Fintech growth hindered by inability to collaborate

By Adedeji Olowe and Ifunanya Ezeani

Confidence in the Nigerian digital payments and Fintech industry is rising. And this is best exemplified by the rise of the African Fintech unicorns, three of which are based in Lagos. Their rapid rise is so unprecedented within the African context that It’s not uncommon to hear whispers about how Nigerian banks would be obliterated in a flash because they are slow and antediluvian.

Ironically, these Fintechs have leveraged their very existence on the core infrastructure built by these banks. Furthermore, most Fintechs continue to exist and attract investors anchored on the assurance of access to these payments infrastructure.

Even more ironic is the fact that while banks have collaborated in ensuring interoperability and fostering collaborations, Fintechs struggle to collaborate and build any enduring artifacts beyond a smattering of commercial partnerships.

Built by Banks. Used by all.

Take the Bank Verification Number (BVN) for example. Faced with a perennial lack of  credible foundational identity systems and the inability of the Nigerian Government to build one, the Central Bank of Nigeria, in collaboration with all Nigerian banks launched BVN, a centralized biometric identification system. The BVN gives each customer a unique identity across the Nigerian banking industry that can be used for easy identification and verification. The BVN consequently enabled seamless verifications that allowed Fintech to get millions of customers at scale. Who built the BVN? The Nigerian banks.

Nigeria Interbank Bank Settlement System (NIBSS) drives more than 90% of all interbank transfers through the NIBSS Instant Payment (NIP) network. (NIBSS) was founded and owned by all licensed banks including the Central Bank of Nigeria (CBN). Every Fintech offering account transfer service routes that through NIP directly or indirectly through a bank who then routes that through NIP. Who built the NIBSS and the NIP? The Nigerian banks. 

Super agents and mobile money agents have found success with last-mile agency networks that are powered by NIBSS and SANEF networks. Super agents are driving almost N100b a day in transaction value. Who built the SANEF? The Nigerian banks.

To avert the risks of systemic failure in the financial system, nine Nigerian banks in partnership with Dun & Bradstreet, a global provider of credit information products and services, and IFC formed Nigeria’s Credit Reference Company in 2007. The largest Nigerian digital lenders desperately depend on the data from these credit bureaus to guide the underwriting of the multi-billion loan portfolios. Who built the credit bureaus? The Nigerian banks.

Interswitch was founded as  a national ISO switch for cards and ATM switching. Interswitch consequently grew into bills payments and a mass of various API services. The company routes a significant portion of traffic for super agents and web payments companies. Who funded Interswitch at creation? The Nigerian banks.

Banks compete. Banks collaborate. Banks win.

There are twenty-two (22) commercial banks in Nigeria that serve the 70m Nigerians with financial access. The sheer size of the Nigerian banking industry is partly attributable to the mad pressure it places on its employees to open and drive deposits in their bank accounts. Yet, Nigerian banks are experts in collaborative competition. They go aggressively after the same customers but understand the power of an ecosystem play.  They have learned that collaboration creates a multiplier effect and allows everyone to reach their destination faster. Their collaboration reinforces users’ trust in the financial system, discouraging fraudsters from exploiting the system. 

Distrustful competition. Negative synergy.

The Nigerian Fintechs industry is young and growing. Being in the early growth phase, there is this tendency to compete rather than to collaborate. Yet, it makes more sense to collaborate; your competitor isn’t your enemy.

Take digital lenders, most of whom get shafted every day by bad borrowers but never share data or with credit bureaus. They are so bitter about their losses they would rather other lenders suffer the same fate. But guess what, the bad borrowers continue to rampage them while the market struggles to grow. Increasing interest rates to cover the losses only exacerbates the vicious cycle of adverse selection. 

Web payments collections are another example. Nigeria is rife with fraud of bad actors using stolen identities to raid victims’ accounts and subsequently have the funds usually moved through Fintech digital wallets. While banks typically have a BVN blacklist and actively help each other with account blockage and funds recovery, Fintechs don’t work with each other. Subsequently, the same gangs of fraudsters go around marauding the Fintechs while life-threatening chargebacks are levied against them.

Lastly, while banks routinely band together for collective bargaining of common services or products (POS, ATMs, etc.), the Fintechs continue to undermine each other with pricing. Subsequently, every time there is a downward trend in pricing, the Fintech partner to banks takes most of the commercial haircut. Why are they not able to agree on a common industry price and hold their own?

I’m smarter than you. I can do it alone.

There is this tendency for the Fintechs to want to go alone, each trying to outshine the next rather than share data and lessons to aid one another to succeed. This could be due to the developing market and the fact that the success of one or two Fintechs naturally leads to the creation of tens of similar Fintech, subsequently competing for the same market share. In Paytech, there are three popular players but their successes have led to over 30 businesses getting approval or approval in principle to operate similar businesses. So, it’s conceivable for the few that have succeeded to refuse any collaboration. 

Rethink the game. Collaborate.

Collaboration creates synergies that are hard to individually pull off and this should be obvious to the Fintechs within the Nigerian and African ecosystem. Fintechs could learn from established markets like the US where Paypal’s success was due to its widespread adoption and partnership with eBay. 

The time has also come for the emergence of big-picture and open-minded thinking among Fintechs.