The fate of digital finance in Nigeria’s fintech sector

This article was submitted to TechCabal by Nicolas Teisserenc. Nicolas runs Poinciana, a communications consultancy specialising in Africa

Over the last decade, fintech has become perhaps the most exciting industry in Nigeria. Hundreds of companies have popped up, attracting up to two-thirds of all local start-up funding in recent years. In 2021 alone, the sector handled close to $700 million in digital transactions. However, recent developments including a decrease in enthusiasm for digital finance fueled by the crypto crash, a series of scandals, an ailing global economy and an oversaturated industry have left Nigerian fintech looking a little worse for wear.

Nonetheless, these could be looked at as mere growing pains for a sector that is yet far from reaching its ceiling. As telcos begin to foray into the digital finance game, competition in the sector promises to heat up. So where does that leave the traditional banking sector? After spending decades building the financial infrastructure of the continent, do African banks risk becoming obsolete in the wake of digital disruption? Or will they adapt to the digital avenue and turn their perceived weakness into a strength? 

The last few years have been very kind to the Nigerian fintech industry. With 150 to 200 fintech startups calling Nigeria home, the country seemed poised to become the uncontested African leader in the industry. The sector raised around $440 million in investments in 2020, and more than $600 million in 2021, amounting to nearly a quarter of the total funds attracted by African tech startups. That figure rises to almost two-thirds in the case of Nigeria. 

The growth of Nigerian fintech is perfect proof of the untapped potential in African economies. Fintech startups have enjoyed success and growth in Nigeria due to certain factors including the low penetration of banking services, a youthful population making good use of an explosion in smartphone ownership, and recent regulatory changes that have increased the number of cashless transactions. 

But 2022 brought a number of challenges to fintech providers, both in Nigeria and across the world. While the COVID-19 pandemic hasn’t harmed the fintech industry to the same extent that it impacted other sectors, even strengthening its position somewhat through increased digitisation, there is no hiding from the global economic downturn. The industry has also been affected by the cryptocurrency crash of 2022, which has cast aspersions over the viability of all digital financial services in the public eye.

But perhaps oversaturation may be the most harmful factor to the Nigerian fintech sector. Having consumers choose between 200 different companies all offering similar services is far from viable, even for a growing market. Given the sector’s current challenges, it is difficult to see a future for even half of these companies. 

But even under these adverse auspices, the fintech sector will continue to thrive both in Nigeria and across the globe. As with many other new technologies that offer great leaps in convenience, it will prove impossible to put the genie back in the bottle. 

The next few years will probably be a sink-or-swim moment for Nigerian fintech. The industry may see increased market consolidation and hopefully more sophisticated consumer expectations. Some fintech investors might even realise that cashing out by selling their company to a larger competitor is a desirable business outcome. 

To weather this storm, major players in the Nigerian fintech sector might have to come together and develop a common strategy to stave off competition from outside the sector. Telecom companies, with their large and established user bases, are making quick inroads into the world of digital finance. Fintech might have opened the door for new venues of financial services to more than a hundred million unbanked people in Nigeria, but now everybody is taking notice and rushing to cater to them. 

Within this chaotic but remarkably lucrative context, traditional banks must step up their game to remain at the forefront of financial services. With both fintech and telecoms out in full swing to attract users, traditional financial institutions must seize this window of opportunity and position themselves as the top choice in this three-way race. 

The fintech industry has done remarkable work in providing financial services to the youth, the age demographic least likely to have a traditional bank account. However, this may lead to an entire generation of Nigerians seeing fintech as the most obvious, or even the only viable option for their banking needs, while dismissing traditional banks as slow and antiquated institutions. 

For banks to thrive in the 21st century, they will need to adapt to these new customer expectations, shedding their suit-and-tie, brick-and-mortar reputation for a friendlier, more accessible approach. The digitisation of financial services isn’t going anywhere and banks would do well to embrace digital services and build easy-to-use platforms for their clients. 

When trying to attract the denizens of rural or isolated communities which are the groups most likely to remain completely unbanked, building digital infrastructure will prove faster and less costly than the physical. Banks should be able to turn weaknesses into strengths, using their traditional and established model as an anchor and a safe port in financially volatile times. 

The upcoming competition between fintech and telecoms is likely to further expand the number of people using an online banking service for the first time. Rather than find themselves on one side of a technological rift between digital haves and have-nots, banks must bridge the gap between traditional and digital banking. With the digital revolution in Africa in full swing, the traditional financial sector simply can’t afford to be left behind.