Financial Inclusion: Separating Facts from Fad and Fiction

Nigeria may be in the middle of a fintech boom with an ecosystem brimming with more than 200 fintechs and four unicorns, but just a handful of them are tackling financial exclusion

Photo Credit: SustainableDFS

I toured Nigeria in 2019, visiting the country’s most remote and financially excluded regions. 

We were shooting a documentary for a commercial bank and my major objective was to observe how people without bank accounts live day to day. That’s when I met Janet. 

Janet lives in a remote fishing settlement around Igbokoda, Ondo state, where she makes a living selling roasted fish, prawns and periwinkle. The community is located just along the coast, and the residents survive on the barest amenities and infrastructure. 

Based on what her friends told me, she’s one of the best caterers in the area. (I’d wager this is a fair assessment based on the samples I tasted). 

However, Janet does not have a bank account. When I asked her why, she told me, for one, the two-way journey to the nearest bank (which also has the nearest ATM) would cost N1200 transport fare. And then, the bank clerks would ask for things like her ID card.

She tells me she doesn’t even know her own birth date (but she celebrates it on May 15, to commemorate the day she was baptised in church). 

Janet gets by without a bank but her business is feeling the impact. 

With many customers in town, she gets hundreds of orders in a month. Unfortunately, being financially excluded, she was unable to receive initial deposits to facilitate these orders. She tried many options but none could offer the security and privacy of having a personal account. 

The story changed when a mobile money agent opened up shop in her settlement. She explained to me the arrangement she has with the agent, and how he helps her by receiving these funds on her behalf into his own account. This enables her to buy more wares and transport them in bulk to the city, making her customers happy.

Happier customers have led to more business, which have led to increased profits and her children staying in school. 

She calls Baba Sola (the agent) “a godsend and answer to my prayer”. 

Janet’s story has a happy ending. 

However, there are millions of Janets in Nigeria living in places where there are no banks, no ATMs and no agents, all due to harsh business conditions. 

There’s no happy ending in sight for these Nigerians. 

I shared that story to highlight something I’ve learned over the last 5 years - financial inclusion is not a meme or a fad. 

Financial inclusion matters. 

More fintechs, less inclusion

Nigeria is one of the leading protagonists in the Africa rising narrative. 

A country hosting Africa’s largest economy with a population of 200 million people, 40 percent of its adults living without bank accounts, and about 82.4 percent mobile phone penetration. A textbook mobile-first market, ready for digital disruption. 

It makes for a great pitch, if I do say so myself. 

So the current fintech boom shouldn’t be a surprise. The country has produced 4 fintech unicorns and Nigerian fintechs have raised over $2 billion in funding between 2014 and 2021 with no signs of slowing down. Every other week, we wake up to another fintech funding announcement. 

At the same time, Nigeria’s financial inclusion progress (the rate at which people without bank accounts are opening bank accounts) has stalled. Between 2016 - 2021, the number of people without bank accounts has remained almost the same. 

To put it another way, the influx of fintechs is not having an impact on the financially excluded. 

The reason is actually simple - not every fintech is ‘banking the unbanked’, regardless of what their pitch deck says.

So what are fintechs doing?

Nigeria’s central switch (NIBSS) is arguably the best in Africa, with advanced interoperability and peer to peer transfer technology. Business Insider describes it as “the most developed real-time payments scheme in Africa” and ranks alongside global leaders from Asia. 

We tend to take it for granted here in Nigeria, but being able to send someone money and 5 minutes later, asking them to confirm receipt is not something you can do in many other countries around the world. 

This kind of innovation has enabled fintech entrepreneurs to build solutions that unbundle banking into its composite parts and deliver even better experiences to bank customers. Today, we have fintechs focused on savings, payments, investments, credit, wealth management, allowing them to focus their marketing and deliver customised user experiences.

This is where majority of fintechs participate and compete for market share. 

However, as successful as these fintech solutions have been, majority target people like you and me - already included bank customers. Their products, apps and solutions require you to have a bank account and a BVN. 

And that’s not really financial inclusion. 

You cant ‘appify’ financial inclusion 

Financial inclusion casts the spotlight on building financial solutions for the millions who do not have bank accounts of any kind. By Nigerian standards, that means they have no BVN, do not own smartphones and most likely earn below NGN20,000 (about US$48) each month. 

Having survived without banking systems for so long, they’ve developed their own systems of storing and moving money around their communities by using crops, livestock and cash. While these solutions may be adequate within their community, it falls apart when interacting with the larger economic system which is increasingly becoming digital. 

Also, transitioning to the formal banking system is expensive for excluded people, many of whom are poor and experience income volatility. They have also lived and worked in the shadow economy all their lives and lack necessary documentation to register for essential services. 

Needless to say, financial inclusion is not as easy as “making an app for financially excluded people”. 

Which brings me to my last point.

Who’s really banking the unbanked?

Financial inclusion is not a unicorn business (yet). Aside from Interswitch, none of the 4 fintech unicorns are tackling financial exclusion head-on. 

First of all, 36 million Nigerians without bank accounts sounds like a huge market opportunity. But because the market is underdeveloped, it is harder and riskier for fintechs to go after unbanked people.

So anyone who’s truly pursuing financial inclusion is pretty brave. How do we tell which fintechs are tackling financial exclusion? Let me share two fundamental things to look out for:

1. Does the fintech leverage USSD? Majority of financially excluded people do not own smartphones. They also live in regions where the best internet coverage is EDGE (not even 3G), and so, USSD is the best bet. Apps need not apply.

2.  Are they using banking agents (or POS agents as they are fondly called) to reach their customers? Bank branches are unsustainable for last mile delivery especially as you venture into northern Nigeria and rural areas where majority of the excluded (like Janet) live. These are remote and off-grid locations and require lean distributions models to be sustainable. 

   One of the objectives of digital payments systems is to keep the money digital as long as possible. Because Nigeria is still a cash dependent economy (mostly due to the size of the informal sector), people need easy ways to convert that digital money into hard cash they can spend in the local market, on the bus, at the canteen, and so on. POS agents ensure that conversion can occur conveniently - from physical to digital and vice versa. 

These two elements (USSD and agent banking) are essential to customer-facing fintechs who are trying to ‘bank the unbanked’. 

Everything else is window dressing. 

Fad and fiction drives the trend, but impact requires facts 

We’re in exciting times.

‘Banking the unbanked’ has been one of the most powerful narratives driving the growth and interest of institutional investment in Nigerian fintechs. And while narratives are essential to every trend, it’s important that we stay grounded by facts to ensure the hard work of building solutions to real Nigerian problems gets done by competent and willing entrepreneurs. 

The future is ours to build. 

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