How Can Fintechs Serve as Growth Catalysts?

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Friday, June 25, 2021 / 11:37 AM /  By FDC Ltd  / Header Image Credit: Emerging Europe


For developing economies, emerging from the fallout of the coronavirus pandemic will require more than the traditional signposts of economic growth and development. It will also involve the leapfrogging factor that technology introduces.


The far-reaching impact of the pandemic

In 2020, the advent of the coronavirus pandemic and its ensuing effect resulted in a 3.3% contraction in the global economy. For Sub-Saharan Africa, the IMF estimated a 1.9% contraction in 2020 while Nigeria's economy - the top African economy - contracted by 1.8%, even as it reeled from the global oil price crash. Even so, Nigeria is on a growth trajectory in 2021 with a projected 2.5% expansion for the year. The growth in the Nigerian economy is expected to be driven by higher oil prices and increase in production levels coupled with a more general recovery in non-oil sectors. However, Nigeria's susceptibility to commodity price shocks and the current degree of uncertainty surrounding oil prices may derail its growth trajectory. The non-oil sectors, particularly the information and communication technology, are crucial to the country's successful emergence from the pandemic and into long-term sustainability.

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The importance of accessible technology

At the height of the COVID-19 crisis, government-imposed restrictions spurred an uptick in the adoption of technology-driven services, especially FinTech services. FinTech or Financial Technology refers to the connection between modern internet technologies and established business activities of the banking and more broadly, the financial services sector.1 As such, FinTechs disrupt the traditional financial services sector as we know it by challenging the conventional roles, business models and service offerings through the introduction of technology-based innovations. These innovations are provided to end-users through mobile phones and internet connections. In January 2021, internet users rose by 22% to 104mn from 81mn in the same period in 2020, while internet penetration rate was estimated at 50%.2 Similarly, Nigeria's mobile penetration rate currently stands at 90% with 188 million mobile phone connections in the country.3 The broad permeation of internet and mobile connections means that FinTech services in Nigeria can reach as many as 188mn users


The specific role FinTech can play

FinTech products span across multiple subcategories ranging from easy-to-use stored value wallets using mobile phones to automated savings, cross-border transfers, credit platforms, and risk assessment services to mention a few. An analysis of reports from similar emerging markets indicates that FinTech can drive economic development by boosting productivity, creating economic opportunities, improving access to financial services, driving financial inclusion and reducing income inequality. The economic impact will largely result from expanding revenue streams and increasing foreign direct investment (FDI) inflows while the digitization of financial services will result in increased productivity.


According to a recent McKinsey report, an estimated 60% of Nigeria's 200 million people have bank accounts.4 In other words, 40% of the population lacks access to banking services. FinTech can improve the level of financial inclusion by democratizing access to financial services. FinTech product offerings provide a clear and inexpensive channel to meet the needs of the unbanked for financial services, which is key to facilitating financial inclusion. The multiplier effect will be the far-reaching impact of democratized access including human capital development through financial literacy. Consequently, a broader adoption of FinTech can play a pivotal role in bridging the significant gap in Nigeria's economic development. The actualization of this prospect, however, remains largely reliant on supportive policies and a focused regulatory oversight, without which non-oil-driven growth is unachievable.

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The important role of regulators

Regulatory oversight for the Nigerian FinTech sector has been viewed as a clampdown on corporate innovation and fraught with hostility. This is mainly driven by the trust deficit between the regulatory bodies and the regulated. Traditional financial service providers, who initially viewed FinTechs as passing fads, are now in the ring with them. A quick example is the recent conflict in the mobile money space, which saw Africa's largest mobile-money company kicked off the platform shared with brick-and-mortar financial companies. The dispute deprived access to financial services by the unbanked and underserved population approximately 40% of Africa's largest economy.


Industry reports, over the past three years, indicate that investment in the FinTech sector increased by 197% with foreign investment dominating the inflows. The expectation of new entrants, due to rising financial inclusion levels, will drive more investments to the Nigerian FinTech space in the near to medium term. The operating environment must therefore be strengthened enough to protect all stakeholders and permissive enough for innovation to thrive. At its core, policy focus should include a simplified communication pathway between regulators and the companies, the development of cost-effective digital infrastructure as well as measures towards improving financial literacy levels. This is likely to facilitate innovation, research and development and at the same time strengthen risk management. It can also improve access to and lower the cost of data. Similarly, it may expedite financial inclusion. The bulk of the success rests on the regulatory bodies.


What a common ground means for the economy

The designated regulatory bodies appear to be beset by legacy regulations and an ambiguous understanding of the crucial role they and FinTechs play in the overarching goal of Nigeria's broader development. Nigeria's economic development is at an important crossroad; the opening and the required capability are at hand. Consequently, it is imperative for regulators to remain flexible in their role as overseers as the number of innovative players in the space continue to evolve. Regulators must develop an understandable outlook on the novel competences the sector is likely to decipher. They can no longer be sceptical. Instead, they should take opportunity to pave the way for what's on the horizon.

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Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.
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