Fintech growth in Nigeria and challenges for SMEs

The rise in Financial Technology companies has birthed novel business approaches to the Small and Medium-sized Enterprises space. CHRISTIANA UNAKALAMBA takes a look at the challenges small business owners could face with Fintechs

With the rapid growth of Fintech in Nigeria, especially within the SMEs, the technology seems to have come to stay. Speaking at a recent virtual conference themed ‘Fintech Nigeria: The State of Play’ recently, the Chief Executive Officer of Ecobank, Patrick Akinwuntan, disclosed that amid the Coronavirus Disease crises, the Fintech space grew by 800 per cent.

Fintech, an innovation that aims to compete with traditional financial methods in the delivery of financial services, is an emerging industry that uses technology to improve activities within the finance sector.

Nigeria has grown to become one of Africa’s fastest-growing end points for new investments; as such, Fintech products have gradually become disruptive to traditional banking service providers.

According to Frost and Sullivan, a global business consulting firm involved in market research and analysis, Nigeria’s Fintech revenue is expected to reach $543.3m in 2022, from $153.1m in 2017.

The firm stated, “The growth in Nigeria’s Fintech market is partly due to the development of payment services driven by the e-commerce market. Growing smartphone penetration, estimated at 28 per cent in 2016, was also a contributory factor. There is a growing number of Fintechs in Nigeria, driven by the high volume of start-ups. Large mainstream banks are also establishing digital financial products to minimise cost and meet growing demand.”

The disruption

Considering these developments, what does the disruptive invasion of Fintech companies portend for owners of small businesses in Nigeria, bearing in mind the value products developed by Fintechs bring to address customers’ needs. As it is, the Nigerian business environment is yet to fully embrace Fintech or come to terms with the digital reality that has come upon it with the advent of COVID-19.

According to the CEO of Justin Stores, Ndubuisi Justin, “Prior to the advent of Fintechs, banks and other known financial institutions were assisting SMEs. But today, the ecosystem has changed. Fintech companies are beginning to play major roles in small businesses, for instance, through ease of access to loan facility.

“However, SMEs tend to have less disclosed information and knowledge as to how to leverage opportunities in the Fintech space for the growth of SMEs and start-ups. As such, the rapid development of Fintechs is increasing the need for financial education on new technology in SME financing.”

The fears

Although, some fears that small business owners experience in Fintech – which usually revolve around security – may not be unfounded, regulatory bodies are gradually stepping up with policies to forestall the risks surrounding doing business with Fintechs.

The former Director, Communication and Public Affairs Department, Nigeria Deposit Insurance Corporation, Basir Ibrahim, at the NDIC Editors’ Forum last year, pointed out, “Nigeria now has over 200 Fintech stand-alone companies in addition to a number of related solutions offered by banks and Mobile Network Operators. Nigeria’s Fintech brands raised over $600m in funding between 2014 and 2019.

“Managing the risks associated with emerging technology without stifling innovation has become a major theme among regulators and policy-makers. In Nigeria, for instance, the Central Bank recently released a draft framework for regulatory sandbox operations to encourage innovation, especially for start-ups. The NDIC equally established an ‘Innovation and Fintech Unit’ to drive its agenda for emerging technology and provide solutions to improve the safety of depositors and the banking system.”

Even with this seeming assurance, security still remains a major concern for small business owners in their dealings with Fintechs. Virtual security does not equate the more tangible securities evident in traditional banks.

Other concerns

Other concerns owners of small businesses in Nigeria may worry about include credit options for business growth. Fortunately, the opportunities for this are enormous among existing Fintechs in Nigeria. A paper from the Minneapolis Federal Reserve Bank disclosed, “Fintechs initiated more than $41bn in loans in 2017 and the figure has continued to grow ever since.”

Nigeria presents a huge market for digitised unsecured loans.

“Nigeria’s domestic credit to the private sector (as a percentage of Gross Domestic Product) was 10.9 per cent in 2018,” according to Nairametrics in a report, ‘Nigeria’s Fintech industry 2020.’

Senior Editor of the Economist Intelligence Unit, Melanie Noronha, while presenting a report entitled ‘State of Play: Fintech in Nigeria,’ disclosed that Fintech firms were playing heavily in the loan business, as they have a wide range of digital lending products targeted at SMEs.

A senior partner at Afrinvest, Khaled Ben, noted, “There is a new wave of start-ups in the lending space, which are lending to both consumers and small businesses. The payment services have built up data that allow these start-ups to develop models of credit-worthiness for either people or companies in a continent where there is very little data about people’s credit ratings because they never had formal access to the financial sector.”

Nonetheless, the gains of SME adoption of Fintech in business operations far outweigh the challenges. Several indices in the African economy support this.

According to a report from Mckinsey, some of these indices include a youthful population, increasing smartphone penetration and a focused regulatory drive to increase financial inclusion and cashless payments.

“As Africa’s largest economy and with a population of 200 million, 40 per cent of which is financially excluded, Nigeria offers significant opportunities for Fintechs across the consumer spectrum, notably within the SME and affluent segments and, increasingly, in the mass-market segment.

“With savings interest rates between four and five per cent yearly and inflation at 11 to 12 per cent pre-COVID-19, traditional savings accounts have proven to be ineffective in achieving financial goals,” it stated.

Last line

Despite these challenges, SMEs could begin to look to leverage the digital prospects available in Fintech, as there exists a vast opportunity for entrepreneurs to build business solutions that can truly change the lives of millions of Nigerians.