Assessing Nigeria’s payment infrastructure readiness for a digital future

Unlike traditional financial institutions, fintechs are designed to be more agile and flexible, which allows them to innovate and grow rapidly.

This is why McKinsey’s research shows that the global fintech industry is expected to grow almost three times faster than the traditional banking sector between 2022 and 2028.

This rapid growth is borne out of the strong focus fintechs have on enhancing the customer experience, providing user-friendly interfaces, removing friction from onboarding processes, and personalising services, all of which collectively result in making banking more convenient.

Their agility and flexibility allow them quickly adapt to market changes and customer needs while operating with lower overhead costs enabling them to offer competitive pricing and innovative financial products.

They also benefit from a more flexible regulatory environment, fintechs can experiment with new business models and technologies more freely than traditional banks.

Fintechs also generally target underserved or niche markets with specialised products and lead the open banking movement. They promote collaboration and data sharing among financial institutions.

However, the use of technology is perhaps one of the biggest advantages fintechs have over banks. Traditional banks often struggle with staying up to date with IT infrastructure as they are in a stricter regulatory space and have a risk-averse approach to development.

Fintech companies, on the other hand, have leveraged technology to revolutionise payments in Nigeria. Their innovative solutions have disrupted traditional payment systems, resulting in a substantial annual increase in the value of digital transactions across the country.

Rapid innovation and growth in the digital payment space: In today’s fast-paced digital economy, the payment landscape is undergoing a massive change. The advent of digital payment solutions has not only streamlined financial transactions but has also opened up many opportunities for businesses and consumers.

From mobile wallets to blockchain-based payments, rapid innovation in this sector is redefining how we handle money, with compelling statistics to support this transformation. In 2023, the value of electronic payment in the country was ₦600 trillion, a 55 per cent jump from ₦387 trillion from the previous year.

The continuous increase in the value of electronic payments in Nigeria can be attributed to fintech innovations that have enhanced the NIBSS Instant Payment (NIP) system. Developed over 14 years ago by the Nigerian Inter-Bank Settlement Scheme (NIBSS), this real-time electronic payment platform has been a foundational tool that fintechs have effectively leveraged and improved upon.

Fintechs like OPay and Moniepoint have made PoS payment almost ubiquitous in most parts of Nigeria with speedy and largely successful transactions.

Flutterwave and Paystack have also played a pivotal role in facilitating online transactions for businesses and consumers, acting as intermediaries between merchants and financial institutions, and ensuring that online payments are processed smoothly and securely.

Zone is leveraging blockchain to create a never-before-seen payment infrastructure that could make payments even cheaper, more reliable and more secure.

As these fintechs continue to innovate, digital payments could surpass cash as the primary means of exchange in the country. Payments firm, ACI and GlobalData, predict that Nigerian real-time payments will top 8.9 billion transactions by 2027.

Given that these predictions are based on data from 2021 and 2022, Nigeria could record an even greater number of digital transactions.

Traditional banks playing catch-up: While fintechs get more Nigerians to adopt digital payments through the use of technology, convenient financial services and cheaper transactions, traditional banks in the country seem to be playing catch-up.

For example, as of December 2022, two fintechs, OPay and Moniepoint, had the highest number of PoS agents in the country at 563,252 and 303,946 respectively. However, PalmPay, another major fintech revealed in 2023 that it has over 500,000 PoS agents.

With these huge figures, fintechs have a massive lead compared to traditional banks when it comes to PoS payments and almost any other kind of electronic payments.

Fintechs can maintain this lead because banks tend to retain legacy systems which pose infrastructure challenges. While traditional banks can adopt new technologies, they are often slow to do so due to their larger size and lack of agility compared to smaller fintech companies. Also, migrating legacy systems to more flexible platforms is a costly and time-consuming process.

Interestingly, cost might not be the only reason why banks are hesitant.
Unlike fintechs, they are heavily regulated. They must comply with a myriad of local and international laws and regulations. Due to their regulatory environment, banks are inherently risk-averse. They must ensure that any new technology is fully compliant and secure before implementation, which often involves extensive testing and validation processes.

When they successfully do this, they still need to change their business model, user experience, and marketing strategy, and even find new ways to understand change in customer needs.

Fintechs, however, have a competitive advantage when it comes to their digital presence and communicating with their customers whereas traditional banks that have built a large customer base over the years do not have a renewed approach to interacting with customers.

Opportunity for collaboration: According to Reuben Mwatosya, Head of Partnership, Licensing, and Expansion at Tanzanian fintech, NALA, banks are like manufacturers while fintechs are like distributors. This could mean that despite the rapid growth of fintechs, they still need traditional banks.

This symbiotic relationship between banks and fintechs is evidenced by the partnerships we’ve seen between the two generations of financial institutions.

For example, fintechs can tailor products perfectly for their customers by getting their financial data from legacy banks. To be fair, this collaboration is made possible with Open Banking, however, it epitomises the importance of collaboration between fintech and traditional banks.

In more advanced economies, banks take this collaboration further by acquiring fintechs. JP Morgan Chase for example has acquired 80 fintechs as of 2023.

As payment technology continues to evolve, especially with the entrance of blockchain technology, banks need to collaborate with fintechs to improve the security and efficiency of their transactions.

We already see this happening as banks are leveraging decentralised infrastructure providers like Zone to stay up to date with innovations in the payment space.

Regardless of where the innovations come from, financial services must continue to improve to enhance economic activities in the nation.