A growing number of Nigerian big banks are making inroads into the financial technology space, putting the valuation of fintech firms in the country under the spotlight.
Around 2017, when fintech companies were seen as major disruptors in financial services, it was almost a given they will end the reign of the traditional banks. But the banks seem to have taken control of their future through strategic investments in fintech businesses.
Experts say the growing foray of the banks also threatens the valuation game of the fintech companies. Flutterwave, Interswitch, and OPay have over $1 billion in valuations, making them part of the elite unicorn party. Those in payment services like OPay, Moniepoint and Paga are also consolidating their footprints in financial services, aided in part by the naira redesign policy, which saw millions of Nigerians flock to these platforms for the first time in the first quarter of the year to prevent becoming victims of the cash crunch that hit the country.
However, emphasis on high valuation is reducing as venture capitalists and private equity investors reevaluate their funding portfolios and take a more pragmatic approach in deciding who gets funding. This has caused a seismic shift in how fintech companies look at their operations. They are now prioritising their revenue generation strategy. Unfortunately, this is where banks – which have had more years experimenting with different revenue strategies – see opportunity and are capitalising on it.
In May 2023, Stanbic IBTC Holdings, the holding company of Stanbic IBTC Bank, joined the ranks of banks launching a fintech business. Stanbic IBTC Financial Services Limited will function as a payment solutions provider, focusing on developing innovative technology solutions to enhance the holding company’s existing financial services offerings.
Stanbic is following in the footsteps of other financial institutions like Wema Bank, Guaranty Trust Holding Company (GTCO), and Access Holdings, both of which are pushing aggressively into fintech on the back of their startups ALAT, HabariPay, and Hydrogen Pay respectively. Although the banks’ startups are still in their infant stages, their ambitions are enormous.
In 2021, Segun Agbaje, group CEO of GTCO, said the plan was to push HabariPay to unicorn levels quickly. HabariPay carries its payment operations through Squad. From the beginning, Agbaje had his sights on startups like Paystack and Flutterwave. According to a third-quarter report from Squad, its startup capital from GTCO is N3.1 billion.
While Herbert Wigwe, group managing director/CEO of Access Holdings, on the other hand, does not use the term “unicorn” to describe the size of Hydrogen’s ambition, the plan is no less ginormous.
“The idea is that wherever you are in the world, if you are making payment to anyone on the continent, one out of every three transactions that come into this continent will be settled on Access Bank’s platform,” Wigwe told shareholders attending Access Holdings’ statutory meeting in Lagos in December 2022.
Hydrogen Pay’s services cuts across lending, physical and virtual payment card issuance, fraud detection, recurring payments, storefront, inventory management, accounting, and bookkeeping.
The banks are starting to see results from their splash on fintech. According to GTCO’s financial report, Squad, which began operations in June 2022, reached a milestone in January 2023 as it crossed N200 billion in monthly transactions. The platform, which has a total of 46 employees, became profitable in the first month of operations despite competition from fintech companies like Interswitch, Flutterwave, OPay, and Paystack.
Investors’ presentation documents sourced from GTCO showed Squad, which targets micro-merchants, small and medium enterprises as well as large corporates recorded a profit before tax of N926 million in the first six months of its operations, while its revenue for the period stood at N1.52 billion. Between June and December 2022, GTCO said Squad generated a total of N139.3 billion through its Gateway and switching system, while international payments transactions within the period stood at $175,927.
Squad’s first-quarter 2023 report shows it has made even more money from when it was founded to date. The company said its gateway and switching business generated N1.15 trillion, averaging 965 percent growth since inception. International payment revenue has now grown to $699,535 in the same period. Squad also hit profitability from the first month and crossed N200 billion in monthly transactions in January 2023.
Wema Bank also recorded a boom in its electronic banking channels in 2022 as it generated N6.1 billion in digital platforms, according to its 2022 audited financial statement recently released. The 2022 e-banking revenue represents a 79 percent increase when compared with the N3.4 billion the bank generated from electronic channels in 2021. ALAT gained traction and attracted more customers in the year under review. The bank’s report said ALAT recorded a 131 percent increase in the number of customers onboarded in 2022. In addition, Wema Bank said its other card products also recorded a 98 percent increase in the number of new customers within the year.
Experts attribute the progress of the banks’ fintech subsidiaries not to the advertisement but to focusing on retail banking strategies. Kaliba Bilala, founder of Tanabit, a financial data advisory firm, notes how GTCO has invested in food and clothing bazaars, which have drawn large crowds of small businesses and consumers. These festivals not only encourage consumer spending but also expose GTCO brands and services to new customers.
“It would be easier to transition from sponsoring such participants to funding them with small and medium loans based on relationships built over the years. Think of it as a version of Alipay and Buy-Now-Pay-Later for the smart(er) bank fintech,” Kaliba said. “GTCO already has a good relationship with Mastercard. I had initially thought that Segun Agbaje was going to spin off the GTCO payment processing arm (or fintech) and run it as an autonomous entity.”
Squad may not compete with the likes of OPay, Moniepoint and Paga on the speed of transfers, it is, however, bringing the battle to companies like Flutterwave, Interswitch and Flutterwave, going by its first quarter 2023 report.
A person familiar with the fintech ecosystem said the banks’ foray makes the market interesting and increases competition in its most healthy way, although startups bootstrapping from zero would find themselves competing against subsidiaries of established brands with good funding. GTCO, for example, intends to fund Squad a hundred percent without outside investors.
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Nevertheless, the person said that non-bank fintech companies have some advantages.
“These startups have a clear hands-on experience with what it takes to connect, interact and speak the language the target market understands as opposed to subsidiaries of big brands that might approach the market from a view of huge capital expense,” the person said. “Secondly, the market wants to hear your bootstrapping story and be a part of something new, not a fallout from an old order.”
Ademola Olukeye, senior director of Cellulant, a digital payments platform, sees the advantage on the side of Squad, Hydrogen Pay, and other banks’ spin-offs. He said the banks’ startups would gain from an established reporting framework that necessitates transparency. This instills confidence in investors, stakeholders, and consumers in the business.
“Investors and the public often perceive bank-backed fintechs to be more stable and less risky than standalone fintech startups. It’s a major valuation advantage to them,” Olukeye said. “Most investors are now interested in revenues and profit as against gross processed value. Access to free/cheap investors’ funds is no longer the same as they now demand for short-term returns.”