The financial technology (fintech) industry is thriving globally and received $17.4 billion in investment last year alone.
According to EY’s Fintech Adoption Index, a third of consumers worldwide are using two or more fintech services, with 84 percent of customers saying they are aware of fintech (up 22 percent from the previous year).
But users are often unaware that the financial services applications they use count as “fintech“, or may not know what exactlyfintech and its accompanying jargon means.
Here, CNBC explains all the crucial terminology you need to know to understand the sector.
Fintech
Financial technology is broadly defined as any technological innovation in financial services.
Those engaged in the industry develop new technologies to disrupt traditional financial markets.
Various start-ups have been involved in the process of creating these new technologies, but many of the world’s top banks including HSBC and Credit Suisse have been developing their own fintech ideas as well.
Fintech companies utilize technology as widely available as payment apps to more complex software applications such as artificial intelligence and big data.
In 2017, startups focused on financial inclusion in Africa raised 45% of the total startup funding for the year. Fintech startups are increasingly becoming attractive with Nigeria’s Flutterwave alone raising $10 million Series A funding, the largest in the sector for last year. Between 2015 and mid 2017, fintech startups had raised $93 million in investment and in 2016 alone there was an 84% increase in the number of fintech companies that had raised investment compared to the previous year. Despite these, fintech startups still face a significant number of challenges that are limiting their potential.
We take a look at an example of what these challenges are by using Nigeria, one of the top three startup investment destinations in Africa, as a case-study.
The Regulatory Environment Remains Challenging
During a recent Omidyar Event for fintech players, Iyin Aboyeji (CEO, Flutterwave) pointed out that there were too many licenses required for entrepreneurs to participate in the payments space. He said he hoped for the day when there will be very few licenses needed. In a similar vein, Tayo Oviosu (CEO, Paga) said it took them about two years to get approval for a USSD code, this slowed them down in delivering the service to their users.
One founder, Rahmon Ojukotola (Founder, StartCredits) said the regulatory framework as antiquated describing it as an obstacle to growth and investment in the sector. In his words, “It creates supply side barriers to credit as willing lenders are unable to meet the credit demand of qualified borrowers due to legal issues rather than technological ones. The same applies to payment platforms as well”. There is still a lack of clarity in the regulatory environment and regulators are not as proactive in catering to the fast paced nature of the industry.
Collaboration, Partnerships & Funding
At the Omidyar event for fintech players in July, Tunde Kehinde (Co-founder, Lidya) mentioned that fintech startups and traditional microlenders need to collaborate more in order to deliver superior service to consumers. One of the things thatfintech startups require for customer acquisition and distribution is strategic partnerships and it can sometimes be an uphill task to achieve this. According to Segun Adeyemi (CEO, Amplify), “getting key partners (like banks) on board when you’re basically an unknown company/entrepreneur can be very challenging”.
Despite the increase in the number of fintech startups accessing funding, founders still identified funding as a major challenge. “Most fintech verticals require some significant startup cost which remains quite difficult to come by,” says Segun Adeyemi. “Nowadays, it is relatively easier to get initial seed funding than getting scale funding,” Segun Adeyemi added. On the other hand, Tayo Oviosu highlighted during the July Omidyar fintech event that there was a need for early stage financing that is naira-based.
Access To Financial Infrastructure
Infrastructure remains a challenge and where it exists startups can sometimes find it difficult to access it. For example, the National Collateral Registry was launched in 2016 and it has been successful with over 16,236 financing statements for 20,684 movable assets, valued at N392 billion recorded on the registry. However startups have not really benefited from it as they should. As Rahmon Ojukotola pointed out, “A closer look at the data shows the National Collateral Registry has not been as beneficial to fintech start-ups, with only one non-bank lender using the platform as at August 2017”. Perhaps founders don’t really understand how it works or even know about its existence, another reason could be a distrust for the system. Another issue might be the fact that only registered users are able to enter and save data to the database although public users can perform searches on the system. A registered client is a legal financial institution regulated by the CBN .
In his own view, Timilehin Ajiboye (CEO, Bitkoin Africa), identified access to infrastructure in general (and not just financial infrastructure) as a challenge. He said, “Nigeria just does as Nigeria does. It’s always harder due to a lack of infrastructure; even lack of constant power is a challenge”.
Winning Customer Trust And Access To Talent
One of the recurring themes in the responses of the fintech founders we spoke with was the issue of trust. “Nigerians are sceptical when it comes to their money which explains why the banks are and will continue to rule for a while. Building consumer trust, therefore, is a major obstacle to scale,” Segun Adeyemi said. Further highlighting this problem, Timilehin Ajiboye mentioned that in his experience, “users are untrusting and always use products in different ways than one previously imagined”.
Another challenge founders identified is inadequate talent with the right domain experience. In his view, Tayo Oviosu believes the sector needs more experienced people, specifically middle managers from financial institutions to build fintech startups.This will increase the chances of success given their experience and their knowledge will also be useful for the sector.
Navigating The Current Issues
The fintech entrepreneurs we contacted highlighted strategic partnerships with established players or aggregators as an important element to overcoming the challenges. This will help startups get access to a large pool of customers and in turn reduce spend on customer acquisition. It will also remove the issue of trust as startups can leverage the reputation of the established players. As an example, “partnering with a bank and the bank makes their customer base accessible to your product/company can reduce the time to profitability (TTP),” said Mayowa Owolabi (CEO, Afara Partners & Co-founder Mobile Monday Nigeria). Speaking about how they are currently navigating the issues, Segun Adeyemi said “we play more of a partner/enabler role to the financial institutions than disruptors. This helps us leverage key infrastructure and the trust that has been built over decades by the banks”.
On the other hand, Rahmon Ojukotola suggested that “fintech start-ups need to stay updated with the latest changes in policy by the CBN, NDIC and other relevant authorities”. This is very important to those already and those looking to launch fintechstartups to avoid being caught unawares by a change in policy. Stressing the importance of collaboration and knowledge sharing, Timilehin Ajiboye said “it’s always helpful to talk to those who came before you, they always have insight regarding easy things you can avoid (that aren’t always obvious at first)”.
While there has been an uptick in the number of fintech startups accessing funding and tackling the issue of payments in Nigeria & beyond, they still continue to face challenges that affect their growth and survival. There is need for the government, regulators and other fintech players (including startups) to work together to tackle these challenges which will help fintechstartups achieve their full potential and make it easier for Nigerians to access financial services. To make this happen will require continued dialogue, collaboration and specific policies that address these challenges.
CHINA AS NUMBER ONE FINTECH COUNTRY
As major global financial and innovation centers compete to become the “world’s Fintech hub”, China has not only caught up, but rather leapfrogged major cities such as New York, Silicon Valley and London. Many people are even claiming that clusters of cities such as the Pearl River Delta in China are becoming the “new Silicon Valley.” While this comparison may not be totally valid, it is not unfounded. China is unique in the fact it has multiple financial and innovation hubs that offer different yet complementary value to the Chinese Fintech ecosystem. Shenzhen is the home of Tencent, Hangzhou, home to Alibaba, Shanghai is the country’s financial hub, and Beijing, which has a lot of the country’s largest startups and VCs – all provide different but beneficial traits to the ecosystem.
So, where to begin with the Chinese Fintech revolution? Why has it occurred on such scale and with such speed in China as opposed to other countries?
NIGERIA PERFORMANCE ON FINTECH
In Nigeria, like other parts of the world, fintech is becoming a buzzword, with companies sprouting and operating in different niches. Some of the most popular software platforms are Interswitch, e-Tranzact, Paga, Paystack, Piggybank and Remita.
Fintech software, Paga, a mobile payment platform, is helping to drive financial inclusion in the country, where over half of the adult population remain unbanked and underbanked.
Flutterwave, co-founded by a 26-year-old Nigerian entrepreneur, has the most impressive start, having attracted $10million in investment in 2017. It was founded just two years back by a team of ex-bankers, entrepreneurs and engineers, with the mission to provide a technology platform that allows businesses to make and accept payments anywhere in Africa.
Another solution developed 100 percent locally by SystemSpecs Ltd, is Remita, which seems to be receiving both ovation antagonism at the moment because it sits right at the heart of managing public funds. It attracted national and international validation when it was adopted as the payment gateway to Nigeria ’s (acute accent) Treasury Single Account, as it has helped the government achieve incredible success in fiscal management such that the Minister of Finance, Kemi Adeosun, and other government leaders, including Benue State governor, – (acute accent) for whom the software identified 500 ghost workers –(acute accent) speak glowingly about the payment platform.
Clearly, with these fintech innovations, Nigeria has the potential to play a major role in fintech solutions within and beyond Africa. The socioeconomic implication of fintech is broad. McKinsey Global Institute says that some of these fintech initiatives, especially those involving the use of mobile phones, could rapidly drive inclusion and add up to $3.7trillion to the GDP of an emerging economy within a decade. This potential, however, is hinged on availability of support from government and regulators. As is currently being done world over, the Nigerian government must begin to deliberately support and drive conversations about indigenous fintech software with the intent of exporting them to the world.
Here are a number of ways to encourage more innovation domestically and to also encourage international expansion of Nigerian fintech firms:
Recognition: Building our profile as a fintech hub starts from recognising the explosive innovation, and the potential ramifications, going on locally. Only then can we capitalise on our own indigenous solutions and sell them to the world. At present, it is doubtful that the government has a way of incentivising innovation and entrepreneurship in this sector. The Nigerian government has not ascribed much importance to the fintech space and its impact domestically.
Government has an important role in the evolution of fintech. To bring indigenous fintech solutions to the global stage, it is important for Government to be at the forefront of driving conversations to showcase Nigeria ’s (acute accent) strides and solutions in this space making it a key part of the agenda at relevant for especially those targeted at attracting investment – within and outside the country. This will rapidly unlock new economic opportunities and accelerate our development as a nation.
Improving Regulatory Frameworks: Regulatory reforms in favour of fintech is a worldwide discourse. Although technology has challenged existing systems, some rules have not been changed to accommodate its emerging business models. Existing regulation should be upgraded to match the realities of a fintech-driven world.
For fintech to thrive in Nigeria, a framework that encourages innovation and ensures consumers are protected must be in place. Australia, Singapore and Japan, for instance, are creating a thriving fintech ecosystem as well as helping fintech firms access capital and export.
While it is commendable that the President Muhammadu Buhari administration gave local know-how a boost by signing Executive Orders 003 and 005 – (acute accent) which seeks to support local content development across the country – other support, through progressive industry-specific policies, tax incentives and programmes to engender growth, will go a long way towards creating a vibrant fintech ecosystem.
Funding: Nigeria could take a cue from other countries to improve the availability of capital for new and existing firms. For instance, in 2016, the Monetary Authority of Singapore made a meaningful commitment to the development of fintech by investing about $225 million over the next five years in start-ups. As reported by Deloitte, the country also co-hosts events such as hackathons with accelerators to encourage growth and create strong links between fintech and the public sector.
Similarly, Australia developed hubs for fintechs and committed approximately $500million to promote innovation. Dubai International Finance Centre also launched a $100 million fintech-focused fund to develop the sector.
Attracting Foreign Investors: Fintech is already a hot topic for investors. According to data from Disrupt Africa, fintech was the biggest attraction for investors in Africa in 2017, gulping one-third of venture funding. Although a chunk of this was enjoyed by Nigerian start-up, Flutterwave, marketing Nigeria as a viable investment destination for fintech services would attract more of these investments.
The federal government (FG) –(acute accent) and its state counterparts – could also explore assisting fintech firms to connect with foreign investors.
Partnerships: There are two ways this can play out. First, the government needs to facilitate collaboration between banks, and other financial services companies and fintech companies. This is a major impediment to the growth of fintech companies within the country. Undeniably, fintech is the future of banking, and the earlier the banks stop seeing them as competitors, the greater their chances of survival.
Second, the public and private sector can collaborate to further improve Nigeria’s position in the global fintech space. The government can join in as shareholders in major fintech projects. M-Pesa was so successful in Kenya because of a combination of government support and consumer demand. As at 2017, M-Pesa had spread to 10 countries.
Forbes reports that in Middle East countries like Saudi Arabia, fintech is likely to emerge as a sector competing with oil in a matter of years because of the government’s commitment to open up more opportunities outside of oil, in line with its Vision 2030. Similarly, in March 2018, the UK government set out a Fintech Sector Strategy to help related industries collaborate and ‘coopete’ – an interorganisational relationship that combines ‘cooperation’ and ‘competition’.
Bilateral Projects: The highest value from fintech will be derived when the government collaborates with the fintech sector to develop export markets for home-grown solutions. There are many countries for instance who are at the early stages of developing a technological framework for their Treasury Single Account. There are also countries looking for ways to better drive financial inclusion.
Nigeria boasts of efficient solutions to drive these and the government will play a major role in recommending adoption in other countries. As at June 2017, about 23 of such arrangements were in existence between 16 countries already. Late last year, Hong Kong and Dubai teamed up to promote same cross-border fintech innovation. Without the help of government, it is usually difficult for most fintech companies to scale through regulatory hurdles involved in exporting their technology.
Donation of Intellectual Infrastructure: Fintech could be viable tool for regional engagement and integration. It can also be Nigeria ’s(acute accent) form of foreign aid to other countries as opposed to the faux pas of sharing electrical supply with other countries despite battling epileptic power supply. In this light, the government can use fintech as an official development tool designed and funded to combat the problems associated with corruption, financial inclusion, unemployment and poverty in other countries.
Fintech presents an opportunity for us to position ourselves as the giant that we are, especially among other developing countries where integration of technology in financing is still at infancy. With a population of over 190 million, the market forfintech is particularly huge in Nigeria.
Going forward I hold the view that Nigeria is well-positioned to become a hot spot for fintech globally. The FG ’s(acute accent) move towards ensuring that this sector is vibrant will have long term implications on our economic growth as a nation. If properly supported, fintech is projected to create a new kind of economy that is knowledge-driven and can be a veritable source of wealth creation for the country, much like our treasured crude oil.
