Fintech is booming, despite a weak economy. Can this last?

JIT BUZZ about fintech in Lagos, the commercial capital of Nigeria, is so strong that even those without internet access cannot miss it. Flashing billboards advertising Kuda, a digital bank, dominate traffic jams, and signs for Paga, a mobile payment company, adorn thousands of corner stores. Investments have also flowed in. In March, Flutterwave, a digital payments company, raised $170 million, making it Africa’s latest unicorn (i.e. a startup valued at over $1 billion). Interswitch, a payments processor, got its horn in 2019 when it sold a 20% stake to Visa, a credit card company. Last October, Stripe, the West’s most valuable private fintech, acquired Paystack, a Nigerian digital payments company, for $200 million.

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While the Big Three enable online payments, a generation of new fintech is bringing products directly to consumers. FairMoney, which provides instant loans, recently raised $42 million in a round led by Tiger Global Management, a New York-based hedge fund. PiggyVest helps people save money; Bamboo allows Nigerians to invest abroad, despite the scarcity of dollars in the country. People should be “very excited” about fintech in Africa, says Makhtar Diop, the head of the International Finance Corporation, the private arm of the World Bank, which has injected $200 million into the sector.

The long-term potential is vast: Nigeria’s population, now around 200 million, is expected to surpass that of America by 2050; around 95% of transactions are still in crumpled bundles of naira. Even so, some Nigerian investors fear the excitement may be overdone, given the country’s unpredictable regulators and economic malaise.

Running a fintech in Nigeria is tough. Electricity and internet are unreliable. Regulators simply ban things they don’t understand, some founders complain. In April, apps that help Nigerians invest in overseas-listed stocks were suddenly told by the regulator on Twitter that they were breaking the rules. (The government later banned Twitter as well.) Earlier in the year, the central bank upset fintechs by banning trading in cryptocurrencies, which had grown in popularity as the naira fell in value. ‘Fear of the Central Bank of Nigeria is the beginning of wisdom,’ Echo’s Eghosa Omoigui jokesresumea venture capital fund.

Perhaps the biggest challenge for fintechs is the grim state of the economy. Panglossian pitches are common for startups everywhere, and those in Nigeria are no exception, highlighting the country’s large population. Yet, with over 40% of Nigerians living on less than $1.90 a day, inflation at 18% and population growth exceeding that of GDPthe actual market for many fintechs is much smaller.

Falling per capita income is limiting fintech growth opportunities. Payments companies can still convince more people to convert existing cash transactions into digital ones. Other fintechs, which target the smaller group of Nigerians with savings to invest, could win business for a while by poaching disgruntled bank customers. But if these companies want to maintain their profits, they need existing customers to transact more. It’s more difficult if people are getting poorer. The average transfer value in a large payment company, for example, is almost stagnant, despite inflation. Some fintechs, such as Bankly, are targeting the estimated 60 million Nigerians who are unbanked. Yet signing up these often very poor clients takes more time and investment than many investors realize, says Tomilola Majekodunmi, its managing director.

Savvy fintechs are trying to escape the impasse by looking beyond Nigeria. “The goal is to diversify as quickly as possible,” says Nichole Yembra of Chrysalis Capital, a Lagos-based technology investor. Many founders value Lagos for its dynamic workforce, but also see it as a gateway to Africa. Diversification also avoids regulatory risks. Bamboo spans Ghana and speaks Kenya. Flutterwave operates in over 15 African countries.

Yet even Nigerian investors who believe in the potential of fintech fear the excitement is spiraling out of control. Eric Idiahi of Verod Capital Management, a private equity firm, sees “crazy valuations” and warns of “huge losses”. There are mainstream fintechs talking about “valuations over $500 million, and I don’t know anyone who uses the product,” says Maya Horgan Famodu of Ingressive Capital, a venture capital firm. Foreign investors may underestimate how difficult it is to expand into new markets, each with its own regulator.

Losses are part of any technology ecosystem, and exuberance at least allows customers to benefit from financial innovation today. But Ms Horgan Famodu fears that since much of the funding for Nigerian fintechs comes from overseas, the losses could lead the market to “overcorrect”. If foreign capital flees, it could also cripple companies with strong business models. Yet leaving Africa should not be the only option if fintech runs into trouble. Many other tech sectors on the continent are “completely ignored”, says Omoigui. Plus, “margins can be so much better.” The loss of one sector can be a gain for another.

This article appeared in the Finance and Economics section of the print edition under the title “Out of the slump”

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