2021 was quite the year for Fintech in Nigeria.
The ecosystem saw huge injections of VC funds, the highest we’ve ever seen: $963 million (greater than the past two years combined). Investors also showed an appetite to bet on verticals outside of payments. Crypto startups (i.e. Yellow Card, Vibra) and API fintechs (Mono and Okra) announced fundraises that year.
Against that backdrop, 2022 was humbling. Total funding fell by 27% to $702 million as investors cut back on spending due to interest rate hikes in the US. Then it was almost as if we couldn’t get enough of scandals from some of the largest players on the scene: poor workplace cultures, sexual abuse allegations, and the FTX scandal that sent a ripple across many local crypto startups.
Key takeaways:
- High inflation, rising interest rates, and the colossal downturn in crypto markets made 2022 a very sobering year for the Nigerian
We learned that nothing lasts forever between the highs of 2021 and the lows of 2022. So what tone would most likely define 2023? More highs or more lows?
Today, we dish out our top six predictions for the Nigerian Fintech ecosystem in 2023.
Prediction 1: Pay small-small (aka Buy-Now-Pay-Later)
If you took ₦200,000 to splurge on clothes at Debra’s grace (a clothing store in Lagos) in November 2021, that same amount would only fetch you ₦165,180 worth of clothes if you went shopping again in November 2022. Inflation would have eaten the leftover ₦34,820. In November 2022, inflation hit a 17-year high (21.5%). The last time we had inflation higher than current numbers was September 2005 (24.3%).
This grim macroeconomic picture does not seem to be reversing any time soon; the International Monetary Fund, IMF, forecasts slower economic growth for Nigeria in 2023 (‘22: 3.2% vs ‘23: 3.0%).
Nigerian consumers are feeling the heat, and being aware of that; merchants will offer customers the option to shop and pay back in instalments. Local Buy Now Pay Later (BNPL) startups in the market have adopted the playbooks of their foreign counterparts (i.e. Klarna and Affirm). They’ve built e-commerce marketplaces where a shopper can only access BNPL deals by browsing catalogues of inventory on an app.
But, we will see less emphasis on this app-centric model and a shift towards organically embedding BNPL options into a shopper’s normal purchase journey. Wakanow is already doing this by displaying a “pay small small” option at the checkout on their website. This may be the year BNPL takes a step to adapt itself better to the Nigerian context.
Until then, I will patiently wait for my landlord to finally catch that BNPL bug.
Prediction 2: POS Agents will keep their jobs
If you’re a POS agent, December 6, 2022, was probably the day your blood pressure hit the roof. The CBN announced a new weekly limit on cash withdrawals of ₦100,000 for individuals and ₦500,000 for businesses. The CBN basically told agents to pack up and close shop overnight.
Two weeks later, the CBN did an about-turn and announced they would be upping those thresholds (individuals: ₦500,000 and businesses: ₦5 million). The new limits are less likely to make agents’ lives difficult. This is because many agents use the proceeds from their regular day business (i.e. selling food items, airtime vouchers, local bars, etc.) for the cash supply for their POS service. And according to a 2021 survey by NBS, 64% of MSMEs generate below ₦50,000 in sales every month, meaning that their cash flow in a single month falls way below CBN’s cash limits for a single week. However, larger agents in high-traffic urban areas may generate higher cash flow.
That was a jarring way to close out 2022, but if there’s anything the CBN does well, it’s bringing the shock factor.
Prediction 3: Boom, boom, boom in bank transfers
Now that the CBN has asked that we give up our old notes (for new mint that was soaked longer in blue dye) and set limits for withdrawing cash, cash will be in shorter supply. Individuals and businesses will respond to this by making more instant peer-to-peer payments (aka bank transfers) via their bank apps or USSD short codes.
This is not new. Instant bank-to-bank payments have been on a roll.
In 2021, Nigerians moved about ₦272 trillion ($682 billion) of value via instant payments. Get this, that was about 1.5 times Nigeria’s GDP that year.
Expect to see more exponential growth in 2023. More merchants will start accepting instant payments at checkout on POS terminals. Kiss the days of “please wait for my supervisor to confirm your transfer” goodbye. Nigerians will also do more bank transfers and fewer cash withdrawals at POS agent kiosks as they try to avoid higher fees for cash withdrawals.
I’ll be honest, in all of this, my only worry is whether NIBSS (the network super-highway that makes instant bank-to-bank payments possible in Nigeria) can keep up with the surge in network traffic.
Prediction 4: Principalities in high places
But who else is excited about Nigeria’s growing digital payments ecosystem? Fraudsters. In 2023, fraudsters will have a field day. Brace up.
Just look below at how fraud reports have shot up each year since 2014 (the earliest year that data is available).
The number of online fraud reports made in 2021 was about 120x the number of reports made in 2014.
Yet, the real figures are actually worse. We can’t determine just how much fraud is going on. The data published by industry watchdogs like NIBSS and NDIC rely on the figures that banks choose to report to them—emphasis on ‘choose to report’. You’re better off getting my 2-year-old niece to come clean on the number of cookies she’s hiding under her pillow. No Bank or Fintech wants the regulatory authorities coming to bang on their doorstep. Trust me; it’s never pleasant.
Also, in light of the high-profile fraud allegations that came out in 2022, fintechs can expect to be up against more selective investors in 2023. Factors like whether or not a startup has robust enough anti-fraud and basic AML/CFT safeguards (anti-money laundering and counter-terrorist financing) will be taken more seriously before parting with any extra dollar.
Prediction 5: Cross-border fintechs will not escape CBN’s hawkish gaze
The problem of remittance, moving money seamlessly (and affordably) in and out of Nigeria, won’t see much innovation this year. And that’s sad because there probably hasn’t been a more ideal time to run a remittance service. Of all your high school classmates that you started 2022 with, chances are that half of them switched zip codes last year from Lagos to Canada. The Japa wave last year was reaaaal.
And that means more remittances. In 2019, the amount of money sent home by our brethren abroad ($24 billion) was more than all we made from our non-oil exports that year ($10 billion). And this does not even include all the remittances that come through informal channels (i.e. cash carried by friends and family visiting from abroad). The Centre for Financial Regulation and Inclusion (CENFRI) estimates that informal remittances are likely worth half of the formal flows—meaning that an additional $12 billion wound up in the country via informal means in 2019.
This year, expect to see more Fintechs try to crack the code on moving money across borders. But they are likely to wind up like their predecessors: strangled by CBN’s thick regulatory red tape. Need I do a history refresher on WorldRemit, Risevest, and Bamboo?
Prediction 6: Dodgy borrowers and lenders will continue their game of peek-a-boo
In 2023, Nigerian lenders and bad borrowers will continue their game of hide-and-seek. Today, a borrower can use their debit card to apply for a ₦10,000 loan on Kuda Bank’s app and then deactivate their card, so Kuda has no way of recovering those funds. They’ll then use a different card to apply for another ₦12,000 loan on Fairmoney’s app.
This menace keeps digital lenders (like Aella Credit and Migo etc.) up at night. Yes, yes, we know CBN developed a solution for this issue. That’s the Global Standing Instruction (GSI) which permits lenders to debit any borrower's bank account to recover loan payments that the borrower owes.
But let’s be honest. The GSI scores points for effort but none for ease of use. Any lender that has tried to use this system to debit a borrower’s bank account will tell you that it is as good as driving a manual truck on the speed lane on Third mainland bridge with a flat tyre—a real manual pain. For example, the GSI process requires the borrower to visit a bank branch to approve direct debits on their account.
Nigerian retail lenders need a workable solution that can automatically debit any of a borrower's existing bank accounts to recover their dues. Word on the street is that some Fintechs are already trying to develop one. But the only likely contenders will be those with strong enough rapport with the big commercial banks for their solution to ever see the light of day. After all, the banks have to consent to have their customer accounts auto-debited (disclaimer: my personal bet is on Appzone).
All aboard!
Whether this list left you hopeful or apprehensive about the year ahead, we can all at least raise our glasses for the one area the sun will shine brightly on this year: local payments. I will be keenly watching out for how operators will harness all that raw payment data to build more intuitive financial (and even non-financial) products.
Nonetheless, without further ado, we move forward into the year ahead, hopeful for the positives that manifest and expectant for the curveballs 2023 is sure to throw us.
