Visa buying Interswitch would upturn Mastercard’s game

In December 2010, Helios Investment Partners led an acquisition of a majority interest in what is now Africa’s first fintech unicorn – Interswitch. A decade later, Visa’s $200M funding confirms the hope of every investor in the first 10-12 years of their investment, an exit – Initial Price Offering (IPO) in this instance. What is more interesting is that Visa has been strategically acquiring fintech assets over the last few years and now has investments in 3 of the top fintechs in  Nigeria – Flutterwave, Paystack, and Interswitch. 

However, this strategy could go in more interesting ways and not always how you expect. I promise I’m not a conspiracy theorist – stay with me. 

Interswitch’s market dominance in Nigeria is nearly impregnable. Visa on the other hand, despite being a global leader, continues to play third fiddle in Nigeria, Africa’s biggest market. A little bit of history; Visa allegedly used to own 40% of ValuCard, now Unified Payments Services Limited (UPSL) but exited the company in 2012. At the nascent age of card payments in Nigeria, Visa was the dominant Chip and PIN card and the Visa Electron, its flagship. Card payments were quite unstable and domiciliary accounts were non-negotiable if you wanted to shop abroad with your debit card. The credit card was unheard of and even when they called some credit cards, they were 100% cash-backed. Talk of absurdities.

Enter Mastercard. 

While Visa card users were struggling, Mastercard swept into Nigeria and partnered with GTBank and Interswitch to launch the Naira Mastercard. Before anyone could say Jack Robinson, other banks had jumped on the train and Mastercard was crowned the Nigerian King of Cards. Overnight, everyone could shop abroad without hustling for FX; the pain of online payments became a thing of the past; banks earned revenue like bandits. The Mastercard international game was so profitable it accounted for 75% or more of profits declared by digital banking teams. 

Fast forward to the present day. 

Of the 60m cards in Nigeria, Mastercard is about ~43% of the lot while  Verve accounts for ~45%. The rest are Visa cards. Interswitch is a big player in this space, I mean, you can’t be worth $1B if you are playing around. They drive 100% of Verve transactions, about 25% of Visa and 95% of Mastercard. 

But what would happen if the dynamics change? What if Visa’s $200M investment in Interswitch leads to further investments before or after the IPO that then makes Visa the majority equity holder in Interswitch? 

If and when that happens

A  number of things could significantly change the face of payments in Nigeria. For starters, Verve cards would be accepted globally on the Visa network, suddenly giving the brand the legs it has tried to have for the last 9 years. Visa would probably convert all Verve cards to Visa, immediately putting Mastercard and Visa percentages at par. 

Should this happen, Mastercard will not siddon look, after all, they did not come to Nigeria to count bridges. It would be extremely unstrategic to let your biggest global competitor carry 95% of your traffic in the largest market on the last frontier.

What then could Mastercard do? 

The folks at Mastercard are probably thinking about the same thing. At this stage, it’s best to rapidly de-risk transaction transport. The alternative would be to back another switch and/or processor in Nigeria. Unfortunately, Paystack and Flutterwave cannot help with this; as sexy as they are, they are just Payments Services Providers. The game to become switches isn’t for the faint-hearted and it takes a gazillion years to connect a switch to every bank. If Mastercard decides to hit the ground running, they could acquire an existing switch or processor that is connected to every bank and is able and certified to carry Mastercard traffic. That leaves just Network International (NI), Etranzact, and 23-year-old Unified Payments in play. 

Mastercard already owns 10% of NI, which processes most of the credit cards in Nigeria. Using NI remains a viable option to drive Mastercard traffic in Nigeria but I’m not sure that NI as a company has what it takes to play the Nigerian game; it has been struggling for a piece of the pie for years and Mastercard’s 10% isn’t enough to give it the teeth it needs to take a good bite out of the chunk. Etranzact, on the other hand, is listed with a public valuation which makes acquisition easier and more transparent. They also have about 5 licenses covering processing, mobile money, etc.

United Payments might be an old workhorse but has previously processed Mastercard for Access Bank. The company also has a rich set of licenses to play toe-to-toe with Interswitch (Visa) and is currently the largest processor of Visa transactions in Nigeria. 

Should this sequence of events occur, there is no telling how regulators will react; the Okada ban has taught us this. While they love competition, they have always supported local standards like NIP and Verve. Mastercard and Visa going toe to toe further solidify a duopoly of global card giants in Nigeria. This does not mean it won’t be approved however both companies will likely come under increased scrutiny.

Banks so far haven’t liked dominant players as they create imbalance and stifle innovation and pricing. Visa and Mastercard will be caught in the middle trying to please banks. I expect Mastercard to win this round as they already have a history of understanding bank needs and creating the right alignments with incentives and programs. Or how do you think they won the market?

The fintech ecosystem will develop as both Visa and Mastercard would bend over backward to win players over. As usual, they will naturally be drawn to the card network with the more receptive team and better terms of engagement and Mastercard must remain this. 

While the Interswitch play looks interesting, and a Mastercard could buy either of UPSL or Etranzact, the three targets lack a good API play which is dominated by the duo of Flutterwave and Paystack. Knowing that API is the next big thing in payments and banking, the next contention would be to shore up the traditional ISO play by acquiring any of these as an icing on the cake. How this would play out would be an interesting game to watch. Pass me the popcorn. Visa and Mastercard are both investors in Flutterwave while the former has a stake in Paystack as well. Knowing how VIsa throws cash around, I wouldn’t be surprised if it buys both of them, mash them together, and layer them like fondants on Interswitch. 

But then, for all we know, nothing may happen beyond this investment.

10 Predictions for Digital Payments in 2020

2019 was an interesting year for payments globally, and our dear Nigeria wasn’t left out of the parte. But 2020 would be even much more exciting as many of the payments food that got on the fire last year would be served piping hot at the start of the new decade. 2020 would be lit!

As usual, I would be trying out my hands in seeing the future even if I desperately need a pair of glasses to see the tip of my pointy nose in the real world.

So, here’s the third annual prediction of the payments ecosystem in Nigeria. My predictions are always on point: most of them would never happen, and I’m no better than a new age Babalawo. But then who cares?

Let’s dive right in!

#1 Despite CBN’s push, commercial banks won’t crack retail credit

If you didn’t skip Economics 101, you would know that retail credit drives consumption within an economy. Our Nigerian bankers know as well, but maybe they just don’t give two flying horse legs. The CBN has been pushing them with stringent regulatory measures but you can’t give what you don’t have. Our bankers are mostly of the Shashe type and there isn’t a shred of retail DNA in their body. Come December 2020, the drive for retail credit would only have been marginal with banks turning their backside to collect the cane that the CBN would be using to whoop them for not expanding credits

#2 Account-based payments explode. Rapidly overtakes card payments online

Card payments suck in Nigeria, and it isn’t a secret and using accounts to make payments for services have been the mainstay of Instagram and Whatsapp commerce in Nigeria for almost 5 years. But automating and wrapping this around with some beautiful APIs would go mainstream this year. It would touch at least 50% of all card payments. How we will confirm if this prediction is accurate or not is anyone’s guess.

#3 MTN gets a PSB license. Trouble ensures for bankers

MTN has been dancing around financial services for as long as chicken lacked teeth. Last year they got the super agents license and they are already doing something with it but it seems their PSB license application has more dust on it than all the sands at Eleko Beach. But give it to MTN, they don’t give up easily, so expect that somewhere and somehow, they would meet the requirements and get their PSB license. Then trouble ensures for all bankers.

#4 Monthly interbank transfer hits 300m/month and it would be fueled by cheap low-value transfers

Last year, I predicted that interbank pricing would crash; the CBN didn’t disappoint. Now that you can now do transfers as low as N10 a pop, start seeing crazy emergent behavior where it’s now way cheaper to use your app or USSD to send N250 for bread and moin-moin than taking Keke Marwa to the nearest ATM. 

#5 Opay will be one of the top ten banks in Nigeria

Everyone seems to be screaming about how the Chinese African juggernaut has ridden roughshod over GoKada and Max.NG. What they haven’t paid attention to has been the massive growth of the payment infrastructure backing it. In 2017, the first thing Opay did was buy the derelict Paycom mobile money which has now grown from nothing to becoming the seventh-largest player on the interbank market. In 2020, Opay will push massive retail credit, offer better rates for investments, and their size means money stays within their ecosystem than move out. Expect them to get a seat at the Banker’s Committee soon. And if they ain’t invited, they would buy one of the commercial banks.

#6 CBN kickstarts Open Banking

APIs rule the world and the last walls erected by banks against the onslaught customers integrating their bank services into other apps are crashing down with open banking APIs. Nigeria has been slugging it since 2017 but this year, CBN will back it with a directive and possibly adopt the standards being done by Open Banking Nigeria (disclosure, I’m a trustee at Open Banking so this is as much as a prayer and as a prediction)

#7 Agency banking becomes successful as the number of agents hits 600K

My good friends at SANEF had an amazing 2019; they did multiples of what they started the year with. The growth of adoption would see agency banking exploding to over a million agent touchpoints. The vast agent banking network would drive the emergence of new payment products and business models from fintechs. But but but, don’t dance too fast, this would be dominated by MTN as they are pushing more infrastructure and agent recruitment spend that all other super agents, combined. Those guys don’t play around!

#8 A heavy hitter launches a digital bank, eclipses all the struggling existing small players

Many players have tried to crack the digital bank nuts, but it has been mostly eggs thrown at walls just to pull it down. If you call yourself a digital bank in Nigeria today, you are probably too small to be just a little over insignificant. But come this year, someone (probably not a Nigerian entity) puts money down to end this argument and launches the Monzo of Nigeria. But it wouldn’t be any of the players we have now.

#9 A prominent international player buys a major fintech (think Flutterwave, Paystack and not Interswitch)

Visa just plopped $200m to get 20% of Interswitch but doesn’t own it and would have to share the crumbs and strategies with other institutional investors. This year, however, a big hitter would come for any of Flutterwave, Paystack, or even some of the lesser-known but kicking-it fintechs.

#10 Whatsapp decides to launch the next payment play in Nigeria using Facebook Pay, trouble starts for all fintechs

Whatsapp would land forcefully in Nigeria as it’s first foray to own payments within the African ecosystem. After all, if the only massive growth potential left in the world is in the SSA, why not start from the palace of the king of Africa?

#11 The one prediction 100% to come true

Most of these predictions are at best an educated guess at what could happen, which isn’t better than a bunch of bananas trying to eat a monkey.

Wondering what happened the previous years and the predictions? Read about my takes for 2018 and 2019.

10 predictions for digital payments in 2019

2018 was an exciting year for payments in Nigeria. Tons of cash came in as international investments; interbank transfer crossed 700 million transactions, even mCash had a little showing. Of course, the bitcoin bubble made a loud burst with many licking their wounds.

As usual, the following are my 10 predictions for 2019. They are mostly influenced by my understanding of the industry, discussion with various stakeholders, and my penchant for foolery. While these 10 predictions could be a guide for you, rely on them at your own risk.

#1 Interbank transfers overtake ATM cash transactions
Come April 2019, for the first time ever and every month forever after, Nigerians will do more interbank transfers (using USSD, mobile, and online banking) than they collect money from ATM machines. Interbank has seen a steady 100% annual growth over the last few years and is poised to eclipse other payment methods as more bank customers gravitate towards USSD or can afford smartphones.

#2 Payment Service Banking flops
The euphoria around Payment Service Banks (PSB) is unfounded as it is more about financial inclusion than fancy mobile or digital banking. Nevertheless, the poison pill of 22% CRR and 75% deposit with CBN as Treasury Bills is marking this as dead-on-departure. While a lot have applied, only a few will launch. MTN will find that it’s a different kettle of fish and would struggle significantly.

#3 SANEF becomes a surprising success
Shared Agency Network Expansion Facility is a massive N32B undertaking by banks and NIBSS to haul in 30 million financially excluded Nigerians into the financial ecosystem. While it has been on for months with little to show apart from daily adverts by NIBSS, there appear to be unseen moves to make it a success. For example, the adoption of a common API standard for account opening would help the super agents get to the market faster. The appointment of Ronke Kuye, a veteran of payments and a co-founder of CeBIH, to run SANEF is a significant step in the right direction.

#4 A massive data breach or fraud hits some fintechs
Some months ago, someone found exposed data about Arik customers which included card details, phones, and emails. This discovery underscores how pervasive the security lapses have been for technology companies worldwide. When you hear about likes of Google, Facebook, and Yahoo having breaches, you know it’s a matter of time that a Nigerian bank, a fintech, or government agency is walloped. This time around, it would be a hit so hard they cannot sweep the stories under the carpet. By the way, some of these frauds would be done by internal teams.

#5 CBN clamps down on errant fintechs
After the embarrassing frauds and data breaches, CBN will go into a knee-jerk reaction and go after banks and/or fintechs who do not have licenses. A lot of apps will disappear with many investors dollars following the pipe into the drain.

#6 Interbank transfer becomes N20
CBN will update its rules to force banks to reduce their interbank transfer payments to N20 a pop. Bill payments and others will not change though.

#7 Micropayments become free
Part of the CBN rule would say that transfers below N1,000 should not be charged subject to a maximum of N2,000 per day to engender financial inclusion and cashless payments. Customers will rejoice, and I will throw a party (just make sure you RSVP). Before you think I am mad, just remember that CBN made ATM withdrawal free in 2013 and only put a cap of 3 free transactions when banks went begging with their grandmothers. With the cost of interbank transfer down to N20 or even zero for transactions of N1,000 and below, micropayments will explode. Now you can pay for Agege bread with N50, and you won’t get charged.

#8 International players go big
WhatsApp finally figures out how to connect your bank account (for some banks) to your app so you can now transfer funds instantly to anyone. And guess what, they will do it so well and so seamlessly that you wonder if our banks have been playing.

#9 CBN does an about-turn on the new licensing regime
The Central Bank of Nigeria recently threw some gasoline into the fintech fire when it proposed to create 3 licensing bands of up to N5B capital requirements. Since then, everyone has been snipping at CBN’s heels.

#10 Someone hacks AI for banking
A smart bank finally figures out what to do with the mess that WhatsApp banking. Instead of the rubbish flow, you will now be able to chat using natural language. I mean, if you can talk to Alexa in Ijesha accent with all the glory of “H factor” and it recognizes your voice, why can’t you chat with your bank WhatsApp and say “transfer N15,000 to Silifa” and it gets done?

Wondering what happened the previous years and the predictions? Read about my takes for 2018.

I didn't do too bad predicting digital payments for 2018

Last year, I wrote about 10 predictions for digital payments in 2018 (better to read this first). Looking back, I can assure you, my career as a seer hasn’t been as illustrious as I planned it to be. So how bad am I? Let’s take a look at how I scored myself.

Alat gets a (bigger) challenger (Score = 1)
Every bank looked at Alat and moved on. Not a single initiative came out to challenge the dominant digital bank which continues to garner critical acclaims world-wide. Likes of dot.bank and Wallet.ng are snipping at its heels though.

PSD2 instigates Open Banking (Score = 5)
Open Banking is no longer a swear word in the UK, and it has been primarily replaced by enthusiasm. Quite some countries are now on the open API bandwagon. Bahrain is a new country that published specific guidelines. Despite the excitement, the fire is like a table-warmer and not a bonfire.

Maturity comes to Fintech (Score = 8)
The Nigerian fintech ecosystem has grown significantly over the last 12 months. The growth is best represented by about 5 international fintech conferences done in Lagos to showcase opportunities. Additionally, some odd 5 Nigerian fintechs firms got into YC over the year. Likes of Paystack attracted top international investors like Stripe, Visa, and Tencent. Mines.io and Cellulant raised a ton of cash. What else can we ask for?

Smaller Fintechs instigates price war (Score = 0)
No price war happened. Prices are same. Everyone is cranky.

Bitcoins bubble explodes, killing many (Score = 10)
Last year, BTC was dancing around $20K with investors (real and Babalawos) predicting $100K per coin. Of course, the bubble made a loud splat with values dropping 80% over the last 1 year. Many of my friends who were coin fanatics then have lost their voices. Can’t gloat but don’t equate greed with tech

International players come to lunch (Score = 7)
Opera made a serious inroad into Nigeria with the launch of Opera news that now has 28m active users. The company will also start to lend to all my cousins soon.  Stripe and Tencent are also putting a tiny toe via Paystack. Please come! We will take care of you.

Android supports pay with Paga (Score = 0)
Nothing happened. Sorry, come back later.

Fraudsters get a beating (Score = 0)
Nothing changed. Stop Fraud Africa floundered and never launched. People are still getting scalped day-in-day-out.

Retail digital lending become prevalent (Score = 7)
Digital lending is on a tear with likes of Mines.io getting $13m to play. But with just 0.77% of all loans going to individuals, the journey is still very far!

AI to the customer service’ rescue (Score = 0)
You would have thought that the opening of Whatsapp APIs for banking would bring decent AIs to help customers? Fat chance. Practically every implementation has been sub-par. Just someone copying and pasting USSD menu into a chat. Disappointing.

I scored a measly 38 out of 100; which is even less impressive when you considered that I marked myself. Next year, take my predictions with a pinch of salt, but then 38% accuracy about the future is better than most prophets can handle. Maybe I am not so bad after all.

Read the original predictions here: https://dejiolowe.com/2017/12/10-predictions-for-digital-payments-in-2018/ and subscribe to my blog to get other posts whenever I can summon enough energy to write them.

Credit bureaus are holding back digital lending in Nigeria

Accessing credit bureau data in Nigeria is tough for digital lenders due to high costs, poor API integration, and lack of standardized information. Here are some initiatives that could enhance credit bureau services, boosting trust and facilitating greater credit flow.

I was at a recent event organized for alternative lenders, mostly digital lenders serving individuals and SMEs. The engagements were eye-opening even though I was already conversant with most of the issues raised.
Nevertheless, one of the nagging problems kept nagging me after I left that day.

Everyone was complaining about how difficult it was to get access to credit bureau data. Yes, they exist in Nigeria, and about 3 of them (FirstCentral, CRC, and CreditRegistry) have been licensed for operations by the Central Bank of Nigeria. They even have an association, Credit Bureau Association of Nigeria (proper parapo).

I wouldn’t jump the gun to blame the credit bureaus, but the complaints that kept coming from different actors (banks, MFBs, individuals, etc.) were so many they cannot be without some attributions. There ain’t no smoke without fire.

Here are some of the critical issues that lenders raised.

Cost

The cost charged per record by the credit bureau is so high as to make it useless except for the high ticket transactions. Meanwhile, digital lenders lend from the low thousands, and when you aren’t giving credit to everyone you check, the cost becomes a runaway train.

On the flip side, credit bureaus get this data from banks and lenders for free then turn around and sell at an exorbitant price per check. This doesn’t make sense to me or anyone else for that matter.

If digital retail lending will ever explode in Nigeria, the cost of checking credit bureaus has to be so low that it is marginal. Probably in the region of N20 to N50 per call. Do that for 10 million calls a month, and you have a N6B business a year.

APIs

Without APIs, there is no credit bureau intermediation in digital lending. APIs must be simple to integrate with, extremely stable, and always available. In a modern digital finance world, APIs should take a few seconds and not days to apply for. There should be a sandbox to test without having to contact anyone.

The APIs currently provided by credit bureaus are so poorly implemented – they are buggy, slow, and takes forever to integrate. You can imagine these credit bureau struggling with modern technology. It is interesting to note that none of the credit bureaus has any reference to APIs on its website; so if you want to see developer documentation, you are on your own!

Information

Information should be simple. In the US and other countries, a combination of names and other demographic info are used. In Nigeria, there should be a standard use for BVN. It is unambiguous; it’s simple, it’s fast

Reduced cost for contributors

Credit bureaus should give credit of say, five free checks for every record of the contribution made by lenders. It offers incentives for lenders to contribute information. The more they update, the cheaper their operations are. It’s a win-win for everyone.

Partnership with fintechs

It’s possible that these credit bureaus have dinosaur backends and find it difficult to serve the fast-paced digital lending world. They could partner with fintechs (hungry for revenue) to build smart API front ends and developer portals which alternative and digital lenders can connect with. Revenue share is a way to make everyone happy. Any takers?

What happens when these are done

Lenders get to trust the system, and it becomes self-reinforcing. The better the system is, the higher the chances of blocking bad actors. When bad actors are getting barred, anyone (like my cousins) with a propensity to go rogue becomes serious because they can see consequences. Then default rates go down which makes interest rates go down as well. More credit flows. Maybe Nigeria can be great again.

Fun facts

Of the three credit bureaus in Nigeria, two are led by ladies. Amazing Amazons