Note: This article was originally published in the 2019 FinTech Nucleus.
Over time, the Nigerian economy has been responding quite well to FinTech. There has been an astronomic increase in the number of FinTech startups, products, funding and operations, covering more diversified subsectors, despite challenges.
According to the Nigeria Startup Funding Report (Q3 2018), the total amount of investment in technology companies in Nigeria within the first to the third quarter of 2018 stood at $118,463,785. Interestingly, 73% of this sum was invested in FinTech companies. We attribute this upward trajectory to the quality of companies and founders in the FinTech space, the surge in e-commerce and smartphone penetration.
According to the Nigerian Communications Commission (“NCC”), there are currently over 162 million mobile subscribers in Nigeria and about 104.6 million internet users as of August 2018. Internet penetration stands rate has also grown to 84%. This interrelated expansion of mobile internet access, combined with a fast-growing young population, relatively strong talent pool and huge financial inclusion potential (overall financial exclusion rate currently stands at 41.6%), constitute strong indicators of FinTech opportunities in revolutionising ‘consumer’ experience within the Nigerian financial services industry. From insurance to payments to banking to lending to wealth management.
In our view, whilst the FinTech focus today is largely driven by the need to increase financial access, the Nigerian FinTech sector still has quite a margin to cover compared to her global contemporaries. In this FinTech race, we believe FinTech companies and new entrants in Nigeria need to have a clear-eyed strategy, in addition to pursuing business-model innovation, unleashing local talents, building long-term resilience and promoting local development. More importantly, there is a need for innovation-driven regulatory framework that pragmatically facilitates growth and investment in the sector.
Major FinTech Trends in Nigeria
Payments [P2P Transactions]
Nigeria has experienced significant growth in the development of mobile payments solutions in the last decade. Mobile payment consists of payments and transfers with mobile devices. Mobile payment can be used at the Point of Sale (“POS”), replacing debit card, credit card or cash payments. It also includes the use of mobile payment apps for online purchases (e-commerce, m-commerce), and peer-to-peer (“P2P”) transactions which are electronic money transfers made from one person to another through an intermediary.
We recognize that Nigerian Banks are dominant players in the mobile payment sector. Nonetheless, Nigerian FinTech companies remain key players and partners in the sector, and in the ownership of P2P payment platforms. FinTech has also fueled the growth of alternative lenders (an example are operators of P2P Lending platforms) who offer both higher yields to investors and faster, cheaper and more convenient loans for borrowers compared to traditional banks. Interestingly, there are also Nigerian FinTech startups introducing a lot of technology, algorithms, and machine learning to revolutionize credit risk assessment, credit disbursement, and customer banking.
Within the bill-payment space, the CBN in February 2018 issued the Regulation for Bill Payments in Nigeria (“the RBP”). The RBP covers bill payments on various payment channels and any payment platform that seeks to integrate the payment side of commercial activity and merchant aggregators in Nigeria. The RBP requires any person or entity desirous of operating a bill payment platform to apply to the CBN for a license or be integrated to a duly licensed Payment Service Provider (“PSP”). We consider this a strategic move from the apex bank, and expect to see more of these trends in 2019. Other regulations within this space include, the CBN Guidelines on Mobile Money Services in Nigeria, the CBN Guidelines on Operations of Electronic Payment Channels in Nigeria, the CBN Guidelines on International Money Transfer Services in Nigeria, and the Licence Framework for Value Added Service (“VAS”) issued by the Nigerian Communications Commission (“NCC”), just to mention a few.
Crowdfunding is a method of funding campaigns online. It involves the use of small amounts of capital from a large pull of individuals to finance cultural, social, or commercial causes, by leveraging on vast networks of people through social media and crowdfunding websites to bring investors and borrowing entrepreneurs together.
Communication between investors and borrowers is established through the internet and the role of the intermediary is assumed by the crowdfunding platform. The intermediary usually receives a fee for its services, calculated in percentage of the amount raised. The funders receive either monetary compensations (as in profit sharing in equity-based crowdfunding and real estate crowd investing, or interest income in crowdlending and the purchase of a discounted invoice in invoice trading), or a non-monetary compensation in return for their investment, which may take the form of products or services. Besides that, funding may also be provided without any direct and measurable consideration for the investment, as in donation crowdfunding.
In 2016, the Securities and Exchange Commission (“SEC”) of Nigeria, banned equity crowdfunding, due to the lack of clear rules and restrictive provisions on “invitations to the public to subscribe for shares’” as contained in the applicable laws, whilst donation and reward-based crowdfunding are still legal. The Crowdfunding Potential for Nigeria report released in 2017 by the Crowdfunding Hub says that SEC’s ban has stifled the setting up of crowdfunding platforms, despite its significant potentials in Nigeria.
Moving forward, we are aware that an enabler for crowdfunding has been included in the recent review of the amendments to the Investment and Securities Act (“ISA”), now before the National Assembly. We are also seeing startups offering diversified crowd-lending and crowd-investing services. There is also a rise of crowdfunding solutions especially in big sectors like agriculture, which majorly consists of smallholder farmers who lack access to finance or who are simply interested in diversifying their investment portfolios. We hope 2019 will offer a more desirable framework for crowdfunding to further broaden and deepen its opportunities within the Nigerian FinTech space.
Cryptocurrencies are virtual (digital) currencies built with cryptographic protocols that make transactions secure and difficult to fake. Their emergence has, no doubt, attracted investments in payments infrastructure that provides new methods for transmitting value over the internet. We recall, however, that in January 2017, the CBN via its circular warned Nigerians to be cautious of investing in cryptocurrency, as doing so would be at their own risk. A follow-up press release issued by the apex bank in February 2018, reiterated its earlier position that cryptocurrencies are not legal tenders in Nigeria, nor are they deposits or financial instruments licensed or regulated by the apex bank. Hence, the Nigeria Deposit Insurance Corporation (“NDIC”) does not insure them.
Consequently, at the moment, Nigerian laws do not protect dealers and investors of cryptocurrency in any way. Thus, they may be unable to seek legal redress in the event of failure of the exchangers or collapse of the business. In our view, the development of these Virtual Currencies (“VCs”) Payment Products and Services (“VCPPS”) and their interactions with other New Payment Products and Services (“NPPS”) in Nigeria necessitate that regulators work towards developing clear guidelines that reduce associated volatility and fraud risks, whilst maximizing the potentials of VCs. We have already seen SureRemit, a Nigerian non-cash remittance service provider utilizing the blockchain and the Ready-Made Token (“RMT”) token to facilitate global remittances, secure $7Million in funding through an Initial Coin Offering (“ICO”) in 2018.
The FinTech revolution is forcing the financial services industry and everything it touches to evolve innovatively, including the Nigerian insurance sector. With just about 1% of Nigerians holding an insurance policy at the moment, compared to other African countries, like Kenya (2.7%) and South Africa (16.99%), in addition to the growth of the middle class, and increased economic activity, the Nigerian insurance industry has a very bright future. In this wise, we recognize digital technology as a major tool that can be leveraged to: (x) drive the needed growth of the industry, and; (y) increase access to insurance products and services. Indeed, InsurTech solutions will continue to play a major role in shaping the future of the industry.
Moving forward, we expect to see traditional insurance companies embed digital technology across their organizations. We also expect that these companies will be on the lookout to collaborate, invest in, and acquire InsurTechs in order to speed up innovation and digital evolution. We believe integrating InsurTech startup technical capabilities and entrepreneurial culture with traditional insurance will position traditional insurance companies as the digital insurers of the future. Currently, most InsurTechs are being launched to, basically, help solve traditional insurer problems across the organization, from general operations inefficiencies to enhancing underwriting, distribution, claims functions, and customer relations. We are, however, keen on seeing existing and new entrant InsurTech startups adopt more bullish strategies, in terms of competing with and even displacing traditional insurers. We are also keen on seeing how P2P insurance models will play out within the Industry.
Payment Service Banks
From Payment Service Providers (“PSPs”) to Mobile Money Operators (“MMOs”) to Software Application Providers (“SAPs”) and Payment Infrastructure Service Providers (“PISPs”), just to mention a few, the Nigerian FinTech payment space has been having a swell time. The recent addition to the block are the Payment Service Banks (“PSBs”). In October 2018, the Central Bank of Nigeria (“CBN”) issued the Guidelines for Licensing and Regulation of Payment Service Banks in Nigeria (“the PSB Guidelines”). The essence of the PSB Guidelines is to enhance financial inclusion by increasing access to deposit products and payment/remittance services to small businesses, low-income households and other financially excluded entities through high-volume low-value transactions in a secured technology-driven environment. This is in alignment with the 2018 CBN Revised National Financial Inclusion Strategy (“the NFIS”).
Under the PSB Guidelines, promoters of a PSB are required to apply to the CBN for a Payment Service Bank license with a Non-refundable application Fee of ₦500,000, and a Non-Refundable licensing Fee of ₦2Billion. In addition, a PSB is required to have a minimum capital base of ₦5Billion. Eligible promoters of PSBs under the PSB Guidelines include banking agents, telecommunications companies (Telcos) through subsidiaries and retail chains (supermarkets, downstream petroleum marketing companies). Others are postal services providers and courier companies, Mobile Money Operators (MMOs) — MMOs that desire to convert to PSBs are required to apply and comply with the requirements of the PSB Guidelines — FinTech companies, financial holding companies and any other entity on the merit of its application, subject to the approval of the CBN. We note that switching companies which already have record/data of the financial system operators are not be allowed to own PSBs to avert conflict of interests.
In our view, the PSB Guidelines is relatively robust, innovation-driven, and significant in deepening FinTech penetration in Nigeria. The minimum capital requirement and associated fees may however be challenging for entrants, widening the already burdensome but promising investment climate. To cross this hurdle, eligible promoters may need to combine traditional and alternative funding options and structures. We envisage that eligible promoters including investors will take full advantage of the opportunities offered, and are keen on seeing how this will play out in 2019.
We share the sentiment in PwC’s Global FinTech Report 2017, and in the next few years, we expect to see more partnerships between financial institutions and FinTech firms. We note that while partnership constitutes incredible opportunities for the Financial Services Industry, it is not without risks. Indeed, cyber vulnerabilities are likely to arise more where systems run by different entities are integrated. In order to minimize resulting cybersecurity risks and compatibility issues, parties are expected to conduct thorough testing, integrate data closer, and clearly delineate their areas of responsibilities. We have also seen low cybersecurity literacy increase cyber vulnerabilities of end-users of FinTech in Nigeria.
In terms of regulatory framework, there is the Cybercrime (Prohibition, Prevention, etc.) Act 2015, which among others, seeks to promote cybersecurity and the protection of computer systems and networks, electronic communications, data and computer programs, and privacy rights. We note that while the Act is quite commendable, it is not adequate in dealing with specific cybersecurity issues that threaten FinTech.
Interestingly, in June 2018, the CBN released the Exposure Draft of the Risk-Based Cyber Security Framework and Guidelines for Deposit Money Banks and Payment Service Providers, in order to ensure the safety and soundness of banks and payment service providers. The Guidelines seek to address emerging challenges and stipulate minimum requirements in the areas of cybersecurity governance and oversight, cybersecurity risk management system, cyber resilience assessment, cybersecurity operational resilience, cyber-threat intelligence and metrics, monitoring and reporting. We understand that the Guidelines are to act as standard requirements, in a bid to curb cyber security threats. We look forward to seeing these Guidelines come into effect in 2019, and we expect to see how Deposit Money Banks (DMOs) and Payment Service Providers (PSPs) comply with same.
Over time, we have seen a general increase in concerns on data collection and privacy. Indeed, it is typical of FinTech companies to collect large amounts of data about their customers, including sensitive personal information, financial records, online spending behaviour and social media patterns. These FinTech companies also store and analyze customers’ data for the purposes of marketing, sales, and financial decision-making as in credit assessment. This makes data protection and privacy a top priority in FinTech.
There is already a right to privacy provided in Section 37 of the 1999 Constitution, which guarantees the protection of the privacy of citizens, their homes, correspondence, telephone conversations and telegraphic communications. There is also the Cybercrime (Prohibition, Prevention, etc.) Act 2015, which seeks to prevent the interception of electronic communications and imposes data retention requirements on financial institutions. We further note the significance of CBN’s Consumer Protection Framework, NCC’s Registration of Telephone Subscribers Regulation and NCC’s General Consumer Code Practice for Telecommunications Services.
Remarkably, in January 2019, the National Information Technology Development Agency (“NITDA”) released the Nigeria Data Protection Regulation (“the NDPR”) to regulate and control the use of data in the Country. The NDPR takes after the EU General Data Protection Regulation (“GDPR”) and any breach of its provisions is considered a breach of the 2007 NITDA Act. We note that under the NDPR, all public and private organizations in Nigeria that control data of natural persons (including FinTech companies), must within 3 months of the issuance of the NDPR, make available to the general public their respective data protection policies, which must conform with the NDPR. More so, within 6 months of the issuance of the NDPR, each organization is required to conduct a detailed audit of its privacy and data protection practices.
There is also the recent Federal Competition and Consumer Protection Act 2019 which aims to facilitate access by all citizens to safe products and secure the protection of the rights of all consumers in Nigeria. It further seeks to ensure that all service providers (including FinTech firms) comply with the international standards of quality and service delivery. Despite our reservations on some of the provisions of the Act, we are interested in its operational impacts on the Nigerian FinTech space.
We expect to see more enforcements within this space, even as it affects the FinTech sector. The Data Protection Bill and the Digital Rights and Freedom Bill are also under consideration. If passed into law, they would deepen the Nigerian data protection and privacy regime.
The discourse on the application of artificial intelligence (AI) in FinTech is intense. Within the Nigerian financial services industry however, AI proliferation is still very much in its first phase, but heating up. We have seen traditional banks in Nigeria launch AI-powered digital assistants like the Stanbic IBTC BlueBots — designed and deployed to reduce human or manual intervention, eliminate errors and reduce the cost of processing in the bank’s reconciliation processes — Access bank’s Tamara, UBA’s Leo and FCMB’s Temi, just to mention a few. FinTech startups as Kudi.ai use AI to facilitate financial transaction and payment on chat platforms like Facebook Messenger, Slack, and Telegram. Mines.io also uses AI technology in mining high-volume data like phone records, bank records, and payment transactions in real-time, to instantly assess credit risks. We are also aware of the strides FinTech firms as Lidya.co are making within this space. The Federal Government (“FG”) also recently expressed its interest to key into the International Telecoms Union (“ITU”) Mandate on AI ecosystem. It is not surprising that the Nigerian Stock Exchange (“NSE”) recently launched the X-Bot, an AI-powered Chatbot that responds directly and automatically to enquiries through Facebook Messenger.
In our view, the opportunities for the application of AI in the financial services industry are immense and we expect the effect to grow significantly in the next few years. We note, however, that while AI shows great promise for the Nigerian financial industry, it is likely to be more of an evolution than a great leap forward into new data sources and methods. In 2019, we expect to see more serious adoption of AI in FinTech, and deliberate efforts towards an unambiguous regulatory framework for AI, particularly for the Nigerian FinTech sector.