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The Evolution Of FinTech

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This Space is For Sale

The Evolution Of FinTech

Deji Kurumi

A look at history and emerging trends for Fintech across the globe

“Fintech” (an acronym for “financial technology”) is one of the snazziest trends in technology- both in Nigeria and globally. There are new waves of innovations targeted at both mainstream and niche financial markets that had hitherto not been touched by the last major wave of innovations heralded by the dotcom era of the mid 90s into the turn of the new millennial. 

After the dotcom boom and bust, one of the now-global financial technology providers that emerged after the dust settled were the likes of PayPal; who simply decided to develop a use case for email that had to do with money transfer. Emailing itself was a use case for the internet (which was a confusion to the uninitiated just as blockchain is today). The likes to Western Union which started in 1851 using telegraph technology (the old internet: think about a cross boarder local area network) also leveraged the internet to begin the transformation of their service offering in 1995. Back then, the acronym “Fintech” was not used for these innovations in money transfer. 

On the local scene, technology egg heads who focused on financial services had the intent to make banking easier and more efficient for the banker. It was more of banking technology. The most significant evolution in financial technology was a robust collaboration between the banks and technology innovators which gave birth to the likes of ValuCard (started out as Smartcard; now Unified Payments), Interswitch, eTranzact etc. In fact, the banks invested in these startups and were critical to their success. I often refer to this era as the 2nd wave of the fintech evolution. Their reign lasted for so long without any formidable disruptive innovator such that the market became oligopolistic in nature. As a consequence of oligopoly, these companies were minting cash and by default became very formidable gate keepers. They literally have every channel locked down. Even when they give you a gate pass, they can switch you on and off at their will, making your service very erratic especially if you are offering a product that seems to constitute a threat to theirs. It was only a matter of time before a dirge is sang for yet another who bites the dust in brutal fashion. 

You see, the banks hold the money. If you cannot get to the money, you really cannot do “Fintech”. Due to the high level of collaboration in the early days, the 2nd generation guys could get to the money. The banks needed them desperately to improve services. You either cooperate as a bank or become extinct! It took a lot of resources and manpower. Once accomplished, gate closed! You must come with octane-grade might (value proposition) to open the gates. A switching license would not open the gates (maybe one or two via “connection”). In fact, when it was decided that NIBSS be the aggregator for POS transactions in the cashless Nigeria project, the almighty NIBSS were wise enough to know they had to dance for the gods and reach amicable terms to guaranty success.

Without a doubt, the players that rode the 2nd wave earned their badges to be were they are today. However, this did not stop the 3rd generation innovators from harboring a deep-seated dislike for the gods for obvious reasons. They had to roll over like little puppies to get a gate pass for which they would still have to pay tollgate fees which made their own service more expensive for the market. Back in University, all what the tech guys wanted to do was to graduate and shoot down the gods. It wasn’t long before each realized just how massive the pipe of their pipe dreams was. The gods themselves were not sleeping on the bicycle. The CEO of one of the gods once said to me: “the reason why we innovate is because nobody is innovating. All we want to focus on doing is processing transactions”. I was baffled. 

Perhaps the diagram below which is an attempt to display the ecosystem will illustrate the narrative better. 

The above is a simplified schematic. Now, the gods have their footprints across many of the boxes in the diagram. What makes them gods is that they are right at the terminal end of the central nerve of the food chain – switches. What I call the central nerve are the boxes marked with a blue bubble (my emphasis). The gods have their footprints all over there. The boxes marked green are dominated by some other category of gods who are bigger. NIBBS is somewhat an aberration – just like NNPC where you sort of act as regulator while also releasing products that compete with market operators. 

Some have been able to carve out space for themselves in hitherto unchartered territories and made such impact that the gods are forced to sit up and be more cooperative, so they do not come for their lunch – the switching space. Some of these Fintechs have however raised enough cash and are knocking at the regulator’s door for their own priced switching license believing they have built sufficient value that can force the last-mile gates open.

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Something more compelling is however in the air: These new brands of Fintechs already paddling what I will call the 3rd evolutionary wave in financial technology which is being spurred by digital technology advancements are beginning to eat at the core of the financial services value chain. Many of them exploded spontaneously into shaku-shaku dance when the regulator announced a new license called the Payment Service Bank (PSB) because finally they felt they can now break free from the entrenched gods until they saw how much money they would need to raise to acquire the license. It did not take long to realize that it is a playground to invite some other big boys who have been knocking on the door in the name of financial inclusion – the Telcos. They have been on the fringes for too long and they are tired of eating the crumbs dropping from the table. 

These 3rd generation fintechs are extending the frontiers and delivering financial services through digital channels optimized for the millennials who are fast populating the corporate Nigeria landscape; getting into the fabric of the workforce and becoming economically empowered. These new Fintechs are obtaining the minimal license required to service the millennials and the emerging corporates who are also leveraging the digital evolution to deliver service and require innovative payments to sell their products and services. It is little wonder that the payment gateways powering Uber and Taxify payments in Nigeria is not being provided by the 2nd generation wave surfers even though they are still collecting tolls. 

The daring nature of these new brands is such that the banks are not exactly very comfortable. The popular idiom “follow the money” seems to be driving all manner of innovations and counter-innovations in the technology space in Nigeria. These guys are lending, facilitating Peer-to-Peer lending, enabling investments and savings schemes remotely, hosting multiple cooperatives on a single platform, disrupting B2B supply chain payments, solving long standing merchant related issues etc. They are more nimble and agile – able to make decisions quickly, execute with speed to adapt to market demands. With time, the survivors and dominators will build the compelling value of huge commercial consequences – TRUST. Then, omnichannel lifestyle focused digital wallets will hold the ace riding on deep insights and revolutionary technologies that would finally get to the heart of the unbanked. “Calibra” is just the alarm sounding from the mountain top. 

There is a generational shift and what defines TRUST, SIZE and CAPABILITY in financial services will also begin to shift away from brick and mortar. By the time the generation Z approaches maturity, Alert for example may have become more valuable than its parent bank as cheap deposits find new homes. I believe that is the original intent.

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