5 Things Fintechs Need to Remember When Tackling Financial Inclusion

Formal banking has been in Nigeria since 1892.

With such an extensive history, one would expect that banking penetration will be higher and financial inclusion levels would be minimal. But as it stands, with over a century of modern banking, more than 40 percent of the adult population remains outside the formal financial sector.

Several arguments have been proposed, one of which includes insufficient access to financial service points, a problem stemming from the country’s reliance on the traditional network of bank branches (according to fspmaps.com, Nigeria’s bank branch network is slightly below 5000) – it is expensive, and frankly, unable to drive financial inclusion sustainably.

The sufficiency of financial service points is a pain point for everyone in the country, which makes the space ripe for aspiring entrepreneurs. Technology has given a new set of entrepreneurs a second wave, with digital financial services leading the charge to capture and onboard more of the unbanked population into the financial services ecosystem. In recent years, financial technology businesses, otherwise known as fintechs, have emerged as key actors in this space, attempting to deliver financial services to Nigeria’s grossly underserved market.

These fintechs have been able to unbundle the banking experience and streamline their value propositions. Rather than try to do several things moderately well, they have chosen to take one of the services offered by traditional financial institutions – credit and lending, savings, payment and transfers, etc. – and focused on that.

On the other hand, there is a huge unbanked segment which still require financial services. With mobile phone penetration at around 40 percent, over 140 million active lines and about 39 million adults living without financial service of any kind, be it savings, credit, pensions or insurance, the market potential for digital financial services is still quite massive. We expect the emergence of more fintechs both in Nigeria and Africa (Fintech in Africa is predicted to grow from US$ 200 million to US$ 3 billion by 2020).

For fintechs planning to serve the financially excluded, here are 5 things to remember:

1. USSD, not Apps
Digital innovation doesn’t automatically mean “Build an app!”, especially in this market where smartphone penetration is about 30 percent. The other 70 percent of Nigerians either use feature or basic phones. Fintechs targeting the unbanked poor should understand the digital assets and capabilities of their addressable market and hence build solutions that can be easily adopted, i.e. that rely mainly on USSD technology and SMS. This will also need to be coupled with the human touch via agents of some kind. In the bid to acquire new customers among the unbanked population, the place of personal touch points cannot be over-emphasized. Furthermore, the supporting telecoms infrastructure deployed across the nation is mainly 2G with minimal data capacity.

2. All Financial Services are not Created Equal
Relatively speaking, opening a direct savings account (or any other basic transaction account) is perhaps the easiest sell among all financial service products. The value proposition is easier to explain; unlike insurance and pensions. Just look at the financial service strands across service offerings to understand the gap in adoption rate across the country.
As such, fintechs selling financial services other than direct savings have to figure out creative ways to market their products.

Some fintechs use freemium models to introduce customers to a new product.
Everyone likes free, and if users know they don’t have to commit to a paid plan, they are more likely to sign up to give it a try. Others try to cross sell. According to Martin Hintz, former coordinator of microinsurance at Allianz, “insurance providers and their partners can jumpstart an insurance relationship by bundling insurance, either with other insurance products or with other financial or non-financial services. Insurance can also be tied to tangible products, such as school fees, food, or discounts on medicine.”

3. Build Strategic Partnerships to Gain Trust
“If you build it, they will come” is not be a good strategy for the unbanked market, especially for relatively new fintechs without brand recognition. As with all financial services, trust plays a critical role in adoption and use of a fintech’s value proposition. The human psyche is wired to be cautious especially when it comes to entrusting our money with others. This caution is exacerbated by ignorance, a lack of understanding of the fintech’s business and technophobia.
One way fintechs have been able to overcome this is by leveraging partnerships with already existing and trusted groups and brands. According to CGAP, many fintechs in Africa “rely on farmers’ associations, savings groups and other social organizations to sign up and manage relations with large groups of new customers. These partners help explain new financial services to large numbers of new customers at one time, bringing down the FinTech’s staff costs for such physical interactions.”
The partnerships also help with creating trust in the fintech among community members.

4. Patience is Key; Patient Capital is Required
Financial inclusion ventures require patient capital as onboarding new customers into the financial services sphere is a laborious and challenging process. Profits won’t be forthcoming in the first few years, a fact that more fintech founders would be wise to accept as early as possible. Hiring staff, building the technology, running operations like call centers, accounting and field support staff, among others, these are all capital intensive investments. There’s also marketing and advertising to consider. Coupled with the fact that profit margins on DFS transactions are slim, you’ll be playing the role of the patient dog waiting for the bone to be ready.
This is why fintechs seek investment capital from venture capital firms. However, one area of due diligence investors look out for are risk management practices such as client protection principles that promote responsible and inclusive finance. Such principles are defined in the Smart Campaign, Client Protection Principles and the G20 High-Level Principles on Financial Consumer Protection.

5. When You Succeed, the Banks will Encroach on your Space
Success has many lovers. It is attractive so it will be only a matter of time before the banks come visiting. One trend observed across markets is the acquisition of smaller fintechs by big banks. Banks are by reputation, risk averse. They rarely innovate due to the possibility of failure.

With their deep pockets, they can afford to let a fintech do the heavy lifting with all attendant risks and then swoop in later when the coast to profitability is clear.

Another possibility is, the banks could simply copy your idea and replicate it. This means, you have to know what you want early enough. Are you planning to exit, partner or become a major player in that space?

Conclusion
In spite of the many enforcement gaps in the ecosystem which can be attributed to lack of capacity, institutional frameworks and political will, among a bevy of other factors, there is a massive opportunity for fintechs in the Nigerian market. With a 2020 deadline, indeed, there are interesting times ahead for the financial services space.

Olayinka David-West and Ibukun Taiwo

Olayinka David-West and Ibukun Taiwo are members of the Sustainable and Inclusive Digital Financial Services initiative of the Lagos Business School.