With The CBN Always Lurking, 2020 Is Make-Or-Bust Year For Fintech Startups In Nigeria

One minute you’re a fintech company that is making a killing in the payments space. Next minute, you can barely cut it because suddenly your offer of free/low-fee transfers is not so cool anymore because, guess what, the banks now do that too.

When it comes to financial services in Nigeria, there is a cynical-but-not-entirely-baseless narrative that goes something like this; The Central Bank of Nigeria (CBN) is trying to kill fintech startups!

Sure, that’s a rather brash claim but based of the evidence of the year which we all just said goodbye or good riddance to, as appropriate, it could be surmised that the CBN is either trying to keep fintechs on their toes or just trying to put them out of business.

And that’s because it seems Nigerian fintechs are just one CBN regulation away from getting their biggest and best value proposition obliterated.

Over the course of the past year, we saw the CBN’s endless policy tinkering in full view. After all that gospel about boosting financial inclusion through fintech and implementing a cashless policy, the apex bank seemed to have moved against those very goals by formulating policies that are directly counterproductive.

At one point, there was talk of slapping charges on cash withdrawals and deposits above NGN 500 K so as to encourage people to embrace electronic channels for payments. But then, the CBN also placed and then reviewed a tax on POS payments. Counterproductive! And that’s just one example.

The word from the apex bank is that fintech startups are vital to its financial inclusion drive — they are being touted as the dynamic, nimble-footed. fast-growing companies that will take financial services to the last mile and plug the many holes that the traditional banks are too “big” to address.

Yet the CBN has worked against those very same startups by implementing a number of policies that fundamentally threaten the existence of fintech startups in Nigeria; policies that may have not only blindsided fintech companies but may also spell the beginning of the end for many.

In 2018, the CBN basically ordered banks to lend more money or be punished. As a matter of fact, the CBN’s new policies on retail lending has pushed the loan-to-deposit (LDR) to 65 percent; set to hit 70 percent in 2020. And banks have been trying to ‘out-lend’ each other since then. 

And who will suffer? The small lending fintech startups like FairMoney, Carbon, and One-Fi who had no idea that they would be competing with the bigger, well-funded banks for a market segment that the banks themselves have neglected for so long. 

Interest rates are certain to crash due to the deluge of micro-credit and the smaller companies are likely to bear the brunt given that the bigger banks have a far greater capacity to thrive amid significantly low rates.

As a matter of fact, some of the big banks like Sterling Bank and GT Bank, for instance, have developed impressive digital lending platforms that rival fintech startups. 

And to think the CBN has been so generous with issuing fintech licenses while also maintaining its ‘pro-startup optics.’

Also in 2018, the treasury bill fell to its lowest level in 3 years following CBN’s OMO ban on domestic non-bank investors.

The apex bank had earlier announced the exclusion of individuals and corporates from participation in its Open Market Operations (OMO) at both the primary and secondary.

With the exclusion, only Deposit Money Banks (DMBs) and foreign portfolio investors (FPIs) can participate in OMOs, while individuals and non-bank financial institutions will have to shift focus to treasury bills and other investment options. 

It has to be noted that OMOs are issued by the CBN for monetary policy management to control liquidity. The apex bank in recent times had opened the market to foreign investors to generate foreign exchange to maintain the value of the naira, but now, only foreign traders are allowed to hold OMOs.

And who will suffer? Savings/investment fintechs like CowryWise and PiggyVest who will now be hardpressed to maintain attractive rates.

Savings/investment fintech firms in Nigeria have long relied on treasury bill rates and other low-risk investments to generate revenue.  

Several of these firms are known to typically offer returns of 10 percent and above per annum to their users as part of strategies to attract new customers and keep the old ones.

But with treasury bills at a three-year low, these startups may have to adjust their rates and it is unlikely that the new rates will be as attractive. 

Nothing chases customers away like reduced rates and nothing looks more suspicious than a startup offering rates above 10 percent when it’s obvious that neither the bond market nor the stock market is yielding such returns at the moment. So, for those startups, it’s a kind of a bind.

However, the view from Odun Eweniyi, the co-founder of PiggyVest (formerly Piggybank.ng) — arguably one of the best-performing Nigerian fintech startups in 2019 — is that nothing is set in stone at the moment.

“I think that there’s no certainty here – everyone’s interest rates are based on prevalent market behaviour, and everyone is running a business and will take the best decisions for their business, so I cannot presume to speak for all fintech companies,” she told WeeTracker in an emailed response.

“From a personal point of view, we’re observing the changes in the rates on the market, and as soon as any new changes are necessary we will make them. The goal is to offer competitive, sustainable rates to our users and we will continue to do that,” she adds.

So there you have it; micro-lending fintech startups and their savings/investment colleagues aren’t exactly having a swell time at the moment and it will be interesting to see how things pan out in 2020.

On December 22 of last year, fintechs in the Nigerian payments space and digital banks alike were dealt a reality check when the CBN made their previously special offer of zero/low-fee inter-bank transfers seem ordinary.

Before the CBN slashed transfer charges to NGN 10.00, and NGN 25.00, and NGN 50.00 depending on the amount being transferred, many fintechs in the payments space had enticed and wooed people into signing up by offering transfer fees much lower than the NGN 52.50 typically charged by banks.

For instance, at one point, before appearing to switch up on its users, OPay was gaining users by the boatload by charging just NGN 10.00 for all bank transfers. But that has since changed and the fee is now somewhere around 1 percent of the amount being transferred; cue the furore and mass exodus by enraged customers.

Kudabank — the self-acclaimed ‘Bank of the Free’ — is currently offering 25 free inter-bank transfers every month and NGN 45.00 per transfer upon the exhaustion of the 25 free monthly transfers. 

But the CBN’s new move, which not only affected inter-bank transfers, but also touched up on ATM withdrawal charges, card maintenance charges, and many other pain points that many fintech companies have positioned themselves to address and profit off of, means that fintechs would have to get a lot more innovative than merely offering free transfers and free ATM withdrawals if they are to thrive.

Simply put, Nigerian fintechs came into existence with the blessing of the CBN in order to meet needs that the traditional banks have failed to address and are apparently incapable of addressing.

But now it looks like those fintechs are being pressed for space given that the CBN is now also compelling the bigger and better-funded financial institutions to do exactly what the smaller fintechs are doing and effectively knock them out.

With all that has happened in the just-concluded year, and with the possibility of yet more tinkering from the guys who call the shots, it sure looks like the stage is set for a make-or-bust 2020 for fintech startups in Nigeria.

And there’s a feeling that mergers and acquisitions will feature prominently in the fintech fiefdom this year as the ecosystem approaches its proverbial moment of truth.

It’s a thought also shared by the PiggyVest co-founder who is convinced that M&As may come into play. 

“The ecosystem is maturing and M&As are actually indicative of growth,” said Odun. “Not to mention the current economic climate will make collaboration, in many forms, absolutely compulsory.”