“We anticipate exponential increase in venture capital investments to Fintechs”
Of recent, Nigeria’s fintech space has witnessed tremendous growth. The third report by National Bureau of Statistics (NBS) confirms the impact the sector has been having on the country’s GDP.
Boye Ademola, partner and head, FS Technology with KPMG Advisory Services sat down with JUMOKE AKIYODE and FRANK ELEANYA to discuss the implication of the Fintech revolution in Nigeria, its implication for businesses and KPMG’s upcoming Digital summit.
What is Fintech all about and how big is it globally?
They are financial technology companies that enable financial services, and in a sense, they compete with financial institutions. Sometimes you can say they create new opportunities for financial services, but basically they are financial technology companies enabling financial services. What we have seen in the last few years in Nigeria and globally is that the fintechs have created a sector because of their impact on society and is getting a lot of attention.
This year, there were two massive fintech investments in China: U.com (1.2 billion USD) and JD (1 billion USD), these are start-ups in payment and lending- showing the impact they are making. In 2015, globally, investment in fintech was 19 billion USD and this year, we expect it to top up to 20 billion USD.
Looking at our market over the last two years, we have seen over 200 million dollars in fintech investment in Nigeria. Understanding the whole ecosystem and bringing fintech sector out is part of the overall objective of what we are trying to achieve with this summit.
Is it a threat to the Nigerian banking system?
We do not think it is the right perspective to say it is a threat to banking. It can be both a threat and an enabler. For instance, in the banking perspective, there are less than 50 million Nigerians on BVN today. In other words, you have less than 50 million Nigerians who have formal bank accounts and formally in the banking sector. And compare that to a population of 170 million, you might get a population of over 100 million that requires banking and financial services. I would argue that there is a huge financial gap or financial inclusion opportunity, looking at the population and the formally serviced. These people can enjoy financial services. When you look from that perspective, then they can be an enabler to a bank or a financial institution that is keen on financial inclusion.
However, they can also be a threat because fintechs offer services that can directly compete with banks. For example, we have fintechs that are going into lending – they want to lend digitally. They do not want to open branches.
They want to attack a generation of young people and onboard them digitally, give them loans quicker than banks would, use data analytics to do all the risk ratings, profiling and origination disbursement of these credits and tracking. In that case they can be a threat because obviously, they will be attacking some of the customers of the banks.
For a bank or financial institution, it is important to step back and say this is not something to play ostrich. You have to come to terms with this- the reality. These people are here to stay and you should ask yourself what is your understanding of the opportunity and market and what should be our response to it?
Again, this is part of what we want to achieve with the summit. We want to dissect the opportunities and unveil; have a robust discussion around it and different players to then say, ‘Look this is where I want to play. This is what I want to do from a fintech or sector perspective.
The NBS report showed growth in all areas of e-transactions. But the mobile banking was not growing at the same rate as the e-transaction. What do you think is responsible for this trend?
E-transactions have grown across all the channels. What we see if you look at our analysis properly is that e-transaction in the last quarter was about 240 million in volume of transactions and in that same space, the value of N18 trillion was accounted for from these e-transactions. Our prognosis is that this year, we may cross the 1 billion transaction mark from an e-transaction perspective, which will be a landmark. We could easily top 60 trillion and if we juxtapose it against an economy in recession, it just shows you that what is going on in this sector is almost in spite of the economy. It also shows that there is clearly a shift from a cash base society to fintech adoption. From what we see, the adoption is quite strong across the channels. ATMs are about 60 percent. We are going to increasingly see more internet based transactions especially as our broadband data gathers more momentum.
Why do you think there was a significant decline in the use of cheques?
We were expecting that and going forward, we would see more of it because it is more efficient without a cheque. We will see a lot more electronic payments in time to come.
There is a new iTeller mobile cheque truncation solution that was launched recently at the GITEX conference in Dubai that allows a customer take a picture of the cheque and pay the cheque through the application. Do you see innovations like these helping to increase the use of cheques?
I have my doubts that it would have any significant effect in Nigeria. If you see what has happened from more matured markets and sometimes that is where we have not given ourselves credit in the spaces that we have been very successful. For instance in the US, instant payments is something they are still working on which is why you have this sort of cheque solutions.
Those climes do not have the sort of instant payment we have in Nigeria. In Nigeria, instant payment has had a massive impact. If you look at the report we are talking about, from NIPs 52 percent of the transactions that make up the 18 trillion, 82 percent are related to transfers and instant payments.
If you see National Electronics Funds Transfer (NEFT) in that analysis, it was declining. What that tells you is that the adoption, Nigerians have moved. It is very difficult to bring someone who does not have a chequebook back to using it. He does not have a cheque book but he has a savings account he can do transfers to any bank.
If you also look at the quick tellers and all the online payment systems, you just do the transfers. You do not need to carry a chequebook. The way I see it is that those are solutions for more mature markets that have struggled with instant payments regulation.
This is an important perspective of where we are in our revolution. We have leapfrogged in many things. Another one for instance was when we did PCI, chip and pin. You will find that the US is still using the mass swipe. That was leapfrog, with which we have gone to instant payment.
They are still having a robust debate, we have left. You have to step back and ask, how did we get here? Going mobile is so close to going digital. That is why the mobile take-up – you can see Zuckerberg coming to Nigeria to visit. It is because of the Facebook users – the mobile users.
For us, the tech adoption has been very strong and here is where we see the connection with the fintechs. What we see as we started preparing for the summit is that the fintechs have very little visibility. We were surprised that in Nigeria alone we have engaged over 50 fintechs and if you look at them you will see many of them have been part of the success story you are seeing.
Recently, in a conference, it was said that we are used to going to the next level of technology without finding out how we arrived there. What do you think about our just adopting from the top instead of gradually growing from the bottom with the use of technology?
I think to be fair to us, getting to where we are is by design not by default. For instance, the CBN cashless policy, it is by design and we must give ourselves credit. One of the questions we tried to answer with fintech is where we are now and what we need to be better; comparing our country with the leading fintech companies in Hong Kong, Singapore, Israel, Australia, London and America.
We have benchmarked ourselves to those six hubs and two of the things coming to us as recommendations really are around government incentives. If you go to these hubs, you will see that they are incentivising the fintechs. There is a clear understanding that its contribution to GDP can be potentially significant.
Another thing is the regulation around fintech. We have seen regulation around digital in Nigeria, payment systems and CBN has a number of guidelines. If fintechs must grow, there must be regulations, giving investors certainty that in investing in a fintech there is a favourable regulation in place such that their businesses are not suddenly brought to a halt.
Incentivising them is the other opportunity that we see. We have seen that Lagos state has been quite deliberate with building a tech hub out of Yaba and there is a Stanford program supporting Lagos State on that. Those things are in the making but I think part of our recommendations is that government needs to give a little more attention, more focus.
They need to be more engaged with the players and come in to implement programs that will accelerate the growth. One of the things we are trying to do is benchmark and learn from other climes and then we can be sure that we have a roadmap that is really going to contribute to growth.
Do you ever share the concern that the growth we are experiencing in fintech is not at par with our regulations in cyber security?
There is quite some attention to cyber security. There is some legislation on cyber security, there are guidelines. From a regulatory perspective, in the banking there are different guidelines now on security. But we can do better, because the pace or the evolution is much faster than we can catch up.
It is one thing to have a regulation; it is another thing to implement it. So because you have that regulation does not mean that it is effectively implemented. There is clearly a gap. There is work from a regulator’s perspective to ensure that these things are implemented and not just paper.
As an enabler, how can fintech help insurance penetration in Nigeria?
One of the fintechs we are bringing is Insuretech. If you look at where we are in insurance, we know that the number of Nigerians that are insured are way below the number that we have. That is a huge opportunity. What we see here is that the fintechs can help penetration. If you take a look at insurance, like annuity payments, which is very common, whether you do life or general insurance, the fintechs come with a different proposition.
If you do it in a digital way, you can make it easier for people to subscribe to the product. You do not even have to collect manually. If you look at how that money is collected and paid today, it is largely manual. Very few insurance companies have complete digital systems. That is an area that the digitizing world helps with penetration.
If you want to go deeper with retail, one of the things we know is mobile first. So you are thinking of how can I provide for these tens of millions of Nigerians that are carrying mobile phones insurance? To do it in a safe way- a way that gives them confidence and they will feel serviced. That is the challenge for insurance. That is the challenge we see from a retail perspective.
A lot of the focus has been on the corporate and the commercial but in the retail there is a huge opportunity for insurance. The fintechs are already working to enable that. We think that will be cracked in the next few years. Our prognosis is that we will begin to see a different type of play in insurance.
In the process of these fintech disruptions, apart from the insurance sector, can you tell us other sectors that are likely to gain and those likely to lose?
The investment banks or the merchant banks and other financial institutions are likely to gain. The whole concept is to see that we can penetrate much deeper – you can go much further as long as you are digital and you can deliver your products on mobile. That is really what the fintech is saying. So whether you are a very niche player, merchant banks, security business, pensions etc, the more digital you are, the deeper you go in your reach. That is why at the summit we have different tracks.
We will have some of the fintechs coming to share their perspective and we have tracks around the wealth business just coming to share their perspective around insurance and traditional banking. We have what we call bank-in-a-box. We are looking at a completely digital bank and the very important track around the block chain proposition, which is around crypto or digital currency. Nigeria is largest destination for foreign remittances.
We get 2 billion dollars every month in diaspora remittances. This is a growing trend. What we see is that fintechs are coming up with propositions on block chains; block chain technology that is going to allow people do cross border payments. That is potential disruption. At the summit we plan to share the perspective on block chain.
Part of what the summit offers is people learning about this development. This is not futuristic, it is happening. The key issues are around adoption and cyber security and regulation. If those three things get sorted, you can see disruptions everywhere.
Where in the Fintech value chain can Nigerians who are unemployed take advantage?
There are many tracks. For us, lending is about tracking and we are beginning to see people see lending from a digital perspective. The fintechs are getting into micro lending and they are looking to lending to the lower rank of the society. Obviously from an adoption perspective, these people are carrying smartphones and because it is digital you can keep the exposure to risk down.
I spoke about bank-in-box already and SunTrust, which launched early in the year, is looking to do this. Insurance is another opportunity. Again it is about learning how that industry works and seeing how you can become part of the value chain.
The USD200 million currently in Fintech in Nigeria, are they private equity funds, and how much more do you see coming into Fintech in Nigeria?
Largely venture capital investments. We think it is going to grow largely with momentum. There is a gathering of venture capitalists looking to lend to fintechs. We have taken a five-year plan and we anticipate exponential increase in the investments. Despite the recession the venture capitalists are quite bullish on Nigeria. With a bit more clarity on regulation, the acceleration will grow.