Over the last few years, the African fintech sector has seen rapid growth and has attracted the attention of a number of well-resourced venture capital firms. According to one might expect, Nigerian fintech companies have been the most successful in Africa when it comes to funds raised and transactions executed.
Nigeria’s Burgeoning Fintech Scene
This has enticed VCs into investing tens of million of dollars into various Nigerian fintech companies. In fact, a few fintech startups that originated in Nigeria, the continent’s most populous country, have managed to secure funding in excess of $100 million.
The fintech startup have expanded their reach across Africa by using the money raised. They also increased the range of services that they provide. Many people in Africa who are financially disadvantaged have been able to benefit from the fast growth of fintech.
However, critics of Nigeria’s fintechs have argued that some of the VC-backed startups appear interested in brandishing volumes or the number of transactions performed over a certain period. The critics assert that only a small number of them are worried about their future business prospects.
In order to gain some insight into this and other issues within Nigeria’s growing fintech industry, Bitcoin.com News recently reached out to Eghosa Nehikare, the CEO of a financial services fintech startup, Multigate. Nehikare responds to Whatsapp questions by writing and shares his views on the reasons why Nigerian fintechs account for more funds raised through startups.
Nehikare shared his thoughts on the Nigerian fintech sector and also explained the reasons he believes the industry will grow.
Bitcoin.com News (BCN). What are you doing to start a fintech business?
Eghosa Nehikare (EN):My path and motivation began many years ago with my disowned father. He had told me that I hadn’t completed all of my UK medical educations. My father and me have since reconciled, and we are now best buddies. After moving to Lagos, I worked for Africa Courier Express. I was able to help them develop their food delivery service in just 11 months. This helped them become the biggest food delivery provider in Nigeria. Venture Garden Group (VGG), in which I was a Vice President, hired me as the General Manager. This allowed them to build their fintech subsidiary and generate revenue growth of over 1000%.
However, I discovered that the fintechs were not able to solve all of the issues faced by Nigerian large corporations (and Africa in general). It was evident that the major fintechs — though very successful at it — provided solutions to SMEs and eCommerce giants, particularly in the aspect of payment collections. As such, the market was thriving. [payment collections]For me, it was a vast ocean. This led me to the conclusion that my business would be focused on financial technology solutions for large corporate enterprises, with the goal of simplifying treasury management, cross-border payments, and facilitating remittances to African organizations.
This is what motivated me to work with large corporations (including banks and fintechs) on treasury issues and cross-border payments. That same motivation drove me to obtain an Executive MBA from Oxford University, where I’m currently studying. Multigate is ready to go to the next level thanks to my experience at Oxford.
BCN: Tell us about your Fintech Journey so far, since you entered the industry in 2017.
EN:Two (2) years after our inception, we were a necessary part of many large pan-African fintechs, banks and businesses. Because we solved the same complex problem, they were all able to embed us in their cross-border operation fabric. Multigate’s fintech treasury service has been provided with an aggregate total of $4.3bn so far.
Multigate, the African Fintech that was onboarded SWIFT, became the first shared-platform provider of corporates and other fintechs. This was — and continues to be — a significant achievement for us because it enables us to solve a major problem in cross-border payment and treasury management, which is the corporate-to-banks (i.e. It is a one-to many (or multiple) messaging operation challenge.
BCN: According to reports, fintechs account for more funds raised in startups over the last year. Your opinion: What is the main reason fintechs have received more funding and attention than other tech startups?
EN: From my experience, the reason for this is a function of the interrelationship between certain variables such as (1) the scale potential of the business, (2) the level of patience (or impatience) of the VC/PE providing the funding, (3) the proportion of “true” addressable market size of the fintech in comparison to other tech startups, (4) and ultimately the return on investment (ROI). Due to the high demand for fintech solutions by the majority of Africans, African Fintechs offer greater potential scale than most other startup tech companies in the region.
Because of the high demand for solutions by fintechs, African Fintechs are more scaleable than any other startups in this region.
From another angle, with the recent exponential growth of most fintechs, a large number of VC and PE firms — with a relatively high ROI financial obligation to their LPs [liquidity providers] — are left with no choice but to channel a large proportion of their designated African fund to fintechs. On another note, when you compare the “true” addressable market size of most fintechs to other tech startups, it becomes apparent that fintechs have a “boundary-less” market compared to other tech startups, thus allowing them to scale faster than their peers. Finally, and again, in relation to the matter of ROI, fintechs are more likely to generate higher returns given the nature of their cost profile vis-à-vis the fintech’s growth and rate of scale.
The above points are not meant to imply that fintech building is simpler than any other startup. It is one of most difficult endeavors to establish a fintech company, secure investors, licenses and partner with banks.
BCN: Why did you see a rapid rise in transaction processing not only from your company but also from Nigerian fintech startups?
EN: To answer this, consider the analogy of a water tank that’s being filled with water at a steadily increasing rate. It needs efficient piping to allow multiple taps to be supplied with water at the correct pressure. The Nigerian Business Ecosystem is like a water tank. Water is the result of business transactions.
Fintech startups are built on the efficiency of piping and the pressure pump system. The flow and pressure of transactions between the ecosystem and other areas of Nigeria’s economy will increase the more fintech solutions that are implemented to the tank. However, this rapid growth will end at some point.
This time is still far off, however. In short, transactions have risen rapidly due to an increase in Nigeria’s business sector and the rise of digital economies in Nigeria. Customers are constantly demanding new products. Another important aspect is the fact that fintechs continue to have the opportunity to create a wide range of products to meet customer demand.
BCN: In the past few years, Nigeria’s rapidly growing fintech industry has attracted the interest of some of the most renowned VCs. Some fintech startups in Nigeria have become million-dollar businesses thanks to these well-resourced VCs. Do you feel that the pace of growth will be slower in Nigeria?
EN:There is no reason to believe that Nigerian fintechs will experience a slowdown in their growth. Undoubtedly, the competition will become more vicious and aggressive but due to the inchoate demand and ever-increasing size of the aforementioned “business ecosystem,” the demand for fintech solutions will continue to increase. The trajectory of the development and growth of the fintech space in Nigeria can also be academically explained using concepts from an interesting book I recently read, “The Evolution of New Markets” by Paul Geroski where he explains how new markets develop and the characteristics they present as they develop.
First of all, the arena is filled with random products in random or uncoordinated designs. Superior apps and products emerge out of the arena. Afterwards, a seemingly “sluggish” development of the superior products/apps, then comes a breakout and very fast acceptance of the technology across various markets. Nigeria’s fintech industry is at the point of rapid acceptance across different markets.
Recently, the regulator, Central Bank of Nigeria (CBN), has created a favorable environment for fintech companies. The banks are now more receptive to fintech partnerships and “previously resisting” customers are now more willing to engage. There couldn’t have been a better time to be in the space.
BCN Critics claim their sole interest is in obtaining funds from the risk-taking VCs. Are you in agreement?
EN:Every market, i.e. In every country (i.e. Nigeria and the Western more developed countries), there will be both good actors and bad ones. I have found that while these poor actors tend to bring down the industry’s image, it encourages good actors to produce more value for customers, investors and employees. This creates a positive net effect for the fintech sector.
To answer your question, however, I’m aware of the accusations, but cannot verify it as I don’t have any tangible proof to support them.
BCN: Nigerian founders of fintech are accused of being more focused on the high volumes that their companies process than they are the revenues. BCN: Nigerian fintech founders prefer to use a model known as freemium, which is essentially a model where revenue generation and profitability are prioritized. Is this your reaction?
EN:There are many factors that make every company unique, including their goals and motivations. Most fintechs find the “large volumes processed” as an objective measure of “output” to evaluate performance in comparison to other fintechs. Similar to how banks place value on customer deposits more than profits, fintechs also value volumes over revenues or profits.
Sometimes investors (VCs and PE companies) can direct this direction. However, I must add that just because they showcase the large volumes processed, doesn’t necessarily mean they don’t focus on the revenue generated or profitability. I will like to believe that whilst the external metric of evaluation is “volumes processed,” the internal metrics that keep them up at night are revenue (particularly gross profit) and profitability.
BCN: We will now discuss cryptocurrency. The Nigerian central bank announced that it asked banks not to facilitate or process any cryptocurrency-related transactions in February 2021. Now it’s been over a year since this directive was issued, yet interest in cryptocurrencies remains strong. Are there any major factors that Nigerians are still interested in bitcoin and other cryptocurrencies?
EN:Noteworthy is the fact that the Central Bank of Nigeria was motivated by good and noble intentions. The Central Bank of Nigeria explained it was done to combat terrorism financing, as well as other criminal activities. This is something we’ve seen in Nigeria, and that includes terrorism. As we have said, every market will be populated by both good and bad players. Through my conversations and engagements, I discovered that Nigerians continue to be interested in cryptocurrency trading due to its lucrative (but risky) nature.
Most traders who are responsible and persistent in their trades have found it a reliable source of income. Nigerians, as most people know, are hardworking, ambitious and will do whatever it takes to succeed in any field.
Additionally, the increased interest in cryptos like bitcoin can be attributed to the growing youth population of the country.
BCN: What can Nigeria’s government do to support the growth of the fintech sector?
EN:The water-tank metaphor explains that the fintech industry can only expand if two variables are improved and optimized: (1) the capacity of the water tank (the Nigerian financial ecosystem), and (2) the output pipes (quality of fintechs, and support they receive). For the fintech space to grow, the size of the business ecosystem and transactions need to grow, which can be achieved with the right “positively impactful” policies by the government.
The various regulatory agencies must continue their support in the areas of tax incentives and innovation funding. They also need to monitor and support transactions and provide compliance support. We will continue to see growth and expansion of the fintech industry with the collaboration between government agencies and fintechs. We will see a tremendous increase in transactions within Nigeria’s business community if we have the right economic policies.
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