- VC investors like Ribbit Capital and Target Global have made inroads into the Nigerian fintech market.
- The rapidly growing country has a tech ecosystem seemingly ready to support many more startups.
- Returns can be astronomical and early investors will have the best of it, said Kuda Bank’s Babs Ogundeyi.
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The advent of digitizing financial services has arrived and now investors are scrambling to search out the next big thing.
Despite a huge population, youthful demographics and growing mobile phone usage, Africa has yet to see a challenger banking champion like Nubank in Brazil or Chime in the US. That may well change in the coming years, however, as Nigeria bids to be the world’s next fintech powerhouse. Nigeria’s population is set to spike to 400 million people by 2050, which would make it the world’s third-largest country and investors believe the opportunity to invest there is better than ever.
“People have been talking about investing in Africa for years now and it’s been difficult in the past,” Ricardo Schäfer, partner at Target Global told Insider in an interview. “There’s always been a reason not to invest, but that’s changed over the past 12-24 months, the risk appetite is changing and really good founders are emerging.”
Target Global recently led a $10 million seed round into Nigerian fintech bank Kuda, the largest fintech seed round ever in the country. Kuda Bank was built out of a need to provide more accessible and crucially cheaper banking products than those usually available to Nigerians, the company’s founder and CEO Babs Ogundeyi told Insider.
“Banking is generally expensive although in the west it’s not a material expense but when affluence levels are less high, it’s an issue,” he said. Nigeria is dominated by a number of major corporate entities, which have thrived despite the Covid-19 pandemic but have traditionally failed to serve retail customers.
Less than 40% of Nigerians have a bank account, while many in rural areas lack access to ATMs and physical banking operations. Digitization is changing this dynamic and the country is on the verge of a “generational shift,” according to Razaq Ahmed, CEO and cofounder of Cowrywise, a fintech startup, which went through the Y Combinator accelerator and recently raised a $3 million pre-Series A funding round.
The company is focused on the wealth management space and sees a huge opportunity beckoning. Similar to the issues abounding in retail banking, many Nigerians are unable to access investment or savings products but are able to do so through platforms like Cowrywise where sums as little as 100 naira ($0.25) can be invested.
“There’s something happening here which is new,” Schäfer added. “You have a combination of expensive banking, high fees on transactions, it’s all brick and mortar, plus a large unbanked population.”
Despite the bevvy of positive factors buoying confidence in Nigeria there have always been concerns about political instability and the quality of the tech ecosystem in the country. Between 2014 and 2019, Nigeria’s fintech scene raised more than $600 million in funding, attracting 25% ($122 million) of the $491.6 million raised by African tech startups in 2019 alone — second only to Kenya, but there is still a long way to go.
“There has been a raising of the bar and a better thought process in how things have been done recently,” Ogundeyi said. “I think previously there was a gap between operators and capital providers but investors are more confident now.”
Often the key to starting any journey is making the first step. Schafer cites the decision of major Silicon Valley fund Ribbit Capital investing in African fintech Chipper Cash’s $30 million Series B last November as a sign that VC was finally waking up to opportunities on the continent.
Last year ended up being a record year for tech startups across Africa, with 397 companies raising $701 million, according to an annual report from Disrupt Africa.
Ahmed points to the increased number of success stories from the continent and a deepening ecosystem as key to an increased willingness from investors to deploy capital in Nigeria. Both he and Ogundeyi cite far more active and positive regulation from the Central Bank of Nigeria (CBN) in recent years.
Neobanks are now able to apply for a variety of different licenses which encourages new entrants and increased competition. Capital requirements are relatively low, usually a major barrier to setting up banking entities, with neobanks able to apply for four different types of licence, ranging from being a unit microfinance bank, all the way to national microfinance banks.
A vibrant microfinance sector has emerged in Nigeria thanks to these favourable conditions. According to the
CBN, there were 902 licensed MFBs at the end of 2019, although the eight largest ones control 45% of the
Ogundeyi also noted that major tech companies like Microsoft launching its Africa Development Centre (ADC) in Lagos was a positive for the ecosystem.
Bringing in funding as a Nigerian startup is comparatively easier than five years ago, Ahmed added but “it is still tough raising capital as a startup in Nigeria relative to major startup hubs in Europe, America and Asia,” he said.
As with much of the fintech ecosystem worldwide, younger people tend to be earlier adopters of new technology. Happily in Nigeria, the massive and growing population has a median age of 18. Schafer notes that this demographic effectively matches Brazil where challenger bank Nubank has managed to amass 34 million customers in eight years. Nubank recently raised $400 million to become the world’s most valuable neobank, with a $25 billion valuation.
“Africa is the last frontier to be tapped and there is so much to do,” Ogundeyi added. “Returns can be astronomical and those that get in early will have the best of it. There is enough money in the world we just need to channel it.”