THE BUZZ about fintech in Lagos, the commercial capital of Nigeria, is so loud that even those without access to the internet cannot miss it. Flashing billboards advertising Kuda, a digital bank, loom over traffic jams, and signs for Paga, a mobile-payments company, adorn thousands of corner shops. Investment has been flowing in, too. In March Flutterwave, a digital-payments firm, raised $170m, making it Africa’s latest unicorn (ie, a startup valued at more than $1bn). Interswitch, a payments processor, acquired its horn in 2019 when it sold a 20% stake to Visa, a credit-card company. Last October Stripe, the most valuable private fintech in the West, snapped up Paystack, a Nigerian digital-payments company, for $200m.

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Whereas the three big successes enable online payments, a crop of newer fintechs offers products direct to consumers. FairMoney, which provides instant loans, recently raised $42m in a round led by Tiger Global Management, a New York hedge fund. PiggyVest helps people save; Bamboo lets Nigerians invest overseas, despite a scarcity of dollars in the country. People should be “very excited” about fintech in Africa, says Makhtar Diop, the head of the International Finance Corporation, the private-sector arm of the World Bank, which has pumped $200m into the sector.

The long-run potential is vast: Nigeria’s population, now roughly 200m, is projected to pass America’s by 2050; about 95% of transactions still involve wads of crumpled naira. Even so, some Nigerian investors worry that the excitement is overdone, considering the country’s unpredictable regulators and its economic malaise.

Running a fintech in Nigeria is tough. Electricity and the internet are unreliable. Regulators simply ban things they do not understand, complain some founders. In April apps that help Nigerians invest in stocks listed overseas were suddenly told by the regulator on Twitter that they were breaking the rules. (The government later banned Twitter, too.) Earlier in the year the central bank upset fintechs by banning dealing in cryptocurrencies, which had surged in popularity as the naira lost value. “Fear of the Central Bank of Nigeria is the beginning of wisdom,” jokes Eghosa Omoigui of EchoVC, a venture-capital fund.

Perhaps the biggest challenge to fintechs is the grim state of the economy. Panglossian pitches are common for startups anywhere, and those in Nigeria are no exception, stressing the country’s large population. Yet with more than 40% of Nigerians living on less than $1.90 per day, inflation at 18%, and population growth outstripping that of GDP, the real market for many fintechs is far smaller.

Falling income per head limits the ways in which fintechs can grow. Payments firms can still convince more people to convert existing cash transactions to digital ones. Other fintechs, which target the smaller pool of Nigerians with savings to invest, may win business for a time by poaching disgruntled customers from banks. But if these firms are to sustain profits, they need existing customers to transact more. That is harder if people are getting poorer. The average transfer value at a leading payments firm, for instance, is almost stagnant, despite inflation. Some fintechs, such as Bankly, target the roughly 60m Nigerians who are unbanked. Yet signing up these often very poor customers takes more time and investment than many investors realise, says Tomilola Majekodunmi, its chief executive.

Savvy fintechs try to escape the bind by looking beyond Nigeria. “The goal is, as quickly as possible, to diversify,” says Nichole Yembra of Chrysalis Capital, a Lagos-based tech investor. Many founders like Lagos for its energetic workforce but also see it as a gateway to Africa. Diversification helps avoid regulatory risk, too. Bamboo is expanding into Ghana and talking of Kenya. Flutterwave operates in more than 15 African countries.

Still, even Nigerian investors who believe in fintech’s potential worry that the excitement is out of hand. Eric Idiahi of Verod Capital Management, a private-equity firm, sees “crazy valuations” and warns of “huge losses”. There are consumer fintechs with talk of “over $500m valuations, and I don’t know anyone who uses the product”, says Maya Horgan Famodu of Ingressive Capital, a venture-capital firm. Foreign investors may underestimate how hard it is to expand into new markets, each with its own regulator.

Losses are part of any tech ecosystem, and the exuberance at least allows customers to benefit from financial innovation today. But Ms Horgan Famodu worries that because so much of the funding for Nigeria’s fintechs comes from abroad, losses may lead the market to “overcorrect”. If foreign capital flees, that could cripple firms with sound business models, too. Yet quitting Africa need not be the only option if fintech hits trouble. Many other tech sectors on the continent are “completely unaddressed”, says Mr Omoigui. Furthermore, “the margins can be so much better.” One sector’s loss may be another’s gain.

This article appeared in the Finance & economics section of the print edition under the headline “Out of the slump”

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