BY TOM JACKSON
We have not even reached the halfway point of 2021, but already it seems nailed on that the year will break all sorts of funding records – with the surge in investments led by the Nigerian fintech space.
The landmark acquisition of Paystack by Stripe back in October seems to have set an unstoppable train in motion, with March bringing huge developments in the space. First Flutterwave became a “unicorn” as its US$170 million funding round took its value beyond the US$1 billion mark. And then digital bank Kuda raised a US$25 million Series A barely four months after raising its seed round.
Ryan Laubscher, chief operating officer (COO) of Kuda, told Disrupt Podcast that investors in these rounds see fintech in Nigeria – and Africa in general – as the “final frontier of untapped opportunity”.
“You’ve got a combination of there being a vast amount of opportunity throughout the continent, let alone Nigeria, and we’re also starting to see regulators becoming a lot more supportive in terms of fostering entrepreneurial growth and initiatives that have the customer’s best interests in mind,” he said.
A funding bonanza
The acquisition of Paystack and the large Flutterwave and Kuda rounds may have grabbed the attention, but there is also plenty of activity at smaller ticket sizes, speaking to the broader health of the Nigerian fintech ecosystem.
“A lot of the seed level funding that hasn’t been there is now starting to be there,” said Laubscher, revealing that Kuda’s round was actually worth closer to US$39 million as early investors were bought out by new ones – exactly the type of exits needed to encourage further early-stage investment.
“It is vital to have that layer of seed investment community interested and investing, and it certainly allows companies like ourselves to start to make inroads into whatever we are working on, and once that takes place you’ve got an instance where you begin to attract attention from investors that invest later on in the cycle,” he said.
Early-stage and seed-stage activity is certainly high, with this year alone having seen rounds for (take a breath) Bankly, Cowrywise, Crowdyvest, Curacel, ImaliPay, Okra and Xend Finance. Disrupt Africa has already gone into some detail for the reasons behind certain key rounds (Flutterwave, Kuda), but what in general is making the space so popular?
There are various reasons for the appeal, and they vary for different types of investors. Ruby Nimkar, principal at Lagos-based fintech-focused VC firm GreenHouse Capital, said there are two distinct attractions for domestic and international investors.
“Local African investors know that Nigeria is the largest destination market with a vibrant talent pool of entrepreneurs. There is a strong existing ecosystem that is no stranger to fintech, which makes African investors very willing to consider these opportunities,” she said.
“International investors have always been interested in emerging markets and replicating the kind of growth seen in markets like Indonesia and Brazil, for example. Leapfrogging legacy systems in emerging markets is always a compelling opportunity. One of the main reasons these investors have tread cautiously around Africa, however, was because there were not enough high-profile exits to attract attention. Now with the recent Paystack transaction, Flutterwave’s billion-dollar valuation, or landmark deals like Visa and Interswitch, Nigerian fintech firms have demonstrated the possibility of successfully scaling, which has captured the attention of international investors.”
Tomilola Adejana, chief executive officer (CEO) and co-founder of Bankly, agrees that the sector has reached a tipping point.
“The Paystack acquisition was a game changer. It sent a strong signal that Nigerian fintech is a profitable and liquid market. Not even six months later, Flutterwave reaches a US$1 billion valuation with its latest fundraise,” she said. “The Paystack and Flutterwave deals reveal what we in the market have known for a long time – the scale of the problem is huge. We’ve barely scratched the surface in Nigerian fintech.”
It isn’t all just noise
There is a lot of chatter around Nigerian fintech, but the noise is justified by the numbers. The extent to which internet and mobile penetration is increasing, spending power is growing, and people are gaining access to financial services is unprecedented. Nigerian fintechs can ride a huge wave in rolling out solutions to a hungry, underserved market.
Bankly focuses on digitising cash for Nigerians who work in the informal sector.
“Over 50 per cent of Nigerian adults are financially excluded – they don’t have a bank account and transact only in cash. That alone costs Nigeria 12 per cent of her GDP,” Adejana said. “The majority of fintechs have focused on chasing customers who are middle class, digital natives who already have bank accounts. But, the real work is in serving the mass market, which will enlarge the pie of Nigeria’s financial services sector.”
And fintechs are increasingly building solutions that enlarge that pie more effectively. After years of trial and error, and learning from failure, startups have identified the best approaches – both online and offline – to scaling effectively. Adejana takes us through some of them.
“You have to meet people where they are. You have to improve on what they’re already using. Often, when people talk about financial inclusion, they think the answer is getting Nigerians to open bank accounts. But that approach doesn’t work,” she said.
“Nigerians are already using informal banking services — the informal thrift collections system called esusu and ajo in Nigeria – but they’re not safe from fraud or theft. They also don’t allow Nigerians to build a credit profile to access affordable loans. If you digitise both the inflows and outflows of Nigerians working in the informal sector, you can create a network effect whereby the Nigerian mass market moves away from cash altogether. This is the North Star of financial inclusion.”
To reach unbanked Nigerians, startups need to invest in distribution.
“Your product has to be everywhere just like Coca-Cola, Indomie or PZ Cussons soap. When we developed our strategy at Bankly, we looked at the telecoms sector for inspiration. What we observed was that telecoms took off in Nigeria through three steps: distribution by creating an agent network; agents sell commodity services like recharge cards; and full inclusion as a critical mass of Nigerians own the asset – the SIM card, the telephone – to buy services directly. We are approaching banking the same way,” she said.
Cross-sector, cross-border relevance
Another key appeal to investing in fintech is the relevance of the space across verticals and geographies. Every business, everywhere, be it focused on health, agriculture, media or logistics, needs to make and accept payments. Given the basic need for businesses and individuals to transact, fintech is increasingly pervasive, which gives it huge potential for returns on investment.
Adeola Olasewere is director of growth at Pngme, a Nigerian fintech startup that has developed a unified financial data API. She says the entrance of big technology firms such as Apple, Facebook, Amazon, Google and Alibaba into the fintech space has enhanced innovation and competition.
“Interestingly, more players from non-banking industries including e-commerce, telecoms and logistics are increasingly branching into the mobile payment space, which continues to attract FDIs and fintech startups,” she said.
Nimkar makes a similar point.
“One trend that we are interested in is being able to embed financial services into non-financial services companies. This can result in modular banking solutions, which, for example, allow businesses to conduct credit assessments on customers to extend retail and SME loans or simplify the process of KYC, and onboarding and account opening within minutes,” she said.
“Other businesses we like are B2B infrastructure businesses within the open banking, or e-commerce space.”
The progress in the sector from both growth and fundraising perspectives may have been impressive, but Nigerian fintechs still report obstacles. Olasewere said adoption and lack of awareness remain major challenges for most fintechs.
“More than 70 per cent of the population of Nigeria live in the villages and these digital payment platforms are used mostly by the urban population,” she said.
Nimkar makes a related point around the cost of getting online, which is still too high.
“The cost of data in Nigeria is still a barrier to the continued widespread adoption of fintech and tech in general,” she said. “Further, despite headline-grabbing market penetration rates, there is still a significant underserved market in Nigeria. Whether it’s Nigerians with limited internet or the 66 per cent of the Sub-Saharan African population who still have no formal banking relationships, fintech firms still have many clients to reach.”
Adejana highlighted securing collaborations and partnerships as one of the biggest hurdles for Nigerian fintechs.
“The scale of the problem we’re trying to solve – banking the unbanked – is so immense that you need partners to reach your customers at the last mile. Startups and corporates tend to have vastly different cultures. As a fintech startup, it can be difficult to be nimble, fast-moving, customer centric, and innovative when you must partner with a corporate partner who is more slow-moving and bureaucratic,” she said.
Olasewere said there are signs that banks and fintech startups are beginning to work together more, but “it is not where it needs to be, yet”.
“Over the years, the relationship between fintechs and banks has evolved from competition to collaboration. However, there are still significant synergies that have not been fully explored,” she said.
Adejana said banks now seem to realise that fintechs are more nimble and faster-moving, and can complement their legacy operations.
“We both need each other and we’ll grow the sector more and serve financially excluded Nigerians if we work together,” she said.
Key to bringing the whole space together and providing the environment in which Nigerian fintech can thrive is the government, and regulatory authorities. Adejana said regulators and government can be supportive when they understand that startups are aligned with their strategy.
“There is a natural gap between innovation and regulation. As startups, if we want to get regulators on board, we need to persuade them that we’re helping them reach their goals,” she said.
Olasewere says there have been signs of progress in this regard.
“In the last few years, the regulators and government have introduced various initiatives to support the growth of fintech in Nigeria. The recently released Open Banking framework, which is aimed at promoting innovation, broadening the range of financial services and products, and deepening financial inclusion is a testament to the government’s support of fintech,” she said.
If government support can go hand-in-hand with the increased investor interest we have seen in recent times, Nigeria’s fintech space could be set for extraordinary growth, a development that would make a lot of people a lot of money but also go a long way to broadening financial inclusion in Africa’s most populous country and biggest economy.
In 2020, 99 African fintech startups raised a combined total of US$160,319,065, more than any other sector. All details can be found in the African Tech Startups Funding Report 2020.
The latest episode of Disrupt Podcast features in-depth interviews with, among others, representatives from Flutterwave and Kuda. You can listen on Soundcloud, Spotify, Apple Podcasts, and all other podcasting platforms.