The African fintech industry has grown rapidly over the past few years and this has caught the attention of some well-resourced venture capital (VC) firms. As one would expect, Nigerian fintech startups have dominated the continent in terms of funds raised or the number of transactions performed.
Nigeria’s Burgeoning Fintech Scene
This dominance has convinced VCs to pour tens of millions of dollars into different Nigerian fintech projects. In fact, a few fintech startups that originated in Nigeria, the continent’s most populous country, have managed to secure funding in excess of $100 million.
Using the funds raised, the fintech startups have not only expanded their footprint across the African continent but have increased the number of services they offer. Overall, the rapid growth of the fintech industry is said to have benefitted many financially excluded people from Africa.
However, critics of Nigeria’s fintechs have argued that some of the VC-backed startups appear interested in brandishing volumes or the number of transactions performed over a certain period. Only a few are concerned about the future prospects of their businesses, the critics claim.
In order to gain some insight into this and other issues within Nigeria’s growing fintech industry, Bitcoin.com News recently reached out to Eghosa Nehikhare, the CEO of a financial services fintech startup, Multigate. In written responses to questions sent via Whatsapp, Nehikare offers his thoughts on why Nigerian fintechs are accounting for a larger share of funds being raised by startups.
Besides giving his views concerning the Nigerian fintech industry, Nehikare also explained why he thinks the industry will continue to grow.
Bitcoin.com News (BCN): What motivated you to pursue a business in fintech?
Eghosa Nehikhare (EN): My journey and motivation started years ago when my father disowned me for not completing my full medical studies back at university in the UK (I completed my BSc but dropped out of my MBBS). But kindly note that my father and I have reconciled and are now best friends. So, I moved to Lagos and worked at Africa Courier Express (ACE), where I helped them build their food delivery service within the span of eleven (11) months to become one of the largest food delivery providers in Nigeria back in 2015. In 2016, I joined Venture Garden Group (VGG) as a Vice President, and a year later became the General Manager and intrapreneur that built their fintech subsidiary to generate revenue growth of 1000% year-on-year.
However, I realized that there were no fintechs that provided solutions to the challenges experienced by large corporate enterprises in Nigeria (and Africa at large). It was evident that the major fintechs — though very successful at it — provided solutions to SMEs and eCommerce giants, particularly in the aspect of payment collections. As such, this market [payment collections] was a red ocean for me. To this end, I decided that I wanted my company to focus on providing financial technology solutions to large enterprise corporates, particularly with the aim to simplify treasury management and cross-border payments for these organizations operating in Africa.
This was my motivation; to solve treasury and cross-border payment challenges for large corporate enterprises (inclusive of banks and other fintechs). This same motivation pushed me to pursue an Executive MBA degree from the University of Oxford, where I am currently studying at. My experience so far at the University of Oxford has served as an added motivation to take Multigate to the next level.
BCN: Since getting into this industry in 2017, what can you say are some of the highlights of your fintech journey thus far?
EN: Within two (2) years of operations, we became a necessity for some of the largest pan-African companies, fintechs and banks as well. By solving a terribly complex problem they all shared we became embedded in their cross-border operational fabric. So far, Multigate has provided fintech treasury services with a cumulative total of $4.3bn to date.
Additionally, more importantly, and most excitingly is that Multigate became the first African fintech to be onboarded on SWIFT as a shared-platform provider to corporates (and other fintechs). This was — and continues to be — a significant achievement for us because it enables us to solve a major problem in cross-border payment and treasury management, which is the corporate-to-banks (i.e. one-to-many) messaging operational challenge.
BCN: It has been reported that fintechs accounted for a greater portion of funds that were raised by startups in the past year. What, in your opinion, could be the reason(s) why fintechs are getting more attention/funding than tech startups for instance?
EN: From my experience, the reason for this is a function of the interrelationship between certain variables such as (1) the scale potential of the business, (2) the level of patience (or impatience) of the VC/PE providing the funding, (3) the proportion of “true” addressable market size of the fintech in comparison to other tech startups, (4) and ultimately the return on investment (ROI). Fortunately (and unfortunately) African Fintechs have a greater scale potential than other tech startups in the region given the large proportion of the population that is in desperate need of most solutions offered by fintechs today.
African Fintechs have a greater scale potential than other tech startups in the region given the large proportion of the population that is in desperate need of most solutions offered by fintechs today.
From another angle, with the recent exponential growth of most fintechs, a large number of VC and PE firms — with a relatively high ROI financial obligation to their LPs [liquidity providers] — are left with no choice but to channel a large proportion of their designated African fund to fintechs. On another note, when you compare the “true” addressable market size of most fintechs to other tech startups, it becomes apparent that fintechs have a “boundary-less” market compared to other tech startups, thus allowing them to scale faster than their peers. Finally, and again, in relation to the matter of ROI, fintechs are more likely to generate higher returns given the nature of their cost profile vis-à-vis the fintech’s growth and rate of scale.
However, it is worthy to note that the aforementioned points do not insinuate that building a fintech is easier than other tech startups. I dare proclaim that establishing a fintech, securing investors and the relevant licenses, partnering with the banks, hiring the right people (engineers especially), and marketing the fintech business (as a Nigerian) to scale sustainably is one of the most challenging endeavours of all.
BCN: To what do you attribute the rapid rise in the number of transactions processed not just by your company but by Nigerian fintech startups in general?
EN: To answer this, consider the analogy of a water tank that’s being filled with water at a steadily increasing rate. For the water tank to supply multiple taps with the right pressure, it needs an efficient piping and pressure pump system. In this analogy, the Nigerian business ecosystem is the water tank, whilst the water is the business transactions being generated by the various firms in the ecosystem (the water tank).
The efficient piping and pressure pump system are the fintech startups. The more efficient fintech solutions are deployed to the tank, the higher the flow (and pressure) of transactions from the ecosystem to other parts of the Nigerian economy. Notwithstanding, of course, there will come a time when this rapid rise will plateau (or slow down), for which a new level of innovation will be required to spur growth within the ecosystem.
However, such a time still seems far out. In summary, the rapid rise in transactions is due to the consistent increase in business transactions in the Nigerian business ecosystem as well as a surge in the digital economy of the country, thus consistently leading to a new level of demand by customers. Furthermore, another important point is that the inchoate demand of customers continues to provide an avenue for fintechs to develop a variety of products for customers.
BCN: In the past few years, Nigeria’s rapidly growing fintech industry has attracted the interest of some of the most renowned VCs. Backed by these well resourced VCs, some Nigeria fintech startups have suddenly become billion-dollar companies. However, with a lot of money now having been pumped into the industry, do you now get a sense the rate of growth, particularly in Nigeria, will slow down?
EN: I strongly doubt that the rate of growth for fintechs in Nigeria will slow down anytime soon. Undoubtedly, the competition will become more vicious and aggressive but due to the inchoate demand and ever-increasing size of the aforementioned “business ecosystem,” the demand for fintech solutions will continue to increase. The trajectory of the development and growth of the fintech space in Nigeria can also be academically explained using concepts from an interesting book I recently read, “The Evolution of New Markets” by Paul Geroski where he explains how new markets develop and the characteristics they present as they develop.
Firstly, multiple random products emerge in the arena in various random and uncoordinated fashions. Then, superior products and apps arise from the arena. Afterwards, a seemingly “sluggish” development of the superior products/apps, then comes a breakout and very fast acceptance of the technology across various markets. The fintech space in Nigeria is now in the stage of the fast acceptance of technology across various markets.
The regulator (Central Bank of Nigeria) has recently provided a very conducive environment for various fintech players. The banks are now more receptive to fintech partnerships and “previously resisting” customers are now more willing to engage. There couldn’t have been a better time to be in the space.
BCN: Still, on the issue of growth, there are accusations that some founders of fintech startups are not keen on seeing their businesses grow and prosper. Their only interest, the critics say, is to get their hands on funds being pumped out by the risk-taking VCs. Do you agree with this?
EN: In every market (i.e. Nigeria or even in the Western, more developed markets), there will always be good and bad actors. From experience, whilst these bad actors typically tend to cast a bad light on the industry, it motivates the good actors to generate more value for their stakeholders (investors, customers, and employees), thus creating a net-positive output for the fintech industry.
However, to answer the question directly, I am aware of these accusations but I cannot confirm this as I personally do not possess tangible evidence to back it up.
BCN: Nigerian fintech founders are also accused of being more interested in showcasing the large volumes processed by their companies rather than the revenues generated. In other words, instead of using a business model that prioritizes revenue generation and profitability, Nigerian fintech founders are said to prefer what has been called a freemium model? What is your reaction to this?
EN: Every company is different, and their motivations and ultimate goals are equally different. Most fintechs find the “large volumes processed” as an objective measure of “output” to evaluate performance in comparison to other fintechs. In the same way, some banks value customer deposits over profits, some fintechs place more value on volumes processed over revenue or profits.
Sometimes, this direction is governed by the investors (VC and PE firms). However, I must add that just because they showcase the large volumes processed, doesn’t necessarily mean they don’t focus on the revenue generated or profitability. I will like to believe that whilst the external metric of evaluation is “volumes processed,” the internal metrics that keep them up at night are revenue (particularly gross profit) and profitability.
BCN: Now let us talk about cryptocurrency. In early February 2021, the Nigerian central bank revealed it had asked banks to stop facilitating or processing any crypto-related transactions. Now it’s been over a year since this directive was issued, yet interest in cryptocurrencies remains strong. What do you think are the major reasons why Nigerian residents continue to show an interest in cryptocurrencies like bitcoin?
EN: It is worthy to note the Central Bank of Nigeria had good and worthy intentions in doing this. They explained that it was to prevent the financing of terrorism and other criminal activities, which we have seen to be a real menace in Nigeria i.e., terrorism. Though, as previously mentioned, there will always be good and bad actors in every market. From my engagements and discussions, I have found that Nigerian residents continue to show interest in cryptocurrencies due to the profitable (though risky) nature of trading these cryptos like bitcoin.
It has become a good source of livelihood for most traders that indulge in it responsibly and diligently. As most know, Nigerians are extremely hardworking and ambitious, despite the challenges experienced on a daily basis, Nigerians will work hard to be the best at whatever is in vogue.
Furthermore, the increase in the youth population in the country coupled with the increase in the digital economy also contributes greatly to the continued interest in cryptocurrencies like bitcoin.
BCN: In your opinion, what can the Nigerian government do to help the fintech space grow further?
EN: Using the above mentioned water-tank analogy, the fintech space can only grow further if certain variables are optimized and enhanced: (1) the size of the water tank (the Nigerian business ecosystem) and (2) the size of the output pipes and pressure pump (the quality of the fintechs and the support received thereof). For the fintech space to grow, the size of the business ecosystem and transactions need to grow, which can be achieved with the right “positively impactful” policies by the government.
In relation to the fintechs and the support received, the various regulating agencies need to continue to play a supporting role in areas of tax incentives, innovation funding, transaction monitoring and compliance support. With collaborative support between the various government agencies and fintechs, we will see the fintech arena continue to grow and expand. With the right economic policies, we will see transactions within the Nigerian business ecosystem grow tremendously.
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