300,000 mobile banking agents. TeamApt claims 14 million users and 150,000 mobile banking agents. Fairmoney and Payhippp claim to have 3.5 million users and over 4 million users respectively. Kuda Bank claims 650,000 users, and Flutterwave says it has 500,000 users.
Ayobamigbe Teriba, relationship analyst, Ingressive Capital, a venture capital firm that targets early-stage startups, says investors have nothing to worry about.
“Fintech adoption in Nigeria is at an inflammatory stage and the ecosystem is just up at the primary and enabling section. There have been comments about the mono-systemic approach adopted by a lot of the platforms, but we should also be objective that the ambiance of the regulatory and economic setup of a market dictates how flexible/innovative some of these companies can be,” he said.
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However, Bolaji Akinboro, former CEO and co-founder of Cellulant a fintech company and chairman of Voriancorelli, an agritech company, says investors might be buying into vanity metrics.
Vanity metrics, a type of business metrics employed by many companies – refers to performance numbers or hollow numbers that look nice on the surface but hold little substance in terms of reality.
Generally, one of the cardinal rules an entrepreneur learns while creating a startup is the importance of key performance indicators (KPIs) that tell how the business is doing. A business metric is a quantifiable measure that is used to calculate the progress or performance of a goal from a given perspective.
In the Nigerian tech ecosystem, this is employed in many ways like the number of merchants, downloads, raw pageviews, monthly active users or engagements, cost of getting new customers and revenues and profits. It is not enough to present these numbers to investors, but the size of their cheques may largely depend on the weight of the numbers. In 2021, these numbers have shot through the roof.
Investors in these companies have come from different countries and the size of their cheques has remarkably increased from the previous years. While some of them have a history of investing in African companies, it is the first time investing in the African tech market for several of them like Valar Ventures, Softbank, and Target Global.
Importantly, the frequency of the funding announcements has been breathtaking, happening every week of the year. In fact, since July, announcements have come almost on a daily basis, says Maxim Bayen, venture builder at Catalyst Fund.
Many of these investors have invested on the promise of high adoption and profitable returns and the notion that Africa is the next frontier for development and Nigeria has a critical role to play in it.
Although fintech adoption is growing, banking adoption, in general, is not growing at the pace expected. The Central Bank of Nigeria (CBN) had expected to include 70 percent of Nigerians without access to financial services by 2020, this was not to be. Hence, it has shifted the target to 95 percent by 2025.
As the regulator, the apex bank sets the rules in the financial industry in Nigeria which every operator, including fintech companies must come with. For example, transactions carried out by fintech companies are based on an account resident with a commercial bank. The accounts must be linked with Bank Verification Number (BVN). Some of the rules don’t exactly help financial inclusion.
In Nigeria, only 67.5 million (64%) of the 106 million adult population were financially included in the year 2020 according to a report by Enhancing Financial Innovation & Access (EFInA). About 36 percent of the population still remain unbanked.
Nigerians with bank accounts are just 47.6 million of the 106 million adults in the country, representing 45 percent of the population, according to EFiNA 2020 Survey. Although some bank customers are migrating to fintech companies, the majority are still with banks.
A small survey of 100 workers between the ages of 25 to 46 conducted BusinessDay, found that the majority are still stuck with their banks for transactions. Only 2 people actively use a fintech app, 70 percent said they prefer bank USSDs compared to bank apps and would not be bothered with any other payment app. 20 percent who said they once installed other payment apps deleted them after one transaction or feared they would be exposed to cyber-attacks.
Bolaji Akinboro of Voriancorelli says Nigerian banks are getting the advantage because they are innovators and they are not waiting for fintech companies to eat their launch.
Nearly all Nigerian banks have launched one or two mobile applications, pioneered and controlled chat banking or chatbots like LEO by UBA, built mobile payment and lending platforms like ALAT by Wema and Credit Direct by Sterling Bank, and came together to build one of the largest agent networks in the country known as Shared Agent Network Expansion Facilities (SANEF).
First Bank of Nigeria claims through Firstmonie it has 105,000 agent locations, making it the largest by any commercial bank in the country.
In many ways, banks are gradually morphing to fintech companies. Earlier this year, GTbank laid out plans for its holding company structure, part of which is anchored on a payment company it wants to set up.
“In my view, I see fintech as commercial bank-sponsored fintech apps and platforms. I also see it as venture capital- sponsored fintech apps and platforms, and POS as a channel into financial services,” Akinboro said. It is, therefore, not surprising that many bank customers are reluctant to migrate to digital banks.
Olubunmi Toju, a computer scientist who is yet to download a fintech app, said she doesn’t see the need to use the platforms since her banks offer the same service.
Gbemisola Olukoju, a writer, said she installed a fintech app once and had to delete it because of security. According to her, in the case of an incident that affects her money, it would be easier to work into a physical bank branch and have it sorted than a fintech app that has limited physical assets. Now she makes her transactions through a bank app or bank USSDs.
Beyond banks’ competition, fintech companies also contend with the country’s economic situation that has affected the incomes of millions of Nigerians negatively. Smartphone penetration is at 41 percent, and the majority of the devices are at the lower end which has implications for phone storage and quality of data.
“Nigerians are not as segmented as you’d expect, the usability of Nigerian users are basic hence why you see a lot of customer education and market inducements. As the customers are educated and grow their revenue channels, the use case of fintechs will be more utilized, So Nigerians are not stuck; they just have major use cases for what banks and other infrastructure fintechs have to offer at the moment,” Teriba said.
After a record funding year, Teriba says it is expected that fintech companies that have raised monster funding might face some challenges. However, this will largely disappear once the market grows on people and also expansion strategies begin to yield dividends.
Nearly all the companies that have a funding plan to expand to more countries in Africa. For example, Fairmoney after raising $42 million said it was expanding to India, Opay said it is going to North Africa and the Middle East following its funding raise.
With investors focused on revenue, expansion becomes a strategy by fintech companies to diversify their income sources and grow adoption numbers.
“Despite that, it’s an exciting time, we are in a period of “grab-market-share” at all costs but at a point, Economic realities just like the laws of gravity will kick in,” Akinboro said.
