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Fintech is booming despite the weak economy. Can it take a while?

TDAS BUZZ about fintech in Lagos, Nigeria’s commercial capital, is so loud that it cannot be overlooked even without internet access. Flashing billboards advertising Kuda, a digital bank, tower over traffic jams and signs for Paga, a mobile payments company, adorn thousands of corner shops. Investments also flowed. In March, Flutterwave, a digital payments company, raised $ 170 million making it Africa’s newest unicorn (ie, a startup valued at over $ 1 billion). Interswitch, a payment processor, acquired its Horn in 2019 when it sold a 20% stake in Visa, a credit card company. Last October, Stripe, the most valuable private fintech in the west, bought Paystack, a Nigerian digital payments company, for $ 200 million.

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While the three big successes enable online payments, a number of newer fintechs are offering products directly to consumers. FairMoney, which offers instant loans, recently raised $ 42 million in a round led by Tiger Global Management, a New York hedge fund. PiggyVest helps people save; Bamboo enables Nigerians to invest abroad despite the dollar shortage in the country. People in Africa should be “very excited” about fintech, says Makhtar Diop, head of the International Finance Corporation, the private sector division of the World Bank that has pumped $ 200 million into the sector.

The long-term potential is enormous: Nigeria’s population, now around 200 million, is projected to exceed that of the US by 2050; Around 95% of transactions are still bundles of crumpled naira. Still, some Nigerian investors fear the excitement is excessive given the country’s unpredictable regulators and economic malaise.

Running a fintech in Nigeria is tough. Electricity and internet are unreliable. Regulators just forbid things they don’t understand, some founders complain. In April, apps that help Nigerians invest in overseas listed stocks were suddenly informed by the regulator on Twitter that they were breaking the rules. (The government later also banned Twitter.) Earlier this year, the central bank angered fintechs by banning trading in cryptocurrencies that had grown in popularity as the naira fell in value. “Fear of the central bank of Nigeria is the beginning of wisdom,” jokes Eghosa Omoigui of EchoVC, a venture capital fund.

Perhaps the biggest challenge facing fintechs is the dire economic climate. Panglossian pitches are common for startups everywhere, and the ones in Nigeria are no exception, highlighting the country’s large population. But with more than 40% of Nigerians living on less than $ 1.90 a day, inflation at 18%, and population growth exceeding GDP, the real market for many fintechs is much smaller.

Falling per capita incomes are limiting the ways fintechs can grow. Payment companies can still convince more people to turn existing cash transactions into digital ones. Other fintechs targeting the smaller pool of Nigerians with savings could do business for a while by poaching disgruntled customers from banks. But if these companies want to make a profit, they need existing customers to do more business. It’s harder when people get poorer. The average transfer value at a leading payment service provider, for example, has almost stagnated despite inflation. Some fintechs like Bankly target the roughly 60 million Nigerians who don’t have a bank account. Registering these often very poor customers, however, requires more time and investment than many investors are aware of, says Tomilola Majekodunmi, managing director.

Savvy fintechs are trying to escape the dilemma by looking beyond Nigeria. “The goal is to diversify as quickly as possible,” says Nichole Yembra of Chrysalis Capital, a Lagos-based technology investor. Many founders like Lagos because of its energetic employees, but also see it as the gateway to Africa. Diversification also helps avoid regulatory risks. Bamboo expands to Ghana and speaks of Kenya. Flutterwave operates in more than 15 African countries.

Still, even Nigerian investors who believe in the potential of fintechs fear the excitement is getting out of hand. Eric Idiahi of Verod Capital Management, a private equity firm, sees “insane valuations” and warns of “big losses”. There are consumer fintechs who talk about “over $ 500 million in reviews and I don’t know anyone who uses the product,” says Maya Horgan Famodu of Ingressive Capital, a venture capital firm. Foreign investors may underestimate how difficult it is to expand into new markets, each with its own regulator.

Loss is a part of any tech ecosystem, and the exuberance at least enables customers to benefit from financial innovation today. However, Ms. Horgan Famodu fears that losses could “overcorrect” the market as much of the funding for Nigeria’s fintechs comes from abroad. If foreign capital flees, it could also cripple companies with solid business models. But leaving Africa doesn’t have to be the only option when fintech gets into trouble. Many other tech sectors on the continent are “completely unaddressed,” says Omoigui. Also, “the margins can be so much better”. The loss of one sector can be the gain of another.

This article appeared in the Finance & Economy section of the print edition under the heading “Out of the Crisis”

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