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The Opportunities and Challenges of Fintech in Nigeria

Updated: Mar 29, 2021

What is Fintech? Financial technology is the technology and innovation that aims to compete with traditional financial methods in the delivery of financial services. It is an emerging industry that uses technology to improve activities in finance. The use of smartphones for mobile banking, investing, borrowing services, and cryptocurrency are examples of technologies aiming to make financial services more accessible to the general public. Financial technology companies consist of both startups and established financial institutions and technology companies trying to replace or enhance the usage of financial services provided by existing financial companies.

To understand the future of Fintech business in Nigeria, its important to understand how a Fintech business comes into being and what it takes to build a successful fintech model. Fintech companies encompass a broad landscape of businesses, generally around financial-oriented services, and products. Examples of Fintech-related businesses are:

  • Payment infrastructure, processing and issuance, such as services provided by Square, InterSwitch, SystemSpecs, Etransact, Paystack and Stripe

  • Stock trading apps from Robinhood, TD Ameritrade, and Schwab

  • Alternative lending marketplaces, such as Prosper, LendingClub, Kudi and OnDeck

  • Cryptocurrencies and digital cash, a prime example of which is Bitcoin

  • Blockchain technology, such as Ethereum

  • Insurtech, which seeks to modernize and simplify the insurance industry, with companies such as Lemonade, Oscar, and Fabric

  • Money transfer and remittances, including services from TransferWise, PayPal, and Venmo

  • Mortgage lending, such as through LendingHome and Better Mortgage

  • Robo investment advisors, such as Betterment and Wealthfront

  • Neobanks, including Chime, ALATby WEMA, SunTrust, N26, and Monzo

  • Credit reporting, such as Credit Karma

  • Online business loan providers such as Lendio and Kabbage

  • Small business credit cards, payments, and financing, such as through Brex and Fundbox

  • Financial cybersecurity companies seeking to protect institutions from money laundering, chargeback risk. and cybercrimes, such as Forter, EverCompliant, and CrowdStrike.

  • Infrastructure and software to power financial applications, such as from Plaid

There are two types of Fintech businesses: business-to-consumer sales model (B2C) or business-to-business model (B2B). Each model has its own peculiarities and challenges, the business -to-consumer have a shorter business cycle while the business-to-business model has a longer cycle due to slow adoption of technology by business.

Startups in the Fintech space face a number of issues and challenges, from regulatory to fundraising and competitive issues. In this presentation, we will review some of those key issues and challenges.

  • What problem in the financial process is the company’s solution looking to solve?

  • Is there a qualified management team?

  • Is the market opportunity big?

  • What positive early traction has the company achieved? Are there early or pilot customers?

  • Are the founders passionate and determined?

  • Do the founders understand the key financials and metrics of their business?

  • What are the potential risks to the business, especially regulatory risk?

  • Why is the company’s product or service great?

  • Does the company have differentiated technology?

  • Does the company own its own software source code?

  • Are the company’s financial projections realistic and interesting?

  • Can management & shareholders provide market, product, and competitive intelligence?

  • Can management & shareholders help to refine the marketing plan and the customer target list?

Regulatory Issues for Fintech

If you are in the Fintech space, you should anticipate that dealing with regulation will become a daily norm. There is increasing pressure on Fintech startups, globally, to address and deal with existing or potential regulatory hurdles.

It is important to work with regulators and make sure that you hire a capable team member who is dedicated to understanding the trends, can interface with the appropriate regulatory bodies, and who has a solid understanding of any regulatory impact on your product or the way you market the product. Many countries (such as Singapore, Australia, and the UK) have “Regulatory Sandboxes” that can assist and guide Fintech companies.

Fintech companies should expect to engage specialized legal counsel experienced in navigating the morass of laws, regulations, and court decisions that could apply.

With all this competition, a Fintech B2C company should be able to answer the following:

  • What problem do you solve that the large incumbents are not addressing, and why are they ignoring that market segment or opportunity?

  • Are you trying to change customer behavior? If so, what is your approach and why do you think it is possible?

  • What are customers risking if they adopt your solution versus an incumbent’s product?

  • Can you build trust with your customers?

  • How will incumbents react? And if they do, how long will it take them?

  • Do you have any technology that is defensible with your solution?

Cost Effective Marketing to Acquire Customers

Customer acquisition is a significant issue for Fintech startups. To be honest, entire books have been written on the topic of customer acquisition, and the methods will vary depending on whether the company has B2C or B2B offerings. But, in brief, keyways Fintech companies can market themselves are:

  • Search engine ads—Pay Google, Bing, Yahoo, Facebook, or other sites to send you traffic (such as through Google Ads). However, such ads are often expensive and not cost effective, so you need to do testing/pilot programs to see what keywords work and at what price.

  • Company website—Build a great site with lots of high-quality, original content that is search engine optimized as well as optimized for mobile traffic. Continue to add fresh content to the site.

  • Social media marketing—Have a smart social media plan to drive traffic from Facebook, YouTube, Twitter, LinkedIn, Instagram, Pinterest, and other free social media sites.

  • Content marketing—Prepare well-written articles and try to have them posted on other quality sites with links back to your site. Employ content widgets on third-party websites through Taboola or other third-party content discovery platforms.

  • Affiliate programs—Affiliate programs work as a mechanism to pay a finder’s fee to an affiliate who refers a client to a Fintech company. For example, a credit card issuer may pay a N1,000 fee for each client referred who signs up for the issuer’s credit card.

Getting Early Adopters and Avoiding Slow Sales Cycles

Getting early revenue traction is critical to determining initial product market fit. Early adopters are important for this reason. We recommend a pipeline that is a mixture so that the product marketing and engineering teams can receive feedback on the product sooner and are able to iterate on product design to meet market requirements.

Getting early adopters in B2C is much easier, especially if a company uses incentives. Companies need to understand their market segments, the sales cycle for the “proof of concept” phase, and the sales cycle for broader commercial rollout. In a company’s early days, it is fine to be opportunistic. but at some point, usually when the company reaches millions in revenues, an organized sales process needs to be implemented. At this point, an opportunistic approach can become problematic when addressing issues associated with competing sales, engineering, and customer requests.

Too many companies don’t mature organizationally and remain sales opportunistic. Taking the time to prepare a detailed market segmentation and to build a sales process and pipeline will pay off in the long term.

Cyber Security and Data Privacy Issues

Data privacy, cybersecurity, and data breach issues are especially important in the Fintech space. Fintech companies often have access to highly confidential information on individuals: NIN numbers, BVN, passport details, driving license, credit card information, net worth, income, and much more.

Hackers have become increasingly sophisticated at illegally accessing a Fintech company’s data. Their latest stealth methods have made it more difficult for companies to detect and defend themselves from such attacks. Advanced covert surveillance techniques allow attackers to monitor and steal data—often sensitive proprietary information or strategies—over a long period of time without detection.

A delay by a company to discover and report a data breach can result in significant negative publicity, as well as legal exposure, including the risk of substantial fines and potential liabilities due to class action lawsuits and shareholder derivative actions.

Shareholders and management may want to review the company’s procedures to protect the data of employees, customers, and business partners, as well as the company’s networks and systems.

Questions Fintechs may ask include:

  • What is the inherent cybersecurity risk of the company’s business model?

  • Does the company have a written cybersecurity program that establishes administrative, operational, and technical controls to mitigate security risks?

  • Does the company have appropriate policies, including at a minimum an information security policy, an employee-facing acceptable use policy, and a data classification and handling policy?

  • Does the company conduct regular risk assessments, and vulnerability and penetration testing of its systems?

  • Does the company have dedicated security personnel?

  • Does the company perform an annual risk assessment related to privacy and cybersecurity?

  • Does the company train its employees and contractors on privacy and security best practices?

  • Does the company have a comprehensive incident response plan, and is it tested?

  • Does the company manage vendor risk?

  • Does the company have a business continuity and disaster recovery plan, as well as backup protocols?

  • Does the company protect the physical security of its facilities and assets?

Intellectual Property and Technology Issues for Fintech Companies:

The questions shareholders should pursue include:

  • How differentiated is the company’s technology?

  • What competitive advantages will there be over existing Fintech offerings?

  • How easy will it be to replicate the company’s offering? How long will it take?

  • How costly will it be to fully build out, maintain, and enhance the offering?

  • What key intellectual property (Source codes) does the company have (patents, patents pending, copyrights, trade secrets, trademarks, domain names)?

  • How was the company’s intellectual property (Source codes) developed?

  • What comfort is there that the company’s intellectual property does not violate the rights of a third party?

  • Is the intellectual property (Source codes) properly owned by the company, and have all employees and consultants assigned the intellectual property over to the company?

  • Would any prior employers of a team member have a potential claim to the company’s intellectual property?

Business, Revenue and Expense Model Issues:

When building a company’s financial model, it is important to keep expenses as lean as possible until a revenue trajectory can be established. We suggest building the model from the ground level. On the expense side, start with the core engineering team, add a business development person, and one good “athlete” who can be a multi-tasker. Don’t go crazy on fixed expenses.

Fintech startups are usually very accurate at projecting their expenses, but it’s far more difficult to project revenues. It can be difficult to judge when to ramp up expenses.

Once the burn rate gets too high and revenue does not materialize, it is usually difficult for a company to recover. Early-stage companies should avoid the following expenses:

  • Fancy offices and too much office space

  • Too many Fixed Assets i.e SUVs

  • Too many parties paid for by the company.

  • Having a large sales and marketing team before product/market fit has been established.

  • Too many pilots with large financial institutions without predetermined goals/metrics that will lead to full-scale implementation.

  • A lengthy period of product development before being able to launch a minimally viable product.

  • Employee salaries comparable to Citi, GT Bank, or a merchant bank

  • Long-term contractual commitments

Key early expenditures for Fintech companies should include:

  • Engineering talent

  • Product marketing talent

  • A solid business development employee

  • Decent initial office space located in an area where the company can attract top talent

Legal Issues for Fintech Startups:

Fintech Shareholders should look at several questions to ensure a Fintech company’s house is in order from a legal perspective:

  • Is the company paying attention to important contractual issues?

  • Has the company complied with applicable securities laws when issuing stock or options?

  • Has the deal and equity split between co-founders been made clear? What happens if a co-founder leaves the company?

  • Is the company in compliance with employment laws? Does it have appropriate policies in place? Has it obtained all appropriate employment documents from employees?

  • Are all employees and contractors required to sign Confidentiality and Invention Assignment Agreements?

  • Is the company taking appropriate steps to protect itself in its customer contracts (liability limitations, arbitration provision in the event of a dispute, etc.)?

Opportunities and Benefits of Fintech:

  • Fintech improves the health of traditional financial institutions by enhancing performance and improving profitability. When banks and financial institutions see fintech firms as partners in this journey, rather than firms selling products, the opportunities begin to expand.

  • Fintech solutions provide a way for legacy financial institutions to improve customer retention and preference. Data enrichment is an extremely powerful tool that quality fintech firms bring to the game.

  • Fintech firms provide an opportunity to enhance loan portfolio diversification. When you have the ability to become more granular with each customer, you are more likely to find (and offer) consumers the exact products they need, when they need them.

  • Fintech can help solve industry-specific points of pain, like securing credit card processing, transferring money, and processing loans quickly. With a strong fintech partnership, traditional financial organizations benefit from the leverage of a state of the art, secure network that can manage time-consuming and lengthy tasks quickly and effortlessly.

  • Fintech data can provide financial institutions a keener insight into what their customers are doing with their money. This again speaks to the power of data enrichment fintech partnerships can provide. Further, the power of the cloud that quality fintech firms have tapped into is another tool in delivering product offers and services specifically tailored to individual customers in real time.

The Winning Fintech Formula

The point is, there is a huge amount of benefit that fintech firms can provide financial institutions. This isn’t a zero-sum game, where one has to win and the other has to lose.

By combining the stability, product variety, customer knowledge and financial strength of traditional banks and financial institutions with the data enrichment, user experience and modern platforms that quality fintech firms can provide, both can build an amazingly rewarding experience for each other and their customers

The real goal for Fintech companies is to find the right mix of fintech solutions and traditional banking. Play to the tried and true strengths of each type of organization while also opening up to new opportunities to access tools that will empower consumers and reinvigorate marketing opportunities.

Fintechs should be committed to delivering the next generation financial experience to the consumer, so those partnerships can build an even better experience for the consumer than either organization can provide on their own. This isn’t about stealing market share … it’s about building a new paradigm for everyone.

So, the next time you read a hand-wringing article about how fintech is going to make retention and acquisition more difficult, or cross-selling more challenging, keep things in perspective. Just remember that there are a number of fintech firms out there that can turn your concerns into opportunities … growing your revenues, building your customer base and helping you succeed for decades to come.

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Okwudili Paul Mbamalu
Okwudili Paul Mbamalu

Great Article

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