By 2020 in Nigeria, 40% of the banking and payments industry will be at risk, along with 36% of the insurance, asset and investment sector, due to threats from financial technology companies (Fintechs). And these are just the early stages, according to the PWC Nigeria fintech survey. Bill Gates predicts that in the year 2030, two billion new customers will use their phones to save, lend and make payments online.
Nigeria currently leads the world in mobile share of web traffic at 81%. By 2025, 70% of the Nigerian population is expected to be under the age of 25. This demographic represents the millennials; with their high inclination for technology and cutting-edge customer service. It’s an opportunity to intensify the acceptance of fintech solutions.
Fintech in Nigeria started with money transfer platforms but over the years it has grown beyond that. Now, fintech is changing the way business is done and how money is managed (or not). In Africa, investment in fintech has increased significantly from $198 million in 2014 to $800 million in 2016, as investors are increasingly attracted to the industry’s potential to tap into Africa’s huge underserved population. Investments in Nigeria and Africa as a whole have been primarily focused on payment solutions while other segments such as lending and wealth management are in a relatively nascent stage.
Fintech companies cover diverse segments [and sub-segments] related to the financial services industry such as lending, payments, merchant services, loyalty platforms, lending cryptocurrency, finance management, and banking services. Popular names among these platforms in Nigeria include PiggyBank, Paylater, Kudi.ai and Paga.
Most Fintech startups in Nigeria which are in their early stages of development and operating informal structures are already growing large clientele and earning good returns on investments. This is creating a big concern for incumbent financial institutions who are starting to see them as a threat. It will take a great deal for these institutions to be as efficient as the fintechs, and it will cost them more, in terms of change in traditional perceptions and attitudes.
The ability of Fintechs to significantly lower operating costs by decreasing start-up costs and infrastructure cost via adoption of cloud-based platforms, poses a big threat for incumbent financial institutions thereby increasing pressure on margins.
Fintech companies aren’t mired by legacy issues rising from infrastructure, culture and manpower positions. This allows them to try out new technologies and strategies which provide customers with more irresistible products and services in a much more timely manner.
An increase in focus on the customer is the vantage point that is being taken here. These discerning companies are adopting a customer-centric model to fuel their disruption of the financial service industry. Old players in the financial services industry are meeting this challenge by moving to put financial technology at the heart of their strategy. Leveraging the gaps in the financial industry by being agile, FinTech startups are providing new service offerings that better address customer needs by giving enriched convenience, accessibility and tailored products.
Innovation is the ability to perceive old things in different combinations to create new ways, it demands that you see differently. An internal fortitude to throw away something that has worked bears at the threshold of innovation.
It isn’t a coincidence that the rise of financial technology in Nigeria came alongside an economic crisis. For most, the emergence of these fintech companies brought with it a fresh approach to the world of finances. Nigerian Banks are starting to follow the trend by simplifying operations to improve customer service. Banks are leveraging big data and technology to provide a renewed digital customer experience.
Should Banks fear being phased out by Fintechs?
Financial inclusiveness is still quite low in the region; about 40% of Nigerians are still without a bank account. This is a bit of a worry for both banks and FinTechs.
It’s already evident that every significant industry will be led by a technological company in the next 10 -15 years. So yes, banks may eventually lose relevance on a global scale, and Nigerian FinTechs are adequately playing their role. The most likely resolution meanwhile will be for the banks and fintechs to achieve a sort of balance between themselves. This balance will involve collaborations that can help drive financial inclusion in Nigeria.
Collaborations for mutual benefit exist everywhere, one just has to look out for them. The broad domain knowledge and extensive customer base that banks possess can be merged with the agility, incisive ideas and cost cutting processes that fintechs wield, to bring about mutual benefit to all the parties involved.
Some of the ways to find balance and also collaborate are:
- Open API’s: Banks can have a forward thinking approach by developing APIs or leveraging existing ones by offering FinTech organizations the use of their API endpoints. With the objectives to increase collaboration, revenue, reach and accelerate innovation.
- Proactive Processes for Regulatory Environment: The banks and their kin have deep insights about their industry’s regulatory environment and how to go about gaining regulatory approval. These financial institutions can develop a systematic due diligence process and in turn advise fintechs to ensure future stability.
- Fostering An Ecosystem mindset: Banks have tremendous value in their mastery of the market, regulatory environment, customer knowledge and agent networks can be opened up for use by fintechs to enable mutual benefit. Access Bank made a strategic decision to open up their APIs for innovative Fintech outfits like Paystack and Flutterwave to launch and increase their reach.
While FinTech startups are disrupting the financial scene, the traditional banks still have a head start. They have a large base of existing customer relationships and funds; all they need do is capitalize on these relationships and their data to create an omni-channel customer experience i.e. individual customer touch-points over a variety of channels that seamlessly connect, then scale.
Concurrently, customer loyalty to Nigerian financial institutions is on the decrease which affords a fluid competitive landscape to new comers. This low barrier for third party entry has been proven by some companies like Paga and Interswitch.
Finance companies that do not have a traditional payment system but have payment experiences powered by network connectivity and a mass of users can gain market share off incumbent finance companies that are slow to adapt.
There is a change in Nigeria’s payment pattern which is driven by mobile smartphone adoption. The mobile-first consumers expect fast, convenient and secure payment platforms.
Artificial intelligence (AI) and robotic process automation is on course to turn the banking ecosystem on its head, disrupting the way people bank and the manner in which institutions deliver financial services. Banks in Nigeria have indicated that they intend to invest more heavily in FinTech to the tune of $3 billion by 2020 according to the Nigerian Fintech Organization.
Most of the commercial banks are already getting in on the action by backing one FinTech platform or the other. So while fintechs may not replace financial institutions, it’s glaring that it is the way of the future.