Paystack unveiled an ambitious roadmap to turn the product into a sophisticated global shopping tool, loaded with invoice features, sales analytics, and integrations with Substack and Google Pay.

These fintechs, equipped with technology to help businesses accept payments, believed they could unlock new growth if only they could get more businesses to sell to customers using digital marketplaces. As compelling as this proposition was, it failed woefully.

Barely two years later, the platform failed to gain traction, and Paystack hasn’t added any features ever since. It’s effectively abandoned — a rare misadventure for a company that takes a careful approach to product rollout.

The e-commerce platforms of Flutterwave and Remita have also stalled; while OPay shuttered its OTrade and OMall marketplaces after only a few months in operation to focus on its core fintech services. These misadventures highlight the challenges of e-commerce in Nigeria. But it also underscores a fundamental misread of the domestic market as offline businesses rapidly embraced electronic payments while ditching the need for online storefronts.

The Original Premise of New Age Payments Startups

Paystack and Flutterwave are two of the biggest names in Nigerian fintech. But they’ve only been around for a decade. Yet their creation in 2015 and 2016, respectively, heralded the dawn of a rejuvenated Nigerian payments industry by favouring quick API integration and a low-fee model to get more enterprises to accept electronic payments from consumers. Their raison d’être was built on four things:

1. That cash is being digitized, and the future of payments will be electronic.

2. That card payments will be the dominant form of retail payments as financial inclusion — an industry-driven initiative to get more people to use formal financial institutions for their savings and payments needs — scales banking.

3. That e-commerce platforms, which were nascent in Nigeria at the time, that allow people to buy and sell on the internet, will usher in the next era of electronic payments as businesses switch to digital sales channels.

4. And as these changes happen, payment providers can stay in the background, capturing significant economic value as processors without having to be on the ground, since merchants themselves will do all the hard labour to go digital.

But some of these things have played out differently.

E-Commerce Revenue ₦0, Payments Revenue ₦0

On the one hand, Nigeria’s macroeconomic struggles over the last decade greatly destabilized growth plans for local fintechs, their enterprise clients, and consumers’ purchasing power. Yet people didn’t stop spending, nor did it slow the pace of digitizing cash.

Instead, the channels of commerce and the methods of payment changed drastically during this period. In other words, most businesses remained largely offline, with no online footprint, and bank transfers and POS transactions, not pure online payments, became the fastest-growing methods of payment. Fintechs that didn’t get this memo were left for dead or suffered slower growth, especially post-pandemic.

Bank transfers, in particular, represented a big threat for two reasons. Unlike debit cards, still in growth territory and weren’t always efficient at the time, digital banking over smartphones or feature phones was ubiquitous. With a banking app, consumers could send and receive funds in seconds with a real-time alert to verify transactions. With peer-to-peer transfers, a customer can manually send money from their banking app to a recipient’s bank account, removing the need for bank cards entirely. And second, with banks already linked to each other, peer-to-peer transfers completely cut out the fintechs from the value chain.

OPay and Moniepoint were among the earliest fintechs to recognize this seismic change, which accelerated with agency banking. Moniepoint pivoted from its enterprise business model just before the pandemic, while OPay spent huge sums to incentivize consumer behavior towards the peer-to-peer or bank transfer trend. In 2020, mobile money operators and POS transfers accounted for 13% of consumer total payment volume (not value); by 2023, they represented over 40% of transactions.

Elsewhere, payment processors’ anticipated e-commerce boom never arrived. Jumia, the largest e-commerce platform on the continent, continues to report less than 1% market penetration after a decade. The willingness of consumers and merchants to transact entirely online — the loop from product discovery to consumer payments — never gained traction. Fashion businesses didn’t fully go online, car sales didn’t go online, nor did purchases of consumer goods. All of these things remained offline.

Typing “restaurant near me” in Lagos on Maps is not always so helpful in finding dining options. Googling “best hair salon in Maryland” is futile, and even searching for “plain white shirts” on Jumia most times doesn’t return quality results. Everything remained offline, away from organized storefronts. Yet that didn’t mean people didn’t shop online.

Once a consumer sees a local product while doomscrolling on Instagram, they message the seller, haggle or reach a price, wire the money to the seller via bank transfer, while the seller dispatches the item to the customer using a third-party logistics service. In this transaction loop, from product discovery to consumer payment, e-commerce platforms received zero revenue, and payment providers got nothing. Yet an online trade concluded successfully, but via social commerce and peer-to-peer transfers.

Payments Revenue ₦100, E-Commerce Revenue Still ₦0

As these social commerce and peer-to-peer payments trends accelerated post-pandemic, fintechs glued to their original premise were sure to lose. They all recognized this, but slowly. Then comes the industry shift towards open banking and the creation of “pay with bank transfer”.

This revolutionary new payment method brought fintechs back into the peer-to-peer value chain. With open banking, fintechs can ditch cards and integrate directly with every bank in the country. This method has been wildly successful so far, yet it quickly exposed how many transactions were happening offline, away from cards and digital marketplaces. Everything from school fees payments to paying for stuff at a roadside food vendor is increasingly shifting to P2P payments.

So rather than focusing on getting businesses to sell online, the new goal for fintechs over the last six years is getting businesses that are offline to accept payments omnichannel — via cards, bank transfers, web, POS devices, or mobile money. Fintechs and banks are racing to arm every trader in the market with a POS device. In this value chain, while e-commerce platforms continue to earn zero revenue, payment providers earn a decent take rate.

All of a sudden, fintechs are realizing that the way to accelerate growth in the offline payments realm — to scale it — is to repurpose the original e-commerce playbook, but for offline. In other words, after onboarding merchants to their payment service, offer them working capital loans to scale up their inventory, a high-margin value-added service, to drive sales volume; merchant banking services to manage their business, including software for bookkeeping, payroll, and tax management.

This is what Moniepoint and OPay have achieved successfully over the last few years. Paystack recently started on this path, but is rapidly scaling. It first partnered with Titan Bank, then launched an offline payments service, and now it has launched Paystack Microfinance Bank, a licensing regime that gives it the same regulatory cover as Moniepoint.

Unlike the traditional payments paradigm, fintechs on this offline path are poised for more geometric growth over the next few years. Their success is no longer anchored by any swing tied to Nigeria’s anticipated e-commerce pipe dream. Instead, their growth is tied to broader GDP activities in the domestic economy. In other words, as merchants and consumers switch to these payment providers for their daily transaction needs, these fintechs will keep scaling, and the more sales volume merchants record in general, the faster these fintechs scale.

The upside is massive since the majority of Nigerian commerce occurs in the informal economy, driven partly by small unregistered businesses that sometimes lack the corporate structure to access traditional banking services. But they can use P2P payments to keep serving customers.

For now, fintechs expanding in this direction are going to see a bump in key milestones as they push deeper into this market. And once the industry is at scale, the fortunes of these fintechs become closely linked to Nigeria’s GDP performance. This ensures steady revenue growth for the foreseeable future while ensuring that startups are directly tackling some of the biggest needs of small businesses.

But key risks are lurking for these fintechs. On the one hand, their credit exposure is increasing as they use value-added services like lending to appeal to merchants. On the other hand, the resilience of these startups is impacted by their source of capital. Companies that raised or are considering funding from abroad need to be careful when weighing the ROI against business performance because devaluation in recent years has had an impact on startups’ return profiles.

Nevertheless, the future looks exciting.

And Happy Tuesday.

I’ve been fascinated by something. Quite a lot of people assume the naira redesign chaos witnessed earlier this year caused a “surge” in digital payments. Is this true or just an assumption? For the second edition of my newsletter, I wanted to focus on the impact of the cash scarcity on the digital payments industry.

Nigerian payments companies fantasize about the death of cash. It’s on everybody’s pitch. We got the first glimpse of this post-cash Nigerian universe in the first and second quarters of 2020 when Covid-19 shut down much of the world’s physical economy triggering an electronic payments boom in many countries, including Nigeria.

While much of society has since adjusted and even returned to normalcy post-pandemic, digital payments have remained. And in countries such as Nigeria, physical cash and digital payments exist side-by-side.

Then in November 2022, the West African country got another glimpse into a world without physical cash. When the Central Bank of Nigeria announced the double whammy of a rushed currency redesign and tighter regulations on mobile money agents, some folks anticipated that the restrictions would push more consumers into the digital payments bubble.

But when the regulator struggled to mint and circulate a decent amount of the redesigned currency before a needless January 31 deadline, it threw the country into a frenzy not seen since the days of the EndSARS protests. Just weeks before the presidential election, the scarcity and the hoarding of cash saw people break into ATMs, go naked in bank halls and cry their hearts out as the nation descended into chaos.

Naturally, electronic payments should have witnessed an impressive uptick, many assumed. But data from Q1 show a different trend.

In an economy where a majority of consumer transactions are settled in cash, when an obnoxious cash scarcity hit, instead of a digital payments boom, we witnessed a significant pullback. Within the first two months of the cash scarcity, digital payments in Nigeria plummeted dipping by 7.5% in January, and further declined by 5.12% the next month, according to transaction value data from the Nigerian Inter-Bank Settlement Scheme (NIBSS).

However, the payments value recovered quickly the next month (March) — reaching a record high of ₦48.3 trillion with a transaction volume of 1.18 billion (another record peak) — before plummeting consecutively in April and June.

Interestingly though, while the amount of money Nigerians sent overall declined at the height of the cash scarcity, more people flocked to digital payments during the same period. After recording an initial 3.4% dip in January, payments volume witnessed an uptick till March when the intensity of the cash crunch reduced.

Now, interpreting the data, which is available on the NIBSS Industry Database online, is a little challenging partly because NIBSS hasn’t issued any public statement explaining these payment trends.

On the one hand, historical data suggests the payment declines in early 2023 are not really unusual. Instead, they are fairly consistent with previous years. With its memorable holidays and the influx of fun international travelers, December is the peak month for payments in Nigeria, and each year since 2018, transaction activity tends to surge compared to the trailing eleven months. Equally consistent, transaction values tend to decline in both January and February as Nigerian households adjust to the new year after the holidays. The year 2020 would have been the odd year, but the lockdowns didn’t start until late March 2020. So technically, nothing unusual happened this year.

Yet we know for a fact that Q1 2023 was different, especially with all the progress recorded since 2020. If a large chunk of payments happens in cash, why didn’t the scarcity of the physical naira trigger a bump in digital spending? Why did electronic transactions decline for two straight months despite the ubiquity of payment services? Also worth sharing that out of the five months recorded by NIBSS so far, digital payments reported declines in three.

Again, interpreting the data is not straightforward, but we have a few good guesses.

Macroeconomic realities

The first answer is economics. After a festive December, Nigerians tend to cut back overall spending in January and February. But the cash scarcity had an outsized impact this time, according to the National Bureau of Statistics (NBS). The economy plummeted at least 3.11% compared to the previous year and the previous quarter.

Yemi Kale, the former head of NBS, predicted the slump, explaining that around 54% of the Nigerian economy is cash-based. In particular, the informal economy, where the average Nigerian works and shops, represents half of the GDP, and 90% of transactions are settled in cash.

But economics alone doesn’t answer the question.

Agency banking restrictions and higher mobile agent transfer fees

Ahead of the deadline to switch to the redesigned Naira, the CBN placed restrictions on mobile money agents, effectively blocking agents from carrying out completing larger volumes of payments. But as the cash scarcity hit harder and banks became unreliable for withdrawals, agents took advantage of the situation. They handled more payments, NIBSS data showed, but they also raised prices to incredible proportions in different parts of the country. This trend discouraged people from transacting larger sums. Mobile agency firms are still grappling with how to control the army of 1 million agents loosely under their control.

Digital platform instability

Platform stability was a major focus ahead of the cash scarcity and mobile money restrictions. Everybody anticipated this. The signs were on the wall. In the run-up to the cash crunch, Nigerians reported several network outages by major banks that caused embarrassing transaction failure rates.

It only got worse when cash disappeared from the ATMs. Too many bank apps continued to underperform with weak infrastructure and clunky apps that were unusable for long hours of the day. During the height of the crisis, bank customers complained they were unable to log into some of their fintech apps, while others reported high transaction failure rates.

And as the frustration grew, it exploded with customers breaking down emotionally at banking halls while other folks forced their way into banks, damaging ATMs and other infrastructure.

Startup funding decline

Nigerian startups typically don’t let an opportunity or useful crisis go to waste. During the pandemic, payments companies threw their weight behind e-commerce or online storefronts. When traditional banks goof, say extended transaction downtime, startups are quick to remind people why they exist. When banks restricted international payments with naira cards, fintechs weren’t shy to shoot their shots as virtual dollar card providers. And when BBNaija made a comeback as the biggest show on Nigerian television, tech companies led the way with lucrative sponsorship deals ahead of banks and consumer goods companies. All of these were made possible not just by marketing ingenuity, but also the confidence from venture capital funding.

The naira scarcity of January and February came at a stormy period for funding for everybody. With investment outlooks looking bleak, at least for the short term, this was not the time to activate a splashy marketing campaign.

Plus, the incentive to go all out during this period was low. An election period, a macroeconomic pullback, funding concerns, but most importantly, payment fees aren’t high enough to incentivize a sharp deviation from the existing strategies for a crisis that was going to last maybe a week, six months, or a year? It was unclear. And that uncertainty perhaps wasn’t worth it. Companies mostly pushed harder with previous campaigns, including offline efforts, not new ones.

Despite all these challenges, it’s a no-brainer that a couple of companies managed to record some growth in digital payments during one of the most unfortunate periods in recent Nigerian history. Collectively, payments company all hit their peaks in March as awareness of digital alternatives to cash payments grew.

But for the months of January and February, when many assumed real-time payments blossomed, it didn’t. The uptick came after. And payments growth slowed afterward.

Digital payments in Nigeria has had an extraordinary decade. It’s been 14 years since the Nigerian Inter-Bank Settlement System (NIBSS) first introduced a real-time electronic payment system — the NIBSS Instant Payment (NIP).

NIP supports fast transactions across different channels, this includes mobile apps, web/internet banking, USSD, ATM transfers, point-of-sale (POS), or in-person banking. Although NIBSS is not the only company providing instant payments across these channels, it is the largest, thanks to the scale of its real-time infrastructure which ranks among the most sophisticated in the world.

NIP has supercharged how banking works, and for the first seven years, banks led the innovation and adoption of payment platforms for different use cases. But in the later years, younger companies, startups emerged. This nimble bunch is quickly becoming strategic players in the market as their urge to grow deepens consumer payments adoption beyond the realm banks understood or were interested in.

And the dividends are paying off. NIBSS data from January to May shows 2023 is going to be the best year for digital payments.

818.4 million: the average number of times Nigerians did a digital transfer each month so far in 2023

More people are using real-time payments than ever before. Payments volume — the number of times people made a digital transaction — has ballooned over the last few years.

In 2016, Nigerians completed 154.5 million digital payments, representing an annual average of 12.9 million transactions per month. By the end of 2022, average monthly transfers stacked up to 427.8 million as payments volume topped 5.1 billion.

A 2022 report by payments firm, ACI and GlobalData, suggests that Nigerian real-time payments will top 8.9 billion transactions by 2027. But that projection was based on last year’s growth rates when the average monthly volume stood at 428 million transactions.

Data from the first five months of 2023 shows there have already been 4.1 billion payments, representing a monthly average of 818.4 million transfers. TechCabal Insights projects NIBSS, even with a conservative growth rate, will top 9.7 billion transactions by the end of the year, almost double the figure from 2022.

Nigerian payments value could surge past “a quadrillion naira” in the next few years

Payments value is surging dramatically, NIBSS data shows. The sum total of naira transfers stood at ₦38.2 trillion in 2016. At the end of 2022, it had recorded a staggering 913.4% growth to ₦387.1 trillion.

But far more interesting is how fast it has accelerated in recent months. Transaction activity for just the first five months of 2023 is ₦211.1 trillion and we’re still far from the peak period of December.

Growth assumptions are tricky, but historically the annual average growth rate has hovered in the low single digits (under 5%) except in 2020 when it moved at 8.4%. We believe 2023 will be another year with abnormally high growth. We project total payments value will surpass ₦580 trillion. And in a few more years, we’ll see the word “quadrillion” tossed around more frequently as the industry accelerates.

Lower average transaction amount

In 2016, during NIP’s early years, the average Nigerian customer sent ₦247,337, highlighting that fewer people used real-time payments and a majority of transactions were large volume amounts. By the end of 2022, the average transfer declined significantly to just ₦75,393. This is a good signal. Lower average transfer amount suggests greater adoption as more people embrace electronic payments for mundane transfers.

The downward trend has continued in 2023. Average transfers are down to ₦51,592. That’s a good sign. The lower it drops, the higher the penetration of digital payments.

NIBSS revenue will increase even after it cut transaction fees

Although NIBSS is a for-profit government-backed entity, its revenue is not public. But its business model is fairly straightforward. NIBSS charges a fee for every real-time transaction that goes through its platform. That fee used to be ₦50, but it has crashed to ₦3.75. And according to the World Bank, NIP accounts for 70% of all NIBSS payment activity. So if that’s true, then it’s fairly straightforward to calculate its revenue in the digital payments business: just multiply NIBSS payment volume by ₦3.75.

This basic math shows made revenue of ₦25.6 billion in 2022 when it charged ₦5/transfer. Data for the first five months of 2023 suggest it has locked in revenue of ₦20.5 billion already and could double this figure by the end of the year.

NIBSS continues to fuel easy money for Nigerian banks who tend to reduce charges only when instructed by the central bank.

But while the above charts show how embedded digital payments have become in Nigerian society, Q1 2023 reminded us that the industry is still vulnerable to several notable weaknesses. And these challenges represent major problems in the long run.

This article was also published on TechCabal.