21, 2020 / 12:15 PM / by FDC Ltd / Header Image Credit: ICT Works
Financial technology, or fintech, is the innovative use of technology in the design and delivery of financial services. It often results in new business models, applications, processes, or products with an accompanying effect on financial markets and institutions. It promises faster, cheaper, more transparent and more user-friendly financial services for millions around the world.
In Nigeria, the financial industry is semi-developed and has low levels of customer satisfaction. According to the Bank Verification Number statistics, less than 50 million of Nigeria's 200mn+ population has active bank accounts. As a result, entrepreneurs and millennials are turning to fintech to develop financial innovations and disrupt traditional financial services. With fintech gaining traction, there will be an increase in the financial inclusion level as more unbanked customers will have access to financial services. Also, customers with bank accounts would achieve higher levels of customer satisfaction.
Evolution of Fintech in Nigeria
In 2007, the CBN launched its Payment Service Vision (PSV), sparking newfound interest in fintech firms. Fintech firms had been in operation in Nigeria prior to this time, though there was no widespread adoption. Until then, the use of physical cash for financial transactions such as payments, settlement of debt, and fundraising among others was predominant. As a result, the CBN was regularly using limited resources to maintain and print banknotes, which augmented the associated recurrent cost.
For cost minimization, the federal government, through the CBN, spurred the growth of the fintech ecosystem in the country Interswitch (in 2008),11 Etranzact (in 2011)12 and Remitta (in 2011) were the initial sets of fintech firms to draw on the benefits of these policies. The preliminary works of the pioneer fintech firms set the stage for Nigerian commercial banks to ride on years later. In time, commercial banks launched unstructured supplementary service data, internet banking and mobile apps. Since then, fintech has enjoyed rapid development in Nigeria and it is still on the increase.
The general fintech space breaks into categories including artificial intelligence, asset management, advisory services, big data, biometrics, peer to peer lending, crowd computing, digital payments, and blockchain among others. However, only some of the aforementioned categories have matured in Nigeria's fintech landscape. Financing, lending, payments and remittances currently account for 69% of Nigeria's fintech landscape, leaving 31% to relatively untapped categories such as crowd computing, big data, business solutions, insurance, and wealth management.
Opportunities and Benefits of Fintech in Nigeria
Huge market size - Nigeria has a huge market of millennials that want financial services. Millennials are young adults born roughly between the early 1980s and 1996, and most of them today are internet-savvy and technology-driven. They make up roughly 30% of Nigeria's population. Coupled with the rapid growth of youth (about 115 million people below the age of 3515), there is a large potential for financial inclusion and the youth market is a valid indicator of the fintech opportunity in the country.
Income generation - Foreign and local investors have become increasingly interested in tapping into the fintech sector in Nigeria due to its great potential. Fintech companies in Nigeria have raised over $114 million as of 2018, of which global fintech investments account for 75% of the amount reportedly raised by tech firms.16 In 2018, the fintech landscape in Nigeria gained approximately $86 million in funding.17 Fintech has spurred the start-up and maintenance of several businesses in the service industry, which accounts for 55.80% of the GDP composition.
Business solutions - Hackathons have played an interesting role in Nigeria's fintech space. Hackathons are idea innovation contests that bring together tech talent to compete and collaborate on solving business problems with technology. Some financial sector institutions are deploying these events to outsource ideas and solutions that will catalyze innovations in the financial services industry.
The Case of China
When it comes to fintech, China has emerged to be a world leader, adopting technology faster than anywhere else. The structural shifts in its financial system took place during the internet boom. Increased mobile network and internet users created a long-tailed base of potential customers to promote financial inclusion with fintech.
China's financial system had been relatively immature compared to established markets, with clear structural imbalances and an underdeveloped infrastructure two decades ago. Under the Chinese government's recent financial reform efforts, structural shifts have begun to take place with an outburst of innovations and fintech startups. The likes of Alipay, Lufax, Tenpay and ZhongAn Insurance have made their names across the globe by developing some of the most disruptive business models. By the end of 2015, the country had 500 million fintech users, and its overall market size exceeded RMB 12 trillion ($1.87 trillion).
China adopted incentives such as tax incentives, subsidies, incubation funds and other preferential government policies for fintech companies. Also, the People's Bank of China released the Fintech Development Plan (2019-2021) which encourages the development of fintech solutions by using various digital technologies. This created an opportunity for fintech players to bridge the gap in traditional financial services by capitalizing on their strong online presence.
In addition, innovations and inventions in China are protected as copyrightable works under the PRC Copyright Law; as patentable creations under the PRC Patent Law; and as trade secrets under the PRC Anti-Unfair Competition Law. These strong regulations are part of the reasons why China's fintech industry has developed so rapidly in recent years.
How Nigeria can seize the opportunity to improve the financial sector with fintech
In terms of policies, the capital requirement or shareholder funds stipulated in Nigeria's financial regulations should be modified. For instance, the CBN Licensing Regime provides for a N5 billion shareholder funds requirement for the highest license.22 This regulation is not all welcoming as most fintech companies are start-ups and do not meet the shareholder funds requirement.
This should be amended to allow applicability to small fintech businesses. Furthermore, the fintech landscape in Nigeria could be made more appealing to local and foreign investors through income tax relief and government incentives. The President under the Industrial Development Act has the discretion to assign pioneer status to an industry. Due to the level of innovation produced by fintech, pioneer status would be beneficial. When granted, it provides corporate tax relief and holidays for the first three to five years of operation. This will serve as an incentive for the players in the fintech landscape to create more financial innovations.
Fintech finding its way forward
The increasing penetration of the internet and mobile internet stimulated the emergence of the first wave of fintech firms, which provided online product platforms to address the gaps in financial services. Since then, major segments of the fintech market such as online peer-to-peer lending, online wealth management, and digital insurance have improved over the years. With a combination of government support and industry collaboration like working directly with banks to support innovation and tap into existing customer bases, fintech is sure to continue its significant growth in Nigeria.