The African fintech industry has grown rapidly over the past few years, and this has attracted the attention of some venture capital firms with significant resources. As one would expect, Nigerian fintech startups dominate the continent in terms of funds raised or number of transactions conducted.
Nigeria’s booming fintech scene
This dominance has convinced venture capitalists to pour tens of millions of dollars into various Nigerian fintech projects. In fact, several fintech startups originating in Nigeria, the continent’s most populous country, have managed to secure over $100 million in funding.
Using the funds, the fintech startups have not only expanded their presence on the African continent, but also increased the number of services they offer. Overall, the rapid growth of the fintech industry is said to have benefited many financially isolated people from Africa.
However, critics of Nigerian fintechs argue that some of the startups backed by venture capitalists seem interested in branding the volume or number of transactions conducted in a given period. Few of them are concerned about their business prospects, critics argue.
To understand this and other issues of Nigeria’s growing fintech industry, Bitcoin.com News recently contacted Egosa Nehikare, CEO of financial services fintech startup Multigate In written responses to questions sent via Whatsapp, Nehikare gave his thoughts on why Nigerian fintech companies account for a large share of startup funds.
In addition to outlining his views on the Nigerian fintech industry, Nehikare also explained why he thinks the industry will continue to grow.
Bitcoin.com News (BCN): What motivated you to get into the fintech business.
Eghosa Nehikare (EN): My journey and motivation started many years ago when my father disowned me for not completing a full medical degree at a university in the UK (I completed my undergraduate degree, but dropped out of MBBS). But keep in mind that my father and I made up and are now best friends. So, I moved to Lagos and joined Africa Courier Express (ACE), where I helped them create a food delivery service in eleven (11) months and become one of the largest food delivery providers in Nigeria in 2015. In 2016, I joined Venture Garden Group (VGG) as Vice President and a year later became CEO and intrapreneur who created their fintech subsidiary, driving 1000% year-over-year revenue growth.
However, I realized that there were no fintech companies in Nigeria (and Africa in general) that offered solutions to the problems faced by large corporate enterprises. It was obvious that the big fintech companies-though very successful at it-provided solutions for SMEs and e-commerce giants, especially in terms of payment collection. So this [payment collection] market was a red ocean for me. So I decided that my company should focus on providing financial technology solutions for large corporations, particularly to facilitate treasury management and cross-border payments for these organizations operating in Africa.
That was my motivation: to solve treasury and cross-border payment problems for large corporate entities (including banks and other fintech companies). This same motivation drove me to pursue an Executive MBA at Oxford University, where I am currently studying. My experience at Oxford University served as additional motivation to take Multigate to the next level.
BCN: Since entering the industry in 2017, what can you say are the highlights of your fintech journey to date.
EN: In two (2) years, we’ve become a necessity for some of Pan-Africa’s largest companies, fintech companies and banks. By solving a terribly complex problem they all shared, we became an integral part of their cross-border operating structure. To date, Multigate has provided $4.3 billion in fintech treasury services.
In addition, and more importantly and more interestingly, Multigate was the first African fintech to connect to SWIFT as a shared platform provider for corporates (and other fintechs).This was – and still is – a significant achievement for us because it allows us to solve a major problem in cross-border payments and treasury management – the operational problem of messaging between corporations and banks (i.e., one to many).
BCN: It was reported that fintech companies accounted for most of the funds raised by startups last year. What do you think is the reason(s) that fintechs are getting more attention/funding than, for example, tech startups.
EN: In my experience, the reason for this is a function of the relationship between certain variables such as (1) business scale potential, (2) the level of patience (or impatience) of the VC/PE providing funding, (3) the “true” size share of the addressable fintech market compared to other tech startups, (4) and ultimately, the return on investment (ROI). Fortunately (and unfortunately), African fintech companies have greater scale potential than other tech startups in the region, given the large share of the population that desperately needs most of the solutions fintech companies offer today.
African fintech companies have greater scale potential than other tech startups in the region, given the large share of the population that desperately needs most of the solutions offered by fintech companies today.
On the other hand, with the recent exponential growth of most fintech companies, a large number of venture capital and private equity investors with relatively high financial commitments to their LPs [liquidity providers] have no choice but to channel a significant portion of their African fund into fintech. On the other hand, if we compare the “true” addressable market size of most fintech companies to other tech startups, it becomes obvious that fintech companies have a “borderless” market compared to other tech startups, allowing them to scale faster than their peers. Finally, and again related to the ROI issue, fintechs are likely to generate higher returns given the nature of their cost profile relative to fintech growth and pace of scale.
However, it is worth noting that the above points do not mean that creating a fintech is any easier than other technology startups. I dare say that creating a fintech, attracting investors and obtaining the appropriate licenses, partnering with banks, hiring the right people (especially engineers), and marketing a fintech business (like Nigerian) for sustainable growth is one of the most challenging endeavors.
BCN: What do you attribute the rapid growth in the number of transactions handled not only by your company, but by Nigerian fintech startups in general.
EN: To answer this question, consider the analogy of a water tank that fills with water at an ever-increasing rate. An efficient system of piping and pressure pumps is needed to ensure that the tank can deliver water to numerous faucets at the right pressure. In this analogy, Nigeria’s business ecosystem is the water tank, and water is the business operations conducted by the various firms in the ecosystem (the water tank).
An efficient pipeline and pressure pumping system are fintech startups. The more efficient fintech solutions introduced into the reservoir, the higher the flow (and pressure) of transactions from the ecosystem to other parts of the Nigerian economy will be. Even so, of course, there will come a time when this rapid growth will plateau (or slow down), requiring a new level of innovation to fuel the ecosystem’s growth.
Nevertheless, such a time still seems distant. To summarize, the rapid growth in transactions is due to a consistent increase in the number of business transactions in the Nigerian business ecosystem, as well as the dramatic growth of the country’s digital economy, which invariably leads to a new level of demand from customers. In addition, another important point is that nascent customer demand continues to provide fintech companies the opportunity to develop a variety of products for customers.
BCN: Over the past few years, Nigeria’s rapidly growing fintech industry has attracted the interest of some of the most prominent venture capital funds. With the support of these venture capital funds, some Nigerian fintech startups have suddenly turned into billion-dollar companies. However, given the huge amount of money being injected into the industry, do you have any sense that the growth rate, especially in Nigeria, will slow down.
EN: I highly doubt that the growth rate of fintech companies in Nigeria will slow down anytime soon. There is no doubt that competition will become more fierce and aggressive, but because of nascent demand and the ever increasing size of the aforementioned “business ecosystem,” demand for fintech solutions will continue to grow.The trajectory of development and growth of the fintech space in Nigeria can also be explained academically using concepts from an interesting book I recently read, Evolution of New Markets by Paul Geroski, where he explains how new markets evolve and what characteristics they exhibit as they develop.
First there are many random products in various random and uncoordinated fashions in the arena. Then superior products and applications enter the arena. This is followed by a seemingly “sluggish” development of superior products/applications, and then there is a breakthrough and very rapid adoption of the technology in various markets. The fintech space in Nigeria is now at the stage of rapid technology adoption in various markets.
The regulator (Central Bank of Nigeria) has recently created a very favorable environment for various fintech players. Banks have become more receptive to partnering with fintech, and “previously resistant” customers are now more willing to cooperate. There couldn’t be a better time to work in this space.”
BCN: And yet, on the issue of growth, there are accusations that some founders of fintech startups are not interested in seeing their businesses grow and thrive. The only thing they are interested in, according to critics, is getting their hands on the funds siphoned off by risky venture capital funds. Do you agree with this.
EN: In every market (e.g., in Nigeria or even in Western, more developed markets) there are always good players and bad players. In experience, while the bad players usually cast a bad light on the industry, it motivates the good players to generate more value for their stakeholders (investors, customers, and employees), thereby creating a net positive outcome for the fintech industry.
However, to answer the question directly, I am aware of these allegations, but cannot corroborate them because I personally have no tangible evidence to back them up.
BCN: Nigerian fintech founders have also been accused of being more interested in showing the large volumes handled by their companies rather than the revenue generated. In other words, rather than using a business model that prioritizes revenue generation and profitability, Nigerian fintech founders are said to prefer the so-called freemium model. What is your reaction to this.
EN: All companies are different, and their motives and ultimate goals are different too. Most fintech companies consider “large processing volumes” as an objective measure of “performance” to evaluate performance relative to other fintech companies. Just as some banks value customer deposits more than profits, some fintech companies place a higher value on processing volumes than on revenue or profits.
Sometimes this direction is determined by investors (VC and PE firms). However, I should add that if they exhibit large processing volumes, it does not necessarily mean that they are not focused on revenue or profitability generated. I would like to believe that while the external measure of valuation is “processing volume,” the internal measures that keep them awake are revenue (especially gross profit) and profitability.
BCN: Now let’s talk about cryptocurrency. In early February 2021, the central bank of Nigeria said it had asked banks to stop facilitating or processing any transactions involving cryptocurrencies. It’s been over a year since that order was issued, but interest in cryptocurrencies remains high. What do you think are the main reasons why Nigerians continue to be interested in cryptocurrencies such as bitcoin.
EN: It should be noted that the Central Bank of Nigeria had good and decent intentions in doing this. They explained that it was to prevent the financing of terrorism and other criminal activities, which we see is the real threat in Nigeria, i.e., terrorism. Although, as stated earlier, there are always good and bad players in any market. From my conversations and discussions, I have learned that Nigerians continue to be interested in cryptocurrencies because of the lucrative (albeit risky) nature of trading these cryptocurrencies, such as bitcoin.
It has become a good source of livelihood for most traders who do it responsibly and diligently. Nigerians are known to be very industrious and ambitious; despite the difficulties they face daily, they will work hard to become the best at anything that comes into fashion.
In addition, the increasing youth population in the country combined with the growth of the digital economy also contributes greatly to the continued interest in cryptocurrencies such as bitcoin.
BCN: In your opinion, what can the Nigerian government do to help further develop the fintech space.
EN: Using the aforementioned water tank analogy, the fintech space can only grow further if certain variables are optimized and improved: (1) the size of the water tank (Nigeria’s business ecosystem) and (2) the size of the output pipes and pressure pump (the quality of fintech and the support it receives). For the fintech space to grow, the size of the business ecosystem and transactions must grow, which can be achieved with the right “positively influencing” government policies.
With respect to fintech companies and the support they receive, various regulatory agencies should continue to play a supporting role in the areas of tax incentives, innovation funding, transaction monitoring, and compliance support. With the joint support of various government agencies and fintech companies, we will see the fintech arena continue to grow and expand. With the right economic policies in place, we will see tremendous growth of transactions in Nigeria’s business ecosystem.
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