The Rise and Challenges of Fintech Startups in Nigeria

In 2017, fintech startups dedicated to financial inclusion in Africa secured 45% of the total startup funding for the year. This sector has seen increasing interest, with Nigeria's Flutterwave raising $10 million in Series A funding, the largest for the year. Between 2015 and mid-2017, fintech startups amassed $93 million in investment, and in 2016 alone, there was an 84% increase in the number of funded fintech companies compared to the previous year. Despite this growth, fintech startups face several challenges limiting their potential. Using Nigeria, one of Africa's top startup investment destinations, as a case study, we examine these challenges.

Regulatory Environment

The regulatory landscape remains a significant hurdle for fintech startups. During a recent Omidyar Network event, Iyin Aboyeji, CEO of Flutterwave, highlighted the excessive number of licenses required to operate in the payments space, expressing a desire for a streamlined process. Similarly, Tayo Oviosu, CEO of Paga, shared that it took them two years to obtain approval for a USSD code, delaying their service delivery.

Rahmon Ojukotola, Founder of StartCredits, described the regulatory framework as outdated, posing obstacles to growth and investment. He noted that regulatory issues, rather than technological ones, create barriers to credit supply, affecting both lenders and payment platforms. The lack of regulatory clarity and the slow response of regulators to the fast-paced industry further complicate matters.

Collaboration, Partnerships, and Funding

Tunde Kehinde, Co-founder of Lidya, emphasized the need for fintech startups to collaborate with traditional microlenders to enhance service delivery. However, forming strategic partnerships can be challenging, as noted by Segun Adeyemi, CEO of Amplify, who highlighted the difficulty of getting key partners, such as banks, on board.

Despite increased funding for fintech startups, founders still cite funding as a major challenge. Segun Adeyemi pointed out that while initial seed funding is relatively easier to secure, scaling funding remains difficult. Tayo Oviosu emphasized the need for early-stage financing in local currency to support startups.

Access to Financial Infrastructure

Accessing existing infrastructure is another challenge for startups. For instance, while the National Collateral Registry, launched in 2016, has been successful in recording financing statements, fintech startups have not significantly benefited from it. Rahmon Ojukotola suggested that lack of awareness and distrust in the system might be reasons for this. Only registered financial institutions regulated by the CBN can enter and save data, limiting startups' access.

Timilehin Ajiboye, CEO of Bitkoin Africa, noted that access to infrastructure, in general, remains a challenge, including issues like inconsistent power supply.

Winning Customer Trust and Access to Talent

Building consumer trust is crucial yet challenging. Segun Adeyemi observed that Nigerians are skeptical about their money, favoring established banks over fintech startups. Timilehin Ajiboye added that users often behave in unpredictable ways, complicating trust-building efforts.

Additionally, there is a shortage of talent with the right domain experience. Tayo Oviosu highlighted the need for experienced middle managers from financial institutions to join fintech startups, bringing valuable knowledge and expertise to the sector.

Navigating the Challenges

To overcome these challenges, fintech entrepreneurs emphasize the importance of strategic partnerships. Collaborating with established players or aggregators can help startups access a larger customer base and leverage the trust and infrastructure of established entities. Mayowa Owolabi, CEO of Afara Partners, noted that partnering with banks can significantly reduce the time to profitability.

Rahmon Ojukotola stressed the importance of staying updated with policy changes from regulatory authorities like the CBN and NDIC. Timilehin Ajiboye advocated for collaboration and knowledge-sharing among fintech founders to avoid common pitfalls and leverage collective insights.

The Path Forward

While fintech startups in Nigeria have made strides in securing funding and addressing payment issues, they still face substantial challenges that impede their growth and survival. To realize their full potential, there is a need for continued dialogue, collaboration, and policy support from the government, regulators, and industry players. Addressing these challenges will enable fintech startups to provide more accessible financial services and contribute to Nigeria's economic development.