By Akinola Sawyerr

If all you thought about fintech were cryptocurrency and financial startups, you would be right… at least, partially. Fintech is much bigger than the next tech-laden attempt at banking or digital currency.

All through human existence, technology’s purpose has been the pursuit of making life easier and better. A quick look at most technological advances would support this claim and fintech is no different. While fintech today may be another buzzword for startups in the financial sector, this form of technology is only a piece of the puzzle. Fintech or financial technology is much bigger. At its core, fintech is described as any innovation on business transactions. This means that any attempt at simplifying or easing access to financial services either at the back office as was historically or with interventions that are more consumer-centric, fintech has taken place. Simply put, whatever technology that makes for easy delivery of financial transactions is fintech.

The fintech ecosystem usually comprises consumers, financial institutions, startups, investors, and regulators. And since financial services are not limited to the banking sector alone, fintech’s role in society is much wider and far-reaching. As long as money is being exchanged for goods and services or donated, fintech’s reach is inevitable. Equally, since all industries are impacted by fintech, more focus is placed on such technologies due to their impact on the economy.

Due to its widespread use, fintech innovation has taken several forms which are not exhausted in the list below.

1. Payments: These solutions are convenient methods of paying for goods and services through USSD codes, POS transactions, in-app bank transfers, digital wallets etc.
2. Investments: These are platforms where stocks, bonds, and treasury bills can be traded online through a mobile app without a stock broker to mediate.
3. Savings: Services that offer ease of access to savings accounts without the paperwork associated with the traditional banks. Interestingly, traditional banks have also adopted this practice.
4. Loans: Micro-lending has been at the fore with companies offering quick loans at a specified interest rate without collateral. Unlike traditional banks, there is no regulation on how the money is spent.
5. Cryptocurrency: A digital currency devoid of government regulations that use blockchain technology for secure transactions.
6. Robo Advisor: An online application that automatically invests for clients based on data provided.

HISTORY OF FINTECH

The inception of fintech is one that is not agreed upon. Although the popular categorization into eras by Arneris, Barberis & Ross recognize puts its beginning in the late 19^th century, others have claimed even earlier innovations. However, the popular choice among historians is found in 1860 when a device was developed to verify bank signatures. It was called the Pentelegraph. This new technology, at the time, brought about the infrastructure that supported globalised financial services which in turn led to the birth of electronic funds transfer. The next 102 years would see the creation of the foundations of present-day financial technological innovations. This is popularly known as Fintech 1.0.

The next leap in fintech history began at the tail end of the first era with the creation of cashless payments. It began with Diner’s Card in 1950 and Amex’s Credit Card in 1958. But the era did not kick into high gear until Barclays installed the very first Automated Teller Machine (ATM) in 1967, which marked the transition into the digitization of finances. In the decade that followed the NASDAQ Stock Market (1971) and Society for Worldwide Interbank Financial Telecommunications (SWIFT) (1973) were established, and the decade after that (the 1980s) saw the rise of online banking systems and electronic trade. But Fintech 2.0 wasn’t done yet. By the 1990s, e-commerce’s evolution called for the need for digital banking which PayPal’s emergence resolved in 1998. The era powered on till the 2008 global recession.

The reforms that followed the financial crisis and large distrust for banks brought about major changes in fintech innovations. The cryptocurrency was born with Bitcoin in 2009, financial startups began to crop up, mobile banking exploded with the wide adoption of smartphones, and Banking as a Service (BaaS) peer-to-peer (P2P) payment systems, Digital Lending and InsurTech were all founded. It would seem like this is the current era of fintech, but a shift occurred in 2014 that brought about a breakaway era, popularly called Fintech 3.5.

Up until 2014, fintech had been dominated by western countries. The products and services were largely developed to meet their needs but access to the internet in developing countries and the rise of China and India brought about different kinds of innovations. For the first time in fintech history, Asian and African countries began to develop technologies that suited their needs. Indian tech companies designed financial software, and m-Pesa’s reach expanded in Africa and Alipay in China.

FINTECH IN NIGERIA

Fintech’s history in Africa is quite different from the previous eras owing largely to the spirit behind the innovations. While western and some eastern counterparts sought to disrupt the financial services industry, African fintech was developed to support the historically underdeveloped industry. With over 66% of the adult population unbanked, ‘technologies’ like m-Pesa (mobile money) in Kenya were formed to include them. Thus, Nigeria’s fintech ecosystem is composed of innovations centred on mobile payments, digital banking, merchant solutions, wealth management technology and personal finance.

Nigeria, one of the three fintech hubs in Africa (the others are Kenya and South Africa), took a different path from its global counterparts. The first advent of technology into the financial services sector in the country arrived in the late 1980s when banks adopted the wide use of telephones and computers in their operations. At the turn of the millennium, integrated payments processing companies like Interswitch, Etransact and SystemSpecs (now Remita) were founded. The next change would not take place until a few years later when the Central Bank of Nigeria in its bid to revolutionalize payment systems in the country launched the Payment Systems Vision (PSV) 2020 in 2007. The PSV 2020 was an initiative designed to bring financial activities within the country up to speed with the rest of the world. It launched the government’s cashless policy and saw the rise of startups like Paga, Piggyvest, Kudi Bank, Paystack, Flutterwave, Piggyvest etc.

These technologies have majorly focused on these 5 products:

1. Mobile payments: These are in the form of wallets, remittances, processors and merchant service providers which helps to facilitate easy payments and quick transactions.
2. Savings: Automated high-return savings for millennials and middle-class customers, as well as diversified investment options on online platforms promising attractive returns.
3. Lending: Simplified lending process that features instant, unsecured, short-term loans for retail customers and quick loans with minimal documentation for Micro, Small and Medium Enterprises (MSMEs).
4. Personal finance: Expense tracking, budgeting and investments using machine learning technology.
5. Accounts: Wealth management and digital banking services.

Cryptocurrency was (and remains) also a growing product but was banned by the government in February 2021.

Nigerian fintech’s rise was also dependent on the customers. A Mckinsey report revealed that most Nigerians adopted these innovations due to convenience and ease of access. Another compelling factor for their widespread adoption particularly across the country is the use of agents who offer these financial services within local communities reducing the need for trips to banks. Again, at the root of this factor is convenience. As a result, recommendations and referrals have increased usage of these services, and the startups and even traditional financial institutions have taken notice and incentivized these referrals into cash rewards.

But Nigeria is a big place and the numbers from reports can sometimes be misleading. While fintech has transformed some of the financial services sectors, most of these transformations are in the south, with applications still reportedly limited in the north. This is due to the target customers of most fintech. While traditional financial institutions have a more matured and affluent customer base, fintech has targeted the underbanked and unbanked portion of the country (which stood at 36 per cent in 2020). These underbanked are mostly millennials whose adoption of technology is not on par with the traditional financial institutions’ mode of operations. Meanwhile, the unbanked have been brought on board with services that reduce the need for cumbersome documentation that had initially isolated them from the onset.

THE GOOD

Like every other technological advancement, fintech has largely come to the fore due to the desires of innovators to provide better financial services. As a result, financial services have improved over time. Within Nigeria, fintech has brought about lots of positive changes that were mere dreams a little over a decade ago. The most obvious of these changes is the reformation of banking services within the country. Fintech startups have forced traditional banks to innovate their services and push for more convenient banking practices. In the past, opening an account required a visit to the bank alongside documentation like proof of identity and occupation. However, with the advent of technological advances, fintech has adopted recent smartphone and internet capabilities to cut down former lengthy processes. The result is now a faster and more convenient means of opening accounts. A good example is the digitization of banking services like Wema Bank’s ALAT or Guaranty Trust Bank’s 737 services. These were born out of fintech’s leverage on technological advancements to assimilate the unbanked through quick, easy and affordable operations primarily via a mobile phone.

Fintechs are also to be thanked for the monumental transformation of the online payments system. The once cumbersome process has now become simplified as a result of startups like Flutterwave and Paystack, who have simplified the process to only requiring a few clicks.

Access to loans is now easier with fintech. In the past, loans were largely restricted to the traditional banks whose requirements were cumbersome for small business owners. The paperwork needed to facilitate these loans was sometimes considered outrageous; however, the emergence of FairMoney, PayLater, QuickCheck, Aella Credit and many others led to a change in access to microloans. Today, access to loans has become easy, quicker and sometimes without collateral.

Financial Management is yet another area that has experienced this transformation. Different startups have risen in recent times to address different issues associated with financial management. For instance, Cowrywise and PiggyVest (formerly PiggyBank) are just some of several startups that have revolutionalized savings. Their sleek mobile applications, quick support services and favourable interest rates have attracted attention and forced the local banks to adapt to these new technologies. Invoice NG has done the same for invoicing and Kliqr for tracking expenses.

Aside from these services, fintech companies have also contributed to significant and growing foreign direct investment in millions of dollars despite the nation’s challenges.

Then there is social media. Never before in the country has customer engagement been as unencumbered as now, with businesses (traditional and nascent) jostling for the attention of both old and new customers. Fintechs have shown how to amalgamate the platforms to their advantage further breaking the barriers between businesses and consumers, and like every other product and service, the traditional banks have followed suit. Thus, gone are the days of a necessitated visit to a financial institution to resolve an issue, now it can be done remotely… but there are still limitations.

THE BAD

Like everything else, technology is not perfect, and it usually brings along its unique set of challenges. Most of the issues related to fintech problems are borne out of its sparsely regulated status, which is ironic because some of the bottlenecks created by these regulations are what led to the formation of these companies in the first place. However, an absence of order is chaos and that is what has happened with some startups. Chief among them are the lending startups whose bid to make access to quick and easy loans has led to an uptick in the issuance of bad loans. With this patronage increased as people found them favourable in comparison to traditional banks who sought assurances that the loans were being put to good use or demanded collateral in the case where the borrower defaults.

But this created a new problem – indiscriminate borrowing at interest rates that are higher than banks. Some startups understood their position and capitalized on their position to issue emergency loans by giving out loans at much higher interest rates. Thus, the borrowers are unable to pay back the loan and because of the absence of collateral, most lending startups have sought another strategy in the hope of getting back their money – public shaming. Public shaming in this context is a synonym for cyberbullying and other forms of harassment all done in the bid to recover the loan. Popular cases feature messages being sent randomly to the defaulted borrower’s contact list and incessant phone calls to these contacts naming them as ‘guarantors’ of a loan they never knew existed nor signed for. In other cases, posts are made on social media bearing the borrower’s name, picture and contact details in a bid to force payment. And these unethical measures have led to calls for data privacy. Concerns have arisen over the allowance for these companies access to their customer’s data without their knowledge.

Another challenge, that is also borne out of the lax regulation, is illegal startups. Most fintech are internet companies that offer financial services and as a result, their services are exclusively offered via the internet through mobile apps and websites. Thus, with aggressive marketing campaigns, customers are made aware of these enterprises even if they do not have a footprint within the nation but they are required by law to obtain a license to operate. However, the challenge with this is the presence of startups who do not possess these operational licenses as is the case with many loan and wealth management applications. In recent times, companies like GoCash, Okash, EasyCredit, Kashkash, Speedy Choice and Easy Moni have been raided by the authorities in a bid to clamp down on their activities. But it was discovered that these businesses were sometimes owned and operated by the same owner, who is unregistered. The nature of this challenge is in the disparity between the country of location, Nigeria, and the location of the service, the internet. Governing the cyberspace is still a challenge faced by most countries, so the emergence of unlicensed operators has largely affected fintech’s reputation within the country. There are cases where the operator gets a different license to operate and simply touts in its adverts that it is registered with the government whereas its operational license does not cover all of its activities.

Scams have also gained traction with fintech. While they are not new in the country, Ponzi, pyramid schemes and the likes have leveraged the technologies of fintech and have also created their platforms with extravagant returns in the bid to lure customers. Some have even sought celebrity endorsements to legitimize their claims but in the end, the company folds up with investor funds gone without a trace.

In a bid to mitigate against losses, many wealth management fintech has revised their interest rates, which have now fallen below the traditional savings accounts thereby making their offerings unattractive.

Lastly, customers have complained of poor user experience and support. The one-time password was noted to be problematic as it still affected the seamless transaction that is sought. It seems like the fervour of these startups over time dwindles and are plagued by the very problems they sought to resolve at their inception.

THE GOVERNMENT

With technological innovations, the law always plays catch up and the same is true about fintech in Nigeria. However, this is not saying that the fintech space is completely unregulated, rather it is one that is partially regulated with some parts left ambiguous.

The Central Bank of Nigeria (CBN), the authority that oversees the control and administration of the financial sector, already has in place several guidelines that regulate fintech. Examples are the Operation of International Money Transfer Services in Nigeria in 2014 which requires international money transfer operators to be licensed before commencing operations within the country, Framework for QR Code Payments in Nigeria in 2021 which was designed at increasing contactless payments following the pandemic. Others are the Supervisory Framework for Payment Service Banks in 2021 which would streamline their operations and ensure consumer protection and risk management.

While most of the regulations have encouraged fintech applications, others have restricted them. The most popular is the infamous letter released on 5^th February 2021 that prohibited all banks and other financial institutions including fintech from operating accounts for people and entities dealing in cryptocurrencies. The ban coupled with the 7-month Twitter ban served as a reminder of the fragility of the perceived freedom the internet offers in relation to fintech operations within the country.

Yet, the Nigerian government has not only been on the regulatory end of fintech but also launched the eNaira, the digital form of the currency, in late 2021.

Nigeria, like any other country, is one with its unique set of rules that requires adherence to for fintech to thrive. Its fintech operations have thrived inspite of the challenges and largely improved financial transactions within the country. As it forges on in creating more opportunities within the country, an expectation of uniform regulation is a welcome need, one that creates an environment for these unique businesses to flourish.