In November alone, Nigerian fintech start-ups attracted $360 million, equivalent to a third of total venture capital investment raised throughout Africa in 2018 (more than half came from Chinese investors).
The strong interest in Nigerian fintech helps to buoy the development of the continent’s tech ecosystem. But the recent flow of capital seems to overly depend on three myths about the sector, all of which need to be addressed so that fintech can reach its full potential.
Myth #1: Fintech is driving financial inclusion in Nigeria
Fintech alone cannot catalyze widespread financial inclusion in Nigeria. For obvious reasons, lending by Nigerian fintech services can only reach those who are already online—which leaves out roughly 40% of the population, according to the Nigerian Communications Commission.
Similarly, because fintech start-ups remain largely dependent on traditional banks for credit histories, bank accounts, and identity verification—those without a traditional bank account are unlikely to gain financial access through fintech innovation.
At this point a full 60% of Nigerians lack access to banking. The optimism for fintech-driven financial inclusion is not unfounded; elsewhere in Africa, notably Kenya, mobile money did drive such gains. But, Nigerian mobile money providers have so far, almost exclusively, reached customers that are already banked.
EFInA reports that 90% of mobile money customers already had an account with a commercial bank. This reflects poor infrastructure development—notably a lack of resources directed at credit check automation overall—which will need to be addressed before fintech can truly catalyze financial inclusion in Nigeria.
Myth #2: The Nigerian Fintech sector has plateaued
Precisely because of limitations in infrastructure development, innovation in Nigerian fintech hit a plateau years ago. The sector is stuck streamlining payments for merchants and servicing point-to-point (P2P) transfers. Look at O-Pay, for example—one of the Lagos-based start-ups that received a massive investment from Chinese VC this year.
The engine behind the technology is still largely manual—albeit with a splashy interface. Infrastructure is a major limitation here as well: the lack of a national ID program means that companies are on their own to verify their customers, crucial to avoiding massive amounts of fraud.
By contrast, in India the rise of fintech has been largely reliant on the implementation of the country’s massive national ID project. Dependence on paper in the banking sector is a contributor here too—linking accounts to O-Pay profiles can require manual searching through thousands of records.
Myth #3: Data is affordable and accessible across Nigeria
There is a fundamental limitation to fintech potential in Nigeria that underpins all others—many people either don’t have a phone, or can’t afford requisite data to access these services. Unlike Ghana and Senegal, Nigeria lacks a national backbone network through which high-speed Internet can be extended across the country.
Presently, all the operators together comprise about 33,000 km of fiber-optic cable and 24,000 cellular towers, significantly fewer than in far smaller neighboring countries. Because of this limited range, 3G coverage only reaches 54% of the population, and LTE only 51%. The regional average, by contrast, is almost 63%—and that largely refers to countries with smaller physical footprints, weaker economies, far fewer government resources than Nigeria.
More fundamentally: just over 20% of Nigerians even own a smartphone, which is essentially a prerequisite for accessing the majority of fintech products on the market. Without basic growth in these fundamental elements, Nigerian fintech isn’t yet living up to its hype.
Ideally, the smart money that has boosted the global profile of Nigerian fintech to such heights will soon identify these structural limitations and direct resources.
But, it should be clear that the missing ingredient is not more venture capital funding—it is effective government spending and prioritization.
At this point, the government must focus on the fundamentals:
- bring internet access and traditional banking to more citizens
- execute an initiated national ID program and digitization of records
- attract investment into telecoms infrastructure (fiber-optic cables and cell towers) to slash the cost of data.
Without these essential pillars in place, Nigerian fintech will fail to achieve a developmental impact.
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