Lessons From The Nigeria’s Fintech History: Part 1
A Fintech ecosystem consists of consumers, financial institutions, fintech start-ups, investors, regulators and educational institutions. A well-developed ecosystem serves two purposes – it reduces the barrier of entry for consumers who are excluded from the socio-economic benefits that ecosystem is meant to deliver, and, it ensures that businesses (who often are at the centre of the system) efficiently improve their products or services while staying competitive and profitable. The Nigerian fintech ecosystem has made progress in achieving these purposes.
To put things in perspective, Nigeria ranks as one of the top three fintech hubs in Africa. This is a mean feat considering how fintech has evolved in Nigeria despite numerous challenges.
Nigeria's fintech space is unique compared to that of South Africa or Kenya – the two other fintech hubs in Africa. Kenya had an early start with Safaricom's M-Pesa, launched in 2007, while Nigeria is yet to have a telco-led MMO (though this is expected soon). South Africa has a large and sophisticated financial and banking sector, and over the years the top-four largest banks in Africa have been South African banks while Nigeria is ranked in the third class of banking in Africa by this 2018 Mckinsey retail banking report. Furthermore, both South Africa and Kenya had a head start in the adoption and penetration of mobile phones – the device that has come to play a central role in fintech today.
Thus, when you think about how far fintech in Nigeria has come, you should thank the incredible entrepreneurs and intrapreneurs who envisioned, pioneered and executed solo moves that have now crystallized into what is today- a strong and growing landscape. This has happened in spite of huge infrastructural, regulatory and financial challenges. While financial inclusion in Nigeria might not be at its peak yet (over 36% of Nigerians are still not part of the financial system), we must acknowledge that fintech in Nigeria has come far.
In the not-too-distant past, real-time payments were impossible, and the chances of individuals or SMEs obtaining quick loans were next to zero. Today, payments are defined by fast deposits and transfers, and many billboards in major cities advertise quick loans.
Nigeria's Fintech History
I have divided Nigeria's fintech history into three parts - Fintech 1.0 (past), Fintech 2.0 (present) and Fintech 3.0 (future).
I regard Fintech 1.0 as starting from when the first Nigerian bank started employing technology at the back-end and front-end of their operations. Notable technology (telephone and computer) adoption by banks is traceable to the post-1986 Structural Adjustment Programme introduction, which led to increased competition in the banking sector.
Fintech 1.0 ended in 2007 – when the Central Bank of Nigeria (CBN) launched the Payment Systems Vision 2020 (PSV 2020). I consider CBN's action of 2007 as the end of an era and the birth of a new one- Fintech 2.0 The PSV 2020 was the first time the CBN put forward a clear policy for a future cashless society.
In the Fintech 1.0 era, three companies were dominant – Interswitch (founded by Mr Mitchell Elegbe), Etranzact (founded by Mr Valentine Obi) and Systemspecs (founded by Mr John Obaro). These are not the only companies from that era, but these are (arguably) the most prominent.
Fintech 2.0 has run from the launch of the PSV 2020 until now. It has been characterized by the diversification from switching and payments (which Fintech 1.0 was characterized by) and the prominence of mobile payments, increased start-up activity and innovation, a push for financial inclusion and more regulation. For Fintech 2.0, innovators include Paga, Paystack, Kudi, Wallets Africa, Mines.io, PiggyVest, Flutterwave, and Cowrywise.
I propose that we will see Fintech 3.0 launch when the first telco (expected to be MTN) launches its mobile payment platform (thanks to the CBN's Payment Service Bank Regulation 2018). No one has a clear idea of the level of disruption to expect from the launch of a telco-led MMO. Given the massive success of Safaricom's M-Pesa in Kenya and the success of MTN's Mobile Money in Ghana (which currently has the highest growth rate of mobile money in Africa), it appears that the Nigerian payments market is in for a shaking. However, the result will be felt not only in payments but also in several other sectors.
The result of this disruption will impact several other sectors. The health-payment platform, M-Tiba, was built on M-Pesa's infrastructure. M-Pesa's infrastructure also makes payments for the solar energy product, M-Kopa, possible. We should, therefore, expect services around energy, healthcare, education and many more, to launch on the platform of telco-backed MMOs.
Fintech 3.0 will also see the increased adoption of the blockchain (and cryptocurrencies) and artificial intelligence-powered fintech products in our markets. The Nigerian fintech space already features cryptocurrency players like SureRemit and Buycoins and fintechs like Mines and Branch, deploy artificial intelligence in their operations.
I believe it is possible to replicate the success of Nigeria's fintech sector across education, agriculture and health and other sectors if we identify and adopt the lessons in Nigeria's interesting (and developing) fintech story. Here are some of the lessons I have observed.
1. The next set of innovators in these sectors will come from diverse backgrounds
It is interesting to note that all the founders of Fintech 1.0 have strong IT backgrounds and not finance experiences. This lesson would not matter if the companies were merely Enabling fintechs (Enabling Processes & Technologies providers for financial services). Instead, they are or have evolved into Core fintechs, directly providing financial services. This lesson is important because the fact that a company is providing computer and software engineering support for banks or companies in the financial sector does not necessarily render that company a fintech company.
All three founders of the dominant Fintech 1.0 companies at some point in their career, provided technical support in the financial sector.
Systemspecs' 'Human Manager' was, reportedly, widely adopted by Nigerian banks. Mr Valentine Obi was the CEO of Sybase Nigeria Business Solutions Limited before Etranzact. Sybase Nigeria provided software for Nigerian banks as well as the software for the launch of the Nigerian Stock Exchange (NSE) e-trading portal in 2002. Mitchell Elegbe started his career with CSA (Computer Systems Associates) as part of a team that implemented software solutions that enabled Nigerian banks to connect to the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
Interestingly, a good chunk of Nigeria's Fintech 2.0 notable Founders also have a computer science or engineering education/work backgrounds (including the founder of Paga, co-founders of Paystack, Kudi, Wallet NG, Mines.io and PiggyVest, a co-founder of Flutterwave and a co-founder of Cowrywise).
One would think that innovation in Nigeria's fintech space would be championed by ex-investment bankers, former bank branch managers, and other ex-banking and finance workers but techies lead the way. It is possible that the prior experience Fintech 1.0 founders had in providing services to the financial sector may have helped in the birthing/pruning of their innovative ideas.
As far as fintech 2.0 is concerned, the 'source' of their innovative ideas are diverse. Iyinoluwa Aboyeji (Flutterwave's co-founder) had previously set up and exited the pan-African company, Andela. Carbon's founders (with Economics and Accounting certifications between themselves) are sons of one of Nigeria's banking doyens, Mr Pascal Dozie. PiggyVest's founders trace the inspiration for their savings platform to a picture of a kolo on Twitter which one of the co-founders came across (and they built their product off the success of PushCV, their first tech product). The Founder of Nigeria's (arguably) foremost law-tech company, Lawpavilion, Mr Ope Olugasa, has an engineering background and is not a lawyer. ThriveAgric's founders have backgrounds in IT and biochemistry. The two founders of 54 Gene, have IT and health backgrounds. The founders of MDaaS Global have health, IT and supply management backgrounds.
This is the new norm in several tech-related sectors and it should embolden every innovator, who might be discouraged by the fact that he or she has a solution but lacks (direct) education or work experience in the sphere.
2. Say goodbye to the solo founders.
Fintech 1.0 members all started their journeys' alone' (in reality, nobody ever starts a company alone). However, funded start-ups founded just by one individual are presently rare. This is one disparity between Fintech 1.0 and Fintech 2.0 founders. Like I earlier pointed out, Messrs Obi, Elegbe and Obaro all started their Fintech products on the backs of well-established companies. Hence, these Founders already had resources and a great support system and a pool of strength to draw from – funding, office space, IT assets, HR, legal, partnerships, etc.
As far as tech is concerned today, success is likely to be more efficiently delivered in strong partnerships than solo runs. It is not surprising that two or more persons founded every Fintech 2.0 company (highlighted here). The trend of co-founding is also the norm in non-fintech start-ups that have raised funds in recent years.
Any innovator who thinks he/she has the next great idea should seek out co-founders that complement his/her skills. Are you an IT professional who has an idea in a field you have no direct education or work experience in and you seem 'stranded'? You should seek (at least one) co-founder who has expertise in that area. Are you a practitioner who has an innovative idea that needs core technology? You should probably seek a technical co-founder.
3. Markets are not always defined by first, second or third movers, nor by the present size of the market
When Interswitch launched in 2002, it was estimated then that there were just about 200,000 Nigerians with access to the internet. Mr Obi started pushing his idea for mobile payments at a time when Nigerians were still trying to adjust to mobile phone use, and text messages took a day to deliver.
Interestingly, before Interswitch and Etranzact, there were other players. According to this article, "the introduction of such e-payment products in Nigeria commenced in 1996 when the CBN granted Allstates Trust Bank approval to introduce a closed system electronic purse called ESCA. In February 1997, Diamond Bank introduced a similar product called "Paycard". The card-based e-money products assumed an open platform with the authorization in February 1998, of Smartcard Nigeria Plc, a company floated by a consortium of 19 banks to produce and manage cards called 'Valucard' issued by the member banks.
Interestingly, the two banks mentioned are not currently in business (in their original forms). Smartcard Nigeria Plc rebranded as ValuCard Nigeria Plc in 2004 and as Unified Payment Services Limited in 2012.
Regardless of UPS' five-year advantage over Interswitch, in 2008, Interswitch became the first transaction-switching network to have every Nigerian bank connected to it and the only Nigerian e-payment company to have real-time online connections to all the banks in Nigeria.
Etranzact found its niche with government agencies that were collecting revenue, like the Lagos Water Corporation and universities. Currently, it has over 70 universities utilizing its platform to process tuition and other payments by students. Systemspecs launched Remita in 2005 (a latecomer by Fintech 1.0 standards). However, it beat all other players to win the TSA contract.
Several Fintech 2.0 players today compete directly with Fintech 1.0 pioneers. Whether with improved user experience, better customer service, a better understanding of fellow start-ups and SMEs, many Fintech 2.0 players are active in the market. I am sure a few readers of this article have migrated from a Fintech 1.0 provider to a Fintech 2.0 provider.
Key players of Fintech 3.0 will include entrepreneurs who can build services on whatever infrastructure is laid by telco-backed MMOs. They will, alongside the MMOs, compete directly with many Fintech 1.0 and Fintech 2.0 members. Undeniably, the market will get tough, and some companies may go under, but the man on the street will be better for it.
I must also address the issue of infrastructure, which may play a significant role in aiding or impeding market readiness.
When Fintech 1.0 founders began their operations, there were no incubators or accelerators (in the fashion we have them today), there was no organized structure for seed funding, angel or venture capital investment. Mr Obi recounted how power supply was such a big issue when they commenced operations and how they had to build their inverters at the time. Surely, as Mr. Victor Asemota discloses here, there have been low-key tech financiers who funded tech projects in the 80s and 90s, but they were very few. There were no hackathons when Fintech 1.0 started and few grants/impact investment (thank you IFC). Most importantly, few software developers or individuals with start-up appetite existed.
In contrast, most of Fintech 2.0 Founders met an already blossoming ecosystem, and they have done well to nurture it. The recent partnerships between some start-ups and Lambda School is an example of such efforts.
Unfortunately, founders in health, education, agriculture, and fintech 3.0 will still face problems that have persisted from the Fintech 1.0 era. i.e. erratic power supply, poor roads, rent-seeking federal and state governments that stifle innovation, and endemic corruption.
Fintech 1.0 and 2.0 founders persisted in their innovations regardless. The new generation of founders will need to learn from their grit and determination.
Editor’s note: This was a really engaging and enlightening read from our contributor Chukwuemeka Monye. We’d love to hear your thoughts in the comments section on what the future of Fintech in Nigeria looks like and the steps we can take to realise this.
The concluding part of this essay will be published soon. Join our community to know when it goes live.