It’s the beginning of May in 2024. I have heard the word “Fintech” thrown about my immediate surroundings more times than I can count. It was always one of those trendy words that I paid little attention to previously because I felt no direct implication from what I vaguely considered to be some obscure tech companies that aided my financial transactions to some indefinite extent. However, that recently changed. Now it is now nearly impossible to find a Nigerian who has failed to sing the praises of Opay, Palmpay, Piggyvest or Moniepoint.

The recent bustle of information online and offline about some of these financial helpers being put out of the market to some degree has caused some level of panic and unrest for the average Nigerian who has depended on the services of these companies in his day to day living. While he may have some inkling as to the state of affairs in the financial landscape, what does this news really mean for this non-tech inclined Nigerian and how could he better understand the powers at play? This article presents a fairly simplified overview of the fintech industry, its evolution and some analysis of its prospects in the future of Nigeria.

What exactly does Fintech mean?

Fintech (Financial Technology) is an umbrella term that is composed of varying financial service providers that leverage on existing and emerging technologies to serve the general public. The services the Fintech sector provides range from payments to trade, insurance, lending and investment. Nigeria is currently witnessing a rapid increase in the number of these companies and an associated increase in economic progress. With more transactions occurring through these convenient means, there is much gain accruing to the economy since more service is being rendered to underserved and unbanked communities in the country. According to a report by the African Tech Startups Funding Project, Nigeria’s Fintech sector raised an eye opening amount of more than $600 million in funding between 2014 and 2019. So why does the Government want to limit fintech operations? When we consider the recent news that emerged late in April 2024 of the CBN (Central Bank of Nigeria) directing fintech companies like Opay, Moniepoint, Kuda and Palmpay to cease new customer registration, it does appear that way. The purpose of this ban borders on the Federal Government’s effort to deal with illegal foreign exchange transactions. If you’re like me and have thought considerably on the matter, you may not help but consider this measure a little too rash especially considering that based on the ruling by the Federal High Court in Abuja on April 24th, 1146 bank accounts were ordered to be frozen by the EFCC on the basis of illicit foreign exchange and of that number, 90% were operated by commercial banks, leaving only 10% managed by fintechs. If this all sounds a bit wacky to you, I think it’s a good time to go back in time for a brief history of fintech in Nigeria. An Overview of the Evolution of Fintech in Nigeria

Fintech has been around in the country for a while, represented by companies like the NIBSS (Nigerian Inter-Bank Settlement System) in 1993 though under regulatory laws and backed by the Government as can be inferred by its being owned by all banks licensed to practice in the country including the CBN. The NIP (NIBSS Instant Payment) and NAPS (NIBSS Automated Payment Services) both emerged from this entity and paved the way for the over 200 hundred fintech companies that exist today; beginning with the Unified Payment Services Limited (UPSL) that emerged in 1997. By 2002 Interswitch came into being. At this point, there was a gradual shift to serving unbanked communities. By the year 2003 Etranzact was formed and remains the only fintech company listed in the Nigerian Stock Exchange. Remita must also be mentioned in this pioneering list and it remains associated with licensed bank transactions to this day.

These pioneer fintech entities (we can call them first generation companies) were encouraged by the Government and integrated well into the financial system. They collaborated with high rising external stakeholders such as banks and Government institutions which has given them an unwavering foundation in the fintech scene. This is something their successors still struggle with to some degree as it is more difficult for them to find strong footing with high level stakeholders as their predecessors did. These second generation fintech entities began to emerge relatively quickly, driven by a growing tech-savvy and youthful population. While the pioneers were well integrated into the system and interacted most favorably with banks and licensed institutions, these other companies were more concerned about outreach; enabling the average Nigerian tomato vendor transact comfortably from their place of work. While the pioneering fintech encouraged transactions with large scale businesses, the fintech companies that followed were interested in small scale and medium enterprises. Transactions were no longer thought of as scary bureaucratic experiences that involved big offices and intimidating men and women in suits but could be made easily in a few minutes with small or large capital; it didn’t matter.

This brought a lot of ecommerce to the frontline and several businesses were able to be formed this way thanks to fintech companies like Paga, Paystack and Flutterwave. In turn, more Developers emerged who could handle the API’s and improve payment solutions so that the average Nigerian like you and I could access and use money easily for business or personal ventures.

Again…Why does the Government Hate Fintechs?

Based on our brief history, one can deduce why the Government no longer enables fintechs as it once did with the first generation companies like Remitta and Etranzact. When the fintechs emerged, the Government saw potential in the enterprise and they were willingly involved as stakeholders but over time, more of these companies emerged and the Government became wary of them. Fintechs are largely associated with crypto transactions and financial exchange. If you are no stranger to crypto and blockchain, you must be aware that the whole point of this financial system is decentralized financing which means that payments and other transactions should typically be untraceable. For regulatory bodies, this can cause some cold sweats.

Referring to regulations, fintechs still do not have a proper regulatory framework to keep tabs on their growing number and practices. While the CBN is in fact responsible for regulating financial institutions, there should be a specific framework that targets these companies and favors both their users and providers of the services. Unfortunately, the recent news limiting the registration of new users for fintech is evidence that whatever existing framework in play has not been properly established and the CBN needs more involved hands on deck so as to be well informed before making decisions of this nature.

What does this Mean for Fintechs in the Future?

We could make educated guesses about the different pathways fintech could take in the future. The first one could be that fintech would become severely regulated by the Government, leading to a decline in emerging fintech enterprises and subsequent limitation in practice of existing ones. Like I mentioned earlier, of the 1146 accounts suspected of fraud, the Federal High Court relinquishing its interim order to the EFCC enabled the EFCC to gather that 90% of such accounts belonged to commercial banks and only 10% to fintech. What does this imply? It appears to me that fintech is not the problem and severe regulation would demise the economy as a whole as existing businesses may crumble and potential businesses may never see the light of day. It is a simple chain effect. If the Government severely restricts fintechs, businesses will suffer and the economy would suffer as well. Based on a report by Business Day, SMEs (Small and Medium Enterprises) contribute to more than 45% to the national GDP and make up 96.7% of all businesses in the country. The efficient and accessible transactional ability needed to run these businesses is a service that fintechs provide and without them or in severe limitation, these numbers may drop.

This may be an oversimplified view on the matter but the trend leads here if news such as the one we heard recently continues to occur. A second scenario is the polar opposite of the first. Here, fintechs would be allowed to run their operations uninterrupted by CBN regulations. One cannot help but agree that this may be as bad as the first instance. Without proper regulation, any institution may succumb to illicit ways that could affect both consumer and provider. Illegal currency usage and the like associated with fintechs has made some weary of it. Since the average Nigerian is not as enlightened on digital currencies as he should be, the tendency for him to be cheated and fall prey to ‘419’ in the crypto and foreign exchange space is high. It is therefore up to the companies themselves to set policies in place to tackle such inevitable illicit practices that could occur on their platform and the CBN to enforce regulations that are not severe. If these measures are not put in place, there would be more fear than curiosity over the use of fintechs that the same outcome from the first scenario would befall the second.

Conclusion

As you can see from this simplified analysis, the CBN is put in a position where only sufficient information flow is necessary to regulate fintech operations. Its recent measure is not the most methodical approach in my opinion, as fintech operations have a most wide reach and rash decisions may affect the ever fragile financial landscape. All in all, the future of fintech in Nigeria is largely promising. This is due to an ever increasing population, increased usage of technologies such as smartphones and an improved number of tech-savvy youth today. With efficient regulatory frameworks and in overcoming infrastructural hurdles, Nigeria is sure to thrive in the fintech space thereby ensuring a most financially inclusive future.