Unlocking Opportunities in Fintechs

Minister of Communications, Dr. Isa Ali Pantami

Special report

Olusegun Adeniyi and Obinna Chima

Despite the increasing activities of financial technology (fintech) companies in the country, there is

need for the federal and state governments to focus on developing policies that would boost contribution of the sector to the country’s Gross Domestic Product (GDP) significantly.

The sector can unlock economic benefit by driving increased productivity, capital, and labor hours through digitisation of financial services.

Additionally, it will play a leading role in the federal government’s much-desired drive towards economic diversification.

While fintech investments in Nigeria grew to approximately $460 million in 2019, the majority of which was from external investors, this was only a small fraction of the $36 billion invested in fintech globally, McKinsey & Company, stated in a report which focused on fintechs in Nigeria.

The global management consultancy Services Company pointed out that with the right support, fintechs could create impact in three broad dimensions: through stimulating economic activity, by creating a multiplier effect, and by driving progress towards development goals.

“Economic impact will primarily come from expanding revenue pools and attracting foreign direct investment to the country. The sector can unlock economic benefit by driving increased productivity, capital, and labor hours through digitization of financial services.

“Increased fintech activity could also indirectly grow the digital economy by, for example, providing business-to-consumer (B2C) marketplace tools such as payment integration on social media platforms, and further enabling the Nigerian e-commerce industry.

“And finally, fintech can support Nigeria’s human capital development by driving financial inclusion and literacy through the provision of accessible and affordable financial products that are innovative and cater to the needs of unbanked and underserved segments of the population across culture, gender, and geography.

“Significant opportunities also exist for fintech to enable solutions within education and health to address societal challenges such as student financing, digital learning, and affordable health insurance,” McKinsey added.

One of the key factors preventing the sector from achieving its full potential has been that, to date, fintechs have had limited appetite to develop commercially viable use cases to serve the mass-market segment owing to the significant investment required.

But this, according to McKinsey is changing as a result of the impact of the COVID-19.

With consumers turning to digital options during lockdown and government using digital channels to roll out aid packages, it became clear that there was an untapped opportunity to convert the under-banked and unbanked to fintech solutions and unlock the economic and social benefits that this promises.

“Digital financial services have the potential to unlock significant benefits for Nigeria’s economy and society. There are multiple opportunities across product ranges and customer segments, especially if the sector can find ways to move beyond addressing known pain points of the banked population and expand the banking pool.

“The COVID-19 crisis has heightened the challenges. The investment required to foster innovation in order to meet these challenges and realize fintech’s potential in the longer term could be significant, but positive results could be achieved through collaborative action.

“If all stakeholders in the fintech ecosystem, including government regulators, infrastructure players, private organisations, and providers of capital work together, the country can start to unlock the potential of its fintech assets,” it added.

In his opinion, the Head of Consulting at Lagos-based pan-African rating agency, Agusto Consulting, Mr. Jimi Ogbobine, noted that one of the ways the government could stimulate growth in the fintech space was by firstly avoiding knee-jerked regulations that could distort the current strong growth trajectory trend.

Speaking in a chat with THISDAY, he said government’s support for fintechs should be largely concentrated on resolving structural bottlenecks that could inhibit the growth of the industry.

“One of the major structural bottlenecks will be the internet penetration levels across the country. And that’s why the current positive disposition of states to reducing taxes and levies on the right of way (RoW) needs to be retained.

“Secondly, the government needs to concentrate efforts on streamlining and improving efficiencies around the national identity management processes.

“With more Nigerians registered on the national identity database, fintechs will have a more dependable information infrastructure to access for financial innovations,” Ogbobine explained.

Similarly, the International Monetary Fund (IMF), had in a report stated that fintechs could be key to structural transformation in Nigeria and other African countries.

It noted that innovation was allowing Africans to move up the financial services value chain.

How Different Countries Handle Tech Startups

United Kingdom:

The UK government has taken proactive steps to boost the success rate of UK tech startups, while developing an ecosystem (across public and private sectors) that is conducive of innovation. In terms of funding, there are a range of government grants offered by the Department for Business, Energy & Industrial Strategy. The Startup Loans scheme is another initiative that also offers loans of up to £25,000 at a fixed interest rate of 6% per annum for new business ideas — this scheme provides advice on writing up business plans, along with free mentoring from business experts.

Innovate UK, among others, presents another funding option. Startups like Divido, have experienced the benefits of these type of initiatives firsthand.

The CEO and co-founder of the company, Christer Holloman, explained: “We set Divido up back in 2014, and in 2015 we were lucky enough to receive an official government backing in the form of an Innovate UK grant to further develop our platform. The support from the Innovate UK allowed us as a business to not only gain some needed investment but it also provided our business with that added validation that only a government can give.

“This is something that the UK government needs to ensure that it continues doing, particularly in the current political and economic Brexit climate. The UK fintech market has always been ahead of the curve, and now other countries have caught on and are playing catch-up so they’re getting more attention.

“As long as the government continues to reinforce its commitment to this sector through different funding initiatives and events, then I expect the UK and London to continue on its path to being the ultimate fintech capital of the world.”

Also, Innovate UK is part of UK Research and Innovation, a non-departmental public body funded by a grant-in-aid from the UK government. It drives productivity and economic growth by supporting businesses to develop and realise the potential of new ideas, including those from the UK’s world-class research base.

Kenya:

Kenya, in particular its commercial and financial hub of Nairobi, is a major player generally from an economic point of view, not just in East Africa, but the African continent as a whole.

Dubbed as “Silicon Savannah,” Nairobi has a strong fintech and wider tech and financial services ecosystem.

As reported by The FinTech Times in September, the Kenyan parliament has published a Startup Bill, whereby the Kenyan government is aiming to develop a number of incentives for startups. This is in addition to having a protection for intellectual property among several interesting provisions. The Startup Bill 2020 provides a framework for the development of innovative entrepreneurship, establishing incubation hubs, and building a network of global and regional investors.

At present, as what the bill highlights, Kenya has some significant successes in the fintech and wider tech space. The examples highlighted in the bill included, first, Cellulant. They have developed a digital payment platform that offers flexible payment options for consumers and businesses, and works with financial institutions, governments, and mobile network operators to increase transparency and expand their reach in Africa.

Second, Sendy is a logistics platform that provides drivers to fulfil customers’ logistics needs from motorcycle deliveries to trucks; they started operating in Kenya before Uber entered.

Third, Twiga foods sources quality produce from thousands of farmers around Kenya, providing them with a ready guaranteed market; this is done with their mobile-based supply platform.

Fourth, M-Kopa provides “pay-as-you-go” energy services for offgrid customers across emerging markets; this is done with their patented technology platform that combines embedded GSM + mobile payments. The company had already connected 600,000 homes across Africa, providing 75 million hours of kerosene-free lighting each month.

The bill highlights that in the African continent, Tunisia and Senegal have noticed the potential of startups in their countries to support rapid social-economic development, which has resulted in them enacting their own laws to recognise, support and regulate start-ups activities. The Kenyan Startup Bill 2020 then justifies its own rationale.

Dubai:

The Dubai Startup Hub, an initiative of Dubai Chamber of Commerce and Industry, in cooperation with Dubai Technology Entrepreneur Campus (Dtec), recently released the Dubai Startup Report 2021, an informative guide on Dubai’s startup ecosystem for international startups and investors that are keen on exploring business opportunities in the emirate.

The report brings together the hands-on experience of Dubai Startup Hub and Dtec serving a community of more than 10,000 founders and investors, and the public policy and legal perspective on incentives and schemes available in the Emirate.

Featured in the report are several business-friendly measures introduced in recent years to support business activity, boost foreign investment and attract promising companies and investors from around the world such as several stimulus packages, the golden card permanent residency system for expat investors, a 5-year visa for entrepreneurs, a virtual working programme and a decision to grant UAE citizenship to select foreigners.

The report highlights various programmes, resources and value-added services available in Dubai that are designed to support the growth of startups and connect them to new business opportunities. Dubai Startup Hub, an initiative of Dubai Chamber, along with Dtec are among the most active startup ecosystem players in the emirate.

Among other topics of interest covered in the report are ease of doing business, economic competitiveness, government initiatives supporting startup growth, venture capital activity, free zones and the services they offer, access to finance, investment incentives and availability of skilled talent, in addition to useful tips on setting up a company in Dubai.

President and CEO of Dubai Chamber, Hamad Buamim, described the report as a valuable and reliable resource for startups and investors in other markets as it provides a wealth of practical information about Dubai’s dynamic and fast-growing startup ecosystem.

He added that Dubai Chamber supports the growth of startups in Dubai through its entrepreneurship initiative Dubai Startup Hub by providing startup members access to resources, tools, knowledge and market opportunities that can help them thrive and grow.

Vice Chairman and CEO of the Dubai Silicon Oasis Authority (DSOA), Dr Mohammed Al Zarooni, noted that Dubai’s competitiveness attracts innovative thinkers, positioning it as a preferred destination for entrepreneurs in diverse industries, especially those in technology and fourth industrial revolution applications.

These sectors have recently surged, given the measures in response to Covid-19.

Al Zarooni said: “Start-ups are a pillar of a flexible economic system that is agile enough to quickly adapt to new developments and achieve sustainable growth. The facilities that Dubai offers to this dynamic segment, through a supportive ecosystem and an incubator for innovation, helps them grow and achieve strategic business objectives.

“The Dubai Technology Entrepreneur Campus at Dubai Silicon Oasis, which is home to hundreds of technology start-ups, is an exemplary model of the unique ecosystem that Dubai and the wider UAE offers.”

Abu Dhabi:

The Abu Dhabi Investment Office (ADIO) is the central government hub supporting investment in the emirate of Abu Dhabi. Its vision is to develop a thriving, knowledge-economy for Abu Dhabi that is competitive and diverse, whilst attracting FDI. How? The entity cites the UAE’s strategic location between East and West, its high ranking in regional reports relating to the ‘Ease of Doing Business’, plus its positioning on global competitiveness and innovation indexes.

Dr. Tariq Bin Hendi, is an Emirati-American, London-trained economist who hopes to expand Abu Dhabi’s economy as the Director-General and CEO of the Abu Dhabi Investment Office.

The former Emirates NBD executive is interested in cultivating a viable ecosystem for SMEs and startups in the UAE’s capital.

With a forward-thinking approach, Bin Hendi links diverse value systems across cultures to attract foreign investment.

Ghadan 21 is a $13 billion accelerator program looking to support SMEs in the country.

When Inspire Middle East asked about the impact of Coronavirus on Ghadan 21, Bin Hendi said adaptability is key, with Ghadan 21 being both a proactive and reactive program.

The economist maintained that by adapting policy and with resources such as sovereign wealth funds, support from larger government entities, as well as the private sector, SMEs have the backing support to develop.

The fostering of innovation in the capital has seen the creation of Hub71, an international tech base, which brings together startups, top VC funds, and investors.

ADIO has also encouraged innovators to flourish in the Agricultural Technology (AgTech) space, offering incentive programs, including financial incentives, to companies looking to relocate or expand in Abu Dhabi.

Hendi believes that, “Every company is a technology company or needs to become a technology company,” narrowing the ADIO’s focus on preparing companies to pivot.

“Today what we’re seeing with companies is that if they don’t adapt technology, they’re left behind,” Bin Hendi told Euronews.

“But, if they adopt the wrong type of technology or don’t get the support that they require, particularly in the micro and the SME space, then someone needs to be there to support them, So we provide those financial incentives, we provide the access and we provide the growth.”

ADIO is also focused on building bilateral ties in the near and long-term, which involves opening international offices to support global companies looking to establish and expand their operations in the capital.

South Africa:

Entrepreneurs for Entrepreneurs (E4E) Africa, an entrepreneur-led South African venture capital (VC) firm, recently launched its Section 12J offering. Disrupt Africa reported last year on the launch of E4E, which is backed by a founding investment from the SA SME Fund and has a first close of R135-million (US$8.1 million). In addition to its regular fund, E4E has now launched a Section 12J facility, which grants investors a 100 per cent write-off for their South African taxes on any investment made in the Section 12J fund.

“The 12J incentive offers South Africans, people or companies, a unique opportunity to invest in high growth, early-stage businesses in a way that lowers risk and increases potential returns through the tax saving – while helping build a better South Africa,” said E4E partner Bas Hochstenbach.

Since its mid-2020 launch, E4E has created a significantly-sized fund, investing in a variety of companies that are innovating across key sectors of the South African economy. These include leading township food solutions enterprise YeboFresh, data annotation and labelling startup Enlabeler, and e-health startup Vula Mobile.

“With our proven track record as entrepreneurs and investors, we believe that E4E is uniquely placed to ensure that anyone using our 12J facility has the best possible chance of achieving real returns,” said E4E managing partner Philani Sangweni. “This is only advanced by the fact that we invest in innovation-led, transformative businesses that have the potential to scale globally.”

Egypt

In Egypt, the Information Technology Industry Development Agency (ITIDA) has also launched a new round of its annual “Export IT” programme. The programme was introduced as a coping mechanism for the unprecedented challenges caused by the global coronavirus (COVID-19) pandemic.

The agency introduced the cash incentive to provide economic relief for small businesses and tech startups, and to boost exports amid the pandemic.

ITIDA CEO, Amr Mahfouz highlighted that the approved stimulus comes as part of the agency’s relief plan to curb the economic impact of COVID-19, and ensures more aid for small businesses and local IT companies.

Mahfouz, underlined that the export incentive package is to encourage the local companies to boost exports, secure the position of Egyptian IT products in existing markets, and increase market penetration capabilities.

The programme deals with local ICT companies which are more than 50% owned by Egyptians, headquartered in Egypt, and are exporting ICT services, IT-enabled services such as call centre services, consultation and training services related to the IT industry.

ITIDA has excluded Egyptian IT startups founded in 2016 or later with the “headquarters in Egypt” condition.

According to the programme’s terms and conditions, approved companies receive direct cash incentives of up to 10 per cent, and with a maximum limit of 20 per cent of value-added exports based on the company size.

Spain

There’s money on the table too: Spain will be routing a portion of the “Next Generation EU” coronavirus recovery funding it receives from the pan-EU pot into this “entrepreneurial” push.

“Specifically, for 2021, the budget assigned to the different goals of the strategy — we have more than €1.5 billion for the main measures that we want to start setting up. And for the period 2023 it’s over €4.5 billion dedicated to the rest of the measures. So basically between 2021 and 2023 we will be setting the basis/foundations of the Spain entrepreneurial nation,” says Polo.

Execution of the strategy will be down to the relevant ministries of government — who will be enacting projects and passing legislation, as needed — but Polo’s department is there to “guide and accompany” the various arms and branches of government on that journey; aka “to help make things happen” with a startup hat on.

The national strategy envisages entrepreneurship/startup innovation as the driving force at the top of a pyramid that sits atop existing sectors of the Spanish economy — “spearheading the innovative system that we want to generate”, as Polo puts it. “We are not only focusing on innovative entrepreneurship. We are also trying to create virtuous cycles between this ecosystem and the actual driving sectors of the Spanish economy — that’s why we listed a set of 10 driving sectors that represent above 60% of the GDP. And this is of utmost importance.”

The listed sectors where the government wants to concentrate and foster support — so those same sectors can leverage gains through closer working with digital innovation are: Industry; Tourism and culture; Mobility; Health; Construction and materials; Energy and ecological transition; Banking and finance; Digitalization and telecommunications; Agri-food; and Biotechnology.

“We decided we needed to make the cut at some point and we decided that putting together 60% of the GDP in Spain was a clear direction of the sectors that we could be using in order to accelerate the change that we want to see,” says Polo. “Basically what we want to shift with this model is that the innovative entrepreneurship that has been quite enclosed in the past starts working with the different driving sectors that we have in the country because they can help each other solve their different issues.

“So first, for example, for investment — what if big companies start investing more and more than they are actually doing? We accelerate also that path — into innovative entrepreneurship system. That is going to help close that gap… What if startups and scale-ups in Spain work together with our international companies in order to attract and retain that talent? That is going to put us as a country in a better position.

“To me the best example is about scaling up: Because what is better than scaling up on the shoulders of giants? We have already a big number of international of world-class companies that are in different markets so what is better than being able to scale up with a company that is already there, that has the knowledge and that can help you mature as a scale-up in a shorter period of time. So there are a lot of virtuous cycles that we can generate and that’s why we wanted to make also a broad appeal to the different driving sectors. Because we want to let the country know that everyone is called to make this a reality.”

Digital divides

Digital can itself divide, of course, as has been writ large during a global pandemic in which the development of children excluded from attending school in person can hinge on whether or not they have internet access and computer literacy.

So the principle of entrepreneurial growth being predicated upon social inclusion looks like an important one — even if pulling off major industrial transformations which will necessitate a degree of retraining and upskilling in order to bring workers of all ages along the same path is clearly not going to be easy.

But the 10-year time frame for “Spain Entrepreneurial Nation” looks like a recognition that inclusion requires time.

The long-term plan is also intended to address a common criticism of Spain’s politics being too short-termist, per Polo. “In Spain particularly it’s been a regular criticism that politics always look in the small term so this is proof that this government is also addressing the short-term issues but also is preparing Spain for the future,” he says, adding: “We really believe that [presenting a long-term vision is] a good thing and it’s an answer to that social demand.”

The country has also — over the last decade or so — gained a bit of a reputation for successfully challenging digital developments over specific societal impacts in Europe’s courts. Such as, in 2010, when a Spanish citizen challenged Google’s refusal to delist outdated information about him from its index — which led, in 2014, to Europe’s top court backing what’s colloquially referred to as the “right to be forgotten”.

Uber’s regulation-dodging was also successfully challenged by Spanish taxi associations — leading to a 2017 ruling at the highest level in Europe that Uber is a transport service (and therefore subject to local urban transport rules; not just a technology platform as the ride-hailing giant had sought to claim).

Anti-Uber (and anti-Cabify) strikes have, meanwhile, been a quasi-regular (and sometimes violent) feature of Spain’s streets — as the taxi industry has protested at a perceived lack of enforcement of the law against app-based rivals who are not competing fairly, as it sees it.

And while gig platforms (even homegrown European ones) tend to try to shrug off such protests as protectionist (and/or “anti-innovation”), they have oftentimes found themselves losing challenges to the legality of their models — including most recently in the U.K. Supreme Court (which just slapped down Uber’s classification of drivers/riders as self employed — meaning it’s liable for a slew of costs for associated benefits).

All of which is to say that the muscular sense of injustice that segments of Spanish society have willingly — and even viscerally — demonstrated when they feel unfair impacts flowing from shiny new tech tools should not be dismissed; rather it looks like people here have their finger on the pulse of what’s really important to them.

That may also explain why the government is so keen to ensure no one in Spain feels left behind as it unboxes a major packet of startup-friendly policies.

Among a package of some 50 support measures, the entrepreneurial strategy makes a reference to “smart regulation” and floats the idea of sandboxing for testing products publicly (i.e. without needing to worry about regulatory compliance first).

The idea of opening up sandboxing is popular with local gig platform Glovo. “I really believe this is key; allowing innovation to test products/services without having to go through regulatory nightmares to test. This would really drive innovation,” co-founder Sacha Michaud tells us. “This is working well in financial services but could be applied across a wide range of tech areas.”

Attracting more investment to Spain and improving stock options so that local companies can better compete to attract talent are other key priorities for him.