Harnessing Nigeria’s FinTech potential

Kerry Naidoo: Hello, and welcome to the McKinsey Africa podcast, the podcast that brings you conversations with leading experts offering leading insights from McKinsey. In this episode we're focusing on Nigeria's Fintech industry, a sector that has tremendous potential not just for Nigeria but the continent more broadly. African banking has long been recognized as a hotbed of innovation. Driven by mobile money and a digital-first attitude, the continent's banking landscape is amongst the most exciting in the world and within this Nigeria is one of the most exciting regions on the continent.

Between 2014 and 2019, the Fintech sector in Nigeria raised more than $600 million in funding. Attracting 25% of the $491.6 million raised by African tech startups in 2019 alone, this was second only to Kenya in terms of amounts raised. I'm delighted to be joined in today's episode by two leading authorities on the subject, Topsy Kola-Oyeneyin and Mayowa Kuyoro. I'll be asking them how the FinTech sector can build on these past successes and position itself to continue meeting the needs of customers during these critical times.

Topsy is a McKinsey Partner in the Lagos office and a transformation expert with over 15 years of global experience across a range of industries. Topsy serves clients in both the private and public sectors, developing ambitious growth programs and executing large scale transformations with the primary focus on financial services. Mayowa is an Associate Partner, also based in Lagos and one of the leaders of McKinsey Africa's financial institutions practice. Mayowa has worked with several multilateral institutions both within and outside of Africa and has extensive experience across West, South and East Africa, serving major institutions on topics relating to large strategic transformations.

The two have just co-authored a new report published last month on Fintech in Nigeria titled Harnessing Nigeria's Fintech Potential that you can find on our McKinsey website. They are both passionate about the role that innovation, access to finance, and gender parity can play in the continent's growth and development. Topsy and Mayowa, thank you for being here and welcome to the McKinsey Africa podcast.

Topsy Kola-Oyen...: Super excited to be here. Thank you, Kerry.

Mayowa Kuyoro: Thanks for inviting us, I'm really excited about the conversation.

Kerry Naidoo: A bright spot in the Nigerian economy with exciting potential to get even brighter, this is how you open your new report on Fintech in Nigeria. Tell us why you feel this way, Topsy.

Topsy Kola-Oyen...: Right, Kerry, it's actually been a tough time for the Nigerian economy over the last five years or so and this is across multiple metrics and in GDP per capita, GDP growth, unemployment, just to name a few. But within all this you have this Fintech sector that's having a very impressive run. It's growing in terms of investments, over 197% in the past three years. The number of fintechs have increased dramatically, we have over 200 and there's been tons of innovation and overall impact. So, we've seen positive impact in terms of financial inclusion, we've seen fintechs give young people job opportunities and a reason to develop technical skills. We've also seen it just increase financial access to a number of different people, help them expand businesses, get loans. So all in all it really has done remarkably well.

Kerry Naidoo: Mayowa, what about Fintech's potential to get brighter? Couldn't that be dismissed as wishful thinking given how hard the economy locally and globally has been hit by this pandemic?

Mayowa Kuyoro: I completely agree with you the COVID-19 pandemic has been a significant blue to both lives and livelihoods across the world. Fintechs in common with many companies across the world they face challenges related to the impact of COVID-19 on their people, revenues, even just the way of working. I was speaking to one founder very recently and he was telling me how things have just dramatically changed, not necessarily for the worst but things have changed as a result of COVID-19.

I think one of those changes that we're seeing across all sectors is this theme of digitalization and the rails of Fintech is technology and digitalization. So I do believe that beyond what is happening in the global economy today I think fintechs do have the potential to get better because the foundation of what they're riding on is technology which I think COVID-19 has actually helped to accelerate.

Additionally, when you look at Nigeria in particular, we're Africa's largest economy both from an economic side but also from the population size so the numbers speak to themselves. They're also quite a useful population. I was looking at the numbers yesterday actually and the average age in Africa is I think under 35 which is exactly the right demographic to be thinking about digital adoption. So when you think about some of these external factors, young population, large growing economy, the fact that fintechs ride and ride on digitalization, I think you can come to the conclusion that things can only get brighter and we're only scratching the surface of what fintechs can do.

And then if you cast your mind back actually to just the beginning of the crisis, we saw fintechs really rise enough to the occasion. So for example, Nigerian fintech Flutterwave augmented its core payments business by launching Flutterwave Store which allows merchants and SMEs to create digital stores for people to shop online. So in a nutshell, it's not just wishful thinking. I think the potential is there, at the same time we can't be blind to the economic impact of the pandemic.

Kerry Naidoo: I'd really like to talk a little bit more about those impacts and their implications for the sector. But before we go there, let's establish what's the appeal of Fintech and why is it so important to Nigeria? Topsy?

Topsy Kola-Oyen...: I think, Kerry, the answer is it's convenient and accessible, right? Mayowa just spoke a bit about the very young population we have in Nigeria. 40% of the population are under 14, less than 3% are over 65, so it gives you an idea of just sort of our demographic. And then we also have a very high increase in rate of smartphone penetration. We have over 80 million Nigerians on WhatsApp and on Facebook, so you also have a demographic that's also willing to use digital platforms and who have increasing access to these platforms.

Now, how does that translate to fintechs? Well, they want the same level of access, convenience, and ease of use with their financial solutions as well. And so that's what we see translating. In fact, we find that 57% of respondents in a recent survey prioritized access and convenience as reasons for adopting Fintech, and so that was over access and convenience over price and overvalue. As one young customer told us the prime reason for switching to Fintech for her was that she could pay all her bills and do transfers on her phone without ever going into a banking branch. Another young customer said he didn't want to stare at his screen waiting for a one-time password. And what we've seen also is that certain players like Opay and Quickteller have found success by actually providing this access and convenience to customers.

Kerry Naidoo: Fintech seems to be favored by the youth and that makes sense, but what about other parts of society?

Topsy Kola-Oyen...: Kerry, the need for access and convenience cuts across market segments. So, although the nature of the solutions for each segment might differ, what we've seen is different players creating almost niche solutions to address other segments like the informal segment, mass market segment, SMEs, and other initiatives like that. For example, Bankly is a Fintech in Nigeria and that's a great example of innovation targeting the informal mass market segment.

Essentially what they do is they digitize the local form of savings known as Ajo, whereby you're shifting users from saving with a respected person in their neighborhood to now saving on an electronic app, right? The Bankly App, which offers greater security, you have your alerts and notifications and you also have the ability to access your savings from a wide base of agent networks versus your one agent in your neighborhood. So, that's one innovation that we've seen. Another segment that we feel has a lot of potential for growth is the SME segment. It's been traditionally underserved, but of course it's also a segment that values access and convenience as well. Paystack has been a shining example of a player who's developed simple plug and play solutions that help SMEs receive payments and they can do that within few minutes of onboarding. So that's again how this access and convenience is translating into multiple segments beyond the youth.

Kerry Naidoo: Okay. So it's clear really how Fintech is able to add value to the lives of its customers, but it's importance is bigger than that right? How does the sector add value to the economy and society as a whole? Especially after COVID-19, we are going to need to find ways to kickstart our economies. Does Fintech have something to add here?

Topsy Kola-Oyen...: Absolutely, absolutely. This is actually one of the things I love discussing about the Fintech opportunity, is really the potential for impact. Right? In our report, we talk about how Fintechs can add value by creating impact in three broad dimensions and we are really core believers in these three dimensions. The first is around stimulating economic activity, right? This really comes from meeting customer needs, helping customers transact digitally and helping them stay in business. Mayowa shared a bit about during COVID-19, how some players responded by getting offline businesses online so they could continue to sell and continue to meet the needs of their customers. So we believe that there's a lot Fintechs can do in helping businesses expand access to market and also increase overall business productivity, giving them access to loans, financial services and basically helping them grow.

There is of course also that component of attracting foreign investments, which as we discussed earlier is no small feat in terms of what the sector has been able to do over the last few years. Even last year during the pandemic with all the challenges of exchange rates, we had one of the biggest funding events in the ecosystem with the 200 million acquisition of Paystack by Stripe and so we just see more and more of those things for the ecosystem. The second area where we see potential for impact is around what we call this multiplier effect of Fintechs. As Fintechs increase, you're also increasing the digital economy. Because of the kind of solutions Fintechs have been able to provide, more businesses are able to do e-commerce. It's growing that space and enabling businesses to transact online, that's a multiplier effect. There's also a multiplier effect around skills.

We've seen a significant growth in technical skills and capabilities. Now in a country again with a lot of young people and a lot of people who are unable to find employment, it gives some bright light in terms of, "Hey, we could actually develop skills and we could find things to do." As you have more people in the ecosystem demanding these skills, you're also bringing up people in terms of the capability and their capability levels. So that's also another exciting area of impact, and then last but not least there's something around Fintechs helping drive progress towards development goals. We're talking about financial inclusion, we're talking about increased financial literacy. When you have people in the informal mass segment not very well educated, but who are able to now start leveraging digital solutions, who are able to start having access to tracking apps and savings apps and things like that.

There's also the portion of enabling solutions within education and health to address some of the societal challenges that we have in Nigeria. Things like student financing, all right? That could come out of these Fintech solutions. Digital learning, I mean no one has to reemphasize the importance of digital learning coming out of what we experienced last year. Then also, even things like health insurance and creating affordable solutions around health insurance just to name a few. So in our view, this is an extremely, extremely valuable and very important part of our economy and society. It's an area where we believe that it could really power innovation and leapfrog opportunities for the Nigerian economy.

Kerry Naidoo: So we have this real bright spot with the potential to get brighter and we have all the ingredients of a winning recipe. But we also have the economic impacts of the pandemic that we have to take into account. Mayowa, can you talk to us about those impacts?

Mayowa Kuyoro: We've spoken already about the growing reliance on digital transactions. In some industries we've seen approximately two years worth of digital adoption in just two months and when we started writing the reports we were still somewhat in lockdown. But what we've seen and what we've witnessed is very similar actually to what happened in Asia and first places that experienced the wave of the pandemic, is that actually the transactions have not reverted back down to pre COVID level. So people were forced to shift to digital as a result of the lockdown, we've not seen people sort of reverting completely back to sort of pre lockdown behavior. So I think this is a very good thing for the sector. I think there are a number of challenges, especially in Nigeria that we would need to take into consideration as we think about what the evolution of this space is going to be.

I think the first thing is, Topsy alluded to it early on. As an economy we're in a tricky place, I think last year we were in a recession and there's only going to be... If it's all marginal growth this year. Add to that, we always talk about things at the macro level. When you now take it down to the individual, what does a shrinking economy mean or a very slow growing economy? It means that there's going to be job losses, people are cutting back on spending. The latest prediction said that about a third of jobs and these tend to be sort of people with vulnerable employments are at risk and so people are going to review and downscale their spending. I think the other sort of regulatory thing to be aware of is, as a result of all that happened with the pandemic. In a bid to sort of alleviate the pressure on people's lives, the regulators started to help manage pricing within the industry to help at the individual level and this has its own knock on effect on the players in the economy.

So, if you think about these sort of what I would call tailwinds, I think choices that Fintechs have to make to ensure that they can be sort of well-positioned for the knock on effects of the pandemic on our economy.

Kerry Naidoo: That sounds like a really mixed bag, spending power on the one hand and an upsurge in digital transactions on the other. So you've touched on how the sector is rising to respond to these challenges and opportunities. But can you tell us a bit more about what we can expect in the sector going forward? I believe that you've done some analysis of the likely trajectory of the sector.

Mayowa Kuyoro: Yes, we have and I think also... So let's start with, there's no crystal ball and we might take the path of others or we might forge our own path. Who knows? But I think the future is where anyone's, I guess. But literally I think there's a lot to be learned from analyzing the growth trajectory of sort of similar emerging markets and interpreting what this can mean within the Nigerian context and looking at common sort of characteristics around successful Fintechs. We expect that growth will broadly mirror what has happened in other emerging markets. The evolution of Fintechs has varied significantly from region to region. So if you look at China, ecosystems were formed by the technology giants and they've directly entered and sort of re shift financial services, such as payments, loans, and so on. In the United States and in Europe, which has stringent regulatory requirements and well-established bank offerings.

Efforts have been more fragmented and large technology players have been limited to payments offerings and small-scale lending offerings. If you even look in Africa, actually, you'd see there's quite a big difference between who's leading and who's driving across different markets, depending on what the regulatory regime there is. There is quite a difference in paths even within our own continent.

I think if you were to ask me and say, what is my best guess, I think the growth in Nigeria is likely to be broadly aligned with the Chinese model where technology giants lead the way. In this scenario, there'll be multiple fintech archetypes coexisting, typically consisting of a few dominant players, such as the Tencents and the Ant Financials of this world, Paytm in India, and so on. Grab and Gojek in India, and they'll be long-tail specialized niche players, and we've already seen that emerging within our space.

Then it's interesting to point out, by the way, that both Grab and Gojek started out as ride-hailing platforms that then diversified into super apps, offering a marketplace of services all under one umbrella, with payments and fintechs as a backbone. So essentially, they are creating this ecosystem where your lives are within there and you have to pay for it. I think this is relevant in Nigeria. As fintech in Nigeria matures, we expect to see new pockets of growth emerge, and we see three broad archetypes coming out.

The first is our digital banks and challenger banks, comprising mostly of incumbent financial services providers who provide a digital value proposition and a distinct offering from the traditional model. These could also include fintechs startups, similar to Nubank in Brazil, Revolut in the United Kingdom, and so on and so forth.

Then the next category are what we term 'niche-focus players', comprising fintech startups focused on specific product niches such as credit and payments. Segments such as the SMEs or geographies, for example Northern Nigeria. It could also include B2B players that are focused on supporting incumbents and corporates, and to improve their offerings there.

Finally, you have this ecosystem operator, some people also call them super apps. The ecosystem orchestrators, and these are essentially deeply-funded players who operate big super platforms, such as grab and Gojek. They act as a gateway for consumers, for a wide range of services beyond financial services. In Nigeria, we've seen both banks as well as attackers coming into this space.

Now, I have to say that there's no clear winner and nobody's emerging as, "This is the super app to go on." The jury is out because towards last year, beginning of last year, or end of last year, one of the big players actually announced that they were going to retrench and focus on one vertical. So whether this is going to be a big part of our fintech ecosystem in Nigeria still remains to be seen, but they still exist, and some people are still pursuing that strategy.

Topsy Kola-Oyen...: If I could jump in here, Kerry, the normal rules and competitive advantage apply here. Fintechs are going to have to stay alert and agile to survive and thrive in these times, irrespective of what archetype they choose to compete with. But our analysis suggests that there are five key elements that will mark out successful fintechs going forward. These are the elements we feel will be important to look out for as you look into this space going forward.

I think the first one is compelling use cases. That's use cases that address unmet needs and are driven by differentiated technology. We think this is paramount. We also believe that access to large pools of data and advanced analytics capabilities, to generate innovative products and penetrate new markets, would also be key.

There's a race for data, and being able to translate that data into insights and into innovations. It's going to be very key, especially as you think about the underserved market, the lower mass, the bottom of the pyramid, that is going to come in very handy.

Then there's also something around the ability to attract and retain quality talent, to support this rapid growth and rapid scaling. Talent is still a challenge in this space, in terms of quality talent, especially quality mid-level, senior-level talent. So the ability to attract and retain them will be key for successful fintechs going forward.

Risk management is something that cannot be ignored, especially as fintechs look into a broader set of financial services. We believe that strong risk management capabilities and an understanding of financial services, and the ability to adapt to regulatory requirements, will be critical.

Last but not least, a large customer base, because there's competitive advantage from scale, there's opportunities for differentiated pricing that come about from higher transaction volumes. So definitely, you're going to see a lot of the successful fintechs with a large customer base, and really going for the user numbers.

Kerry Naidoo: Is there anything in particular that fintechs should be doing, at this time of economic crisis, to really position themselves for success?

Topsy Kola-Oyen...: I think like Mayowa mentioned earlier, many are rising to meet the moment and they're pivoting their business models just based on the realities of what's happening in the market, and adjusting accordingly. So we have seen a lot of adaptation. We definitely believe that this is not the time for business as usual. Who knows what's happening today, right? Who knows how long we're going to be in the current state? Who knows what happens to customer behavior post the pandemic? There are a lot of unknowns.

So adaptation and adaptability is going to be very key, but we believe more now than ever, for fintechs, focus on use cases that really address customer needs, is critical. An emphasis on products with a clear path to revenue would also be key, to ease funding pressures or potential funding pressures. We believe that now, there might be more of a sense of urgency to say, "Listen, we could do 10,000 experiments, but which experiments has the clearest path to revenue as people think about their cash flows, about their funding, and their next sort of funding milestones?" So that's something that we think might be adjusted going forward.

We also think fintechs need to be a bit more conscious of spend, because managing cashflow now is critical. Unlike traditional banking organizations, the majority of fintechs have been in existence for less than a decade, right? Few are profitable or have large cash reserves. So although we haven't seen much of it in our environment, another thing for fintechs to consider is exploring smart joint ventures, looking at potential alliances, and seeing how they can basically leverage their assets with others in a way that makes it economically viable for them.

Kerry Naidoo: If these are the elements and actions that will enable successful growth of individual fintechs, what can other stakeholders be doing to help unlock potential in the sector? Especially at this time, I am assuming that no company, no matter how innovative, can thrive unless there is some kind of supporting infrastructure.

Mayowa Kuyoro: You're absolutely right, Kerry. I think absolutely everybody who is in one way, shape, or the other involved in fintech ecosystem... that includes both government regulators, infrastructure players, private organizations, providers of capital... everybody needs to come together and work together, so that we can unlock the sector's potential.

Kerry Naidoo: I like the concept of a fintech ecosystem. Value creation and capture in the broader sense is becoming a collaborative affair that increasingly involves multiple stakeholders within a value ecosystem. So what kind of actions do you have in mind?

Topsy Kola-Oyen...: We've identified a spread of actions for different ecosystem role players, including of course the incumbents themselves. We've spoken a little bit about what we think fintechs could do.

We think there's a role for traditional banks. A number of traditional banks already exploring this space. We've seen different models emerge from carving out separate Fintech entities to partner with Fintechs as a core part of their service delivery proposition, we've seen different models. But we also believe that beyond traditional banks and Fintechs, providers of capital have a key role to play, particularly in terms of how they invest in the sector and particularly in Nigeria. We believe a more hands on approach is required. So beyond just capital, beyond financial engineering, basically more hands-on support. We spoke about some of the challenges Fintechs have even in terms of talent and recruiting then and some of those things. Where we feel that providers of capital could also lean in on.

And we also believe that providers of capital could look beyond startups to the broader landscape. For example, the infrastructure players, because these are all vital parts of the ecosystem as well. So those areas could also be viable places for funding. Then there's also this opportunity, again, for providers of capital to bridge the partnership gap between Fintech and incumbents, leveraging the idea of making expertise. What we see is, we haven't seen, like I mentioned earlier, a lot of partnerships between Fintech and some of the incumbents. I think one of the big reasons for that is there's been a perceived lack of equality between partners is often cited, right? Because after all, partnership does suggest a peer based relationship, which is also not always the case. But we believe that VCs and other providers of capital have the advantage of being both able to speak the language of an incumbent and be a peer to them, as well as being comfortable operating with startups and portfolio companies.

So they could actually bridge that gap and perhaps create new exciting combinations for the ecosystem.

Kerry Naidoo: What about the public sector and development partners? They must play a critical role in the ecosystem.

Mayowa Kuyoro: Kerry, they most definitely do. Government regulators, such as the Central Bank of Nigeria acted very swiftly during the crisis or the beginning of the crisis to promote the use of digital financial services. For example, they collaborated with banks and non-bank payment players to restructure transaction fees and transaction limits, which help encourage digital payments. They relaxed certain financial regulations to allow easier access to digital payment tools and so on and so on. I think they also embraced digital payments from the payment of welfare grants.

So I think sort of broadly, through a set of very deliberate action and through some of their policies on cash payments, they've helped create an enabling environmental to what I will say the pool, for digital financial services and Fintech in Nigeria. But we do believe that there is still more they can do, especially around additional infrastructure, such as addressing the cost and quality of data and data access and accelerating the financial inclusion agenda.

For example, regulators could continue to boost financial services penetration across all parts of the country, particularly in underserved areas and increase efforts towards building financial literacy and support disruptors as they develop new products or find ways to make financial services accessible. We've seen this work very effectively in India actually, where the number of adults with at least one digital financial service account, has more than doubled since 2011. This is in large part due to the more than 300 million people who open mobile phone based accounts under the government's mass financial inclusion program. Because these accounts came bundled with financial products such as insurance, savings, micro pensions, it actually proved to be a way to extend financial services to the underserved population in that country. And I think the way to think about it is, when we talk about financial inclusion, when we talk about sort of getting people into the financial ecosystem, let's create a pool, let's give them products that they want.

So it's not only about, Oh, you must open an account. It's about making sure that people who are excluded from the financial services system actually have something. There's something that they want within that system. And that would that encourage them to get a product. And I think the regulator actually has a big role to play in creating that sort of pool for digital financial services from the underserved populations.

I think it's also critical that they're in the position to create a clear interface with a regulator for Fintech. They could set up sort of robust structures to support Fintechs within the regulatory framework, to encourage innovation and experimentation while managing risk.

For example, the Monetary Authority of Singapore has implemented an agenda where they actually try and promote sort of Fintechs to recount sort of private sector leaders who are deliberate on digital priorities for the nation. And then finally, development partners will also provide support by funding and partnering with universities and sort of the places where you get talent and you train up the people who are going to create these innovations that we need. They can begin to develop the scar skills and tech talents that are going to fuel the Fintech ecosystem.

Kerry Naidoo: Your grasp of the sector, its contribution, challenges and opportunities, as well as your ideas on harnessing its potential are really insightful. It seems as if Nigeria could be an oyster for Fintechs and I, for one certainly hope they make poles from it. Any closing thoughts from both of you?

Topsy Kola-Oyen...: So Kerry for us, this is a very, very exciting space for the Nigerian economy. It's really a bright light that we hope we don't only build on, but we actually use it to leap frog. There's much value at stake for the broader society and the economy, and so it's really vital all the stakeholders work together to protect the advancements so far, the gains that we've made, but also to accelerate growth in the Fintech space. Let's take advantage of the opportunity we have now to really move things forward.

Mayowa Kuyoro: I think Topsy is exactly right. I think Fintech creates an opportunity to actually do good and do it well. And it is important that we all come together, all the stakeholders come together to make it work.

Kerry Naidoo: Mayowa, Topsy, thank you very much for joining us in this episode.

Mayowa Kuyoro: It was our pleasure. Thank you so much.

Topsy Kola-Oyen...: Thank you so much for having us. We're always happy to talk Nigeria Fintech. Thank you.

Kerry Naidoo: And thanks to you, our listeners, we hope you enjoyed today's episode of our McKinsey Africa podcast series. If you'd like to learn more about this particular report, we encourage you to visit our insights page on mckinsey.com, where you will find links to all our latest insights. We also encourage you to follow us on Twitter by searching our handle @McKinsey Africa. Thanks again for listening. We hope you remain well and we hope you can join us again soon.