A BRIEF ANALYSIS

OF THE FINTECH
INDUSTRY AND
SPONSORSHIP IN
NIGERIA.

by Tami. Koroye.

1.0. INTRODUCTION

One cannot simply dispute the advent of technology has unilaterally disrupted the customary business
principles over the few preceding decades. Technological innovations have served, and are serving as a
means of fashioning new markets whilst making old financial institutions almost outmoded at a rapid
rate. Technology also functions as a form of auxiliary to the traditional fiscal industries and transmutes
these institutions to an up-to-date financial model in today’s tech age. Technology is more than capable
of doing that, through an algorithm based mobile device applications or websites.

Industries such as the banking industries have formed a sort of dependence on technology to adapt their
established institution and services to the current challenges of the 21st century, with the end goal of
making their services more personable/accessible by statutory recognized adults in every sphere of life.
However, technology has grown, like a well cultured weed, to pose as a well-considered challenge to
established financial institutions, essentially disrupting their principled approach to service.

A revolutionary form of technology which has come to transform the financial atmosphere which young
entrepreneurs are keying into right now is the historic FinTech.

This article aims to give a brief expose on the startup FinTech industry, with Nigeria as a case study.
 1.1. WHAT IS FINTECH?

FinTech can basically be said to be a portmanteau of the words ‘financial’ and

‘technology’1. FinTech, in its broadest form can be referred to as technologies which
are being employed in the financial services sector, chiefly used by already established
financial institutions themselves on the back-end of their sectors. This however, cannot
be said to be a fraction of the activities of FinTech companies, which have transformed
from ‘Enamblers’ of the traditional market to be appropriately referred to as
‘Distruptors’, of the same market.

More and more, FinTech is fast moving to represent technologies that are disrupting
traditional financial services, including mobile payments, money transfers, loans,
fundraising, and asset management. FinTech has expanded to be inclusive of any
technological innovation in, and automation of, the financial sector, including
advances in financial literacy, advice and education, as well as streamlining of wealth
management, lending and borrowing, retail banking, fundraising, money
transfers/payments, investment management and other services. This draws the
question, will there be a collusion between financial institutions and FinTech in the
coming years? Although the general supposition is in the negative, however, FinTech
such as Blockchain, with its most popular warrior Bitcoin, and there mere existence
rattles this proposition to its foundations.

FinTech is altering finance in essentially all its numerous offshoots and subsectors2.
From banking to international money transfers, from business and personal loans to
personal investment, and much more, FinTech is presenting traditional finance with
unprecedented challenges through waves of new, innovative ideas which are having an

1 JULIA KAGAN, ‘FinTech’, (Investobia,) https://www.investopedia.com/terms/f/FinTech.asp, accessed 13th

January 2019.
2
Philippe Gelis and Timothy Woods, The Rise of Fintech in Finance (2014),
https://cdn2.hubspot.net/hub/310641/file-1445626583-pdf/Rise_of_FinTech_in_Finance/FinTech_DEF.pdf,
accessed 15th January, 2019.
increasingly sizeable impact on global finance and how as businesses and individuals
conduct their financial matters. Principally, on the long run, FinTech companies are
designed to be a threat to, challenge, and eventually usurp entrenched outmoded
financial service providers by simply being more lithe and quick, serving an underserved
sector or providing faster and/or better service3

Examples of FinTech globally include but are not limited to stock trading apps and
websites, peer-to-peer loaning sites, thereby reducing rates, robo-advisor services that
provide online, algorithm-based portfolio management, all-in-one online personal
finance management, and budgeting tools. FinTech services can be categorized into
four points, in relation to its users and services:

i. Business-to-business for banks

ii. Business-to-business for banks’ clients
iii. Business-to-client for small businesses
iv. Business-to-client for consumers.

The FinTech industry is growing speedily, and its growth is expected to continue. An
example of its growth can be visualized in the FinTech industry with the recent $22
billion merger agreement between Fiserv and its rival First Data, both FinTech
companies that provide technology solutions to the financial world, including banks,
credit unions, securities processing organizations, insurance companies4.

In Nigeria, some of the services FinTech companies deliver are

i. Payments - this is arguably the biggest services proffered here in Nigeria,

with increased electronic payment modules, so much so the Central Bank of

3
Ibid. 1
4
FISV-E, ‘Fiserv to Combine with First Data Corporation to Create Global Leader in Payments and FinTech’, (First
Data 2018) https://investor.firstdata.com/financial-news/2019/01-16-2019-120649159, accessed January 20th
2019
 Nigeria had to release a Payments System Vision 2020 (PSV 2020), in bid
to regulate the unparalleled growth.
ii. Blockchain – This is a notorious FinTech enterprise existing in Nigeria
currently, with its champion Bitcoin, permeating the financial airwaves of
Nigeria.
iii. Personal Finance- These FinTechs provide similar services, some out
rightly work with Financial Institutions by providing personal saving options
that can be easily accessed by mobile devices.

Africa unlike most things, is not being left behind in the new wave of emerging FinTech
companies and their innovative services. The 2017 Finnovating for Africa report
released by Disrupt Africa found that South Africa was home to 94 of the continent’s
301 FinTech start-ups, of which twenty two (22) focused on some form of lending
support. 5 Kenya, Nigeria and South-Africa are some of the Countries leading FinTech
emergence and growth in Africa.6 Some of the leading FinTech companies in Africa are
Paystack, Paga, Interswitch, and Voguepay.

2.0. CONSIDERATIONS FOR FINTECH START-UPS.

In admittance, First Data, Fiserve and Interswtich aren’t FinTech start-ups, therefore
this article isn’t really meant for. FinTech start-ups have a multiplicity, if this writer can
safely say so, of challenges they face to become an established company, pulling out
heavy punches in the financial services sector. This writer has highlighted some of the
considerations entrepreneurs must keep a keen eye for in launching their start-ups.

5
Tom Jackson, ‘What investors are looking for in Africa’s fintech sector’ (May 31st 2018), http://disrupt-
africa.com/2018/05/what-investors-are-looking-for-in-africas-FinTech-sector/, accessed 20th January, 2019.
6
https://olatorera.com/top-5-FinTech-businesses-in-africa/
 1. Regulations.

As a lawyer, it is apposite my first point of call would be the existing regulations already
set to regulate the services rendered by the FinTech startup. There are already in
existence regulations and regulatory bodies that regularize the various services FinTech
start-ups seek to provide, although they were mainly set in stone for the traditional
service providers. FinTech enthusiasts have to put in key consideration to the various
regulations existing and yet to exist while providing services, as the regulatory bodies
are trying fast to catch up and match the innovation industry, so as not to run foul with
the law, and have a standard startup.

In Nigeria, the рауmеnt and рrосеѕѕing aspect of the FinTесh sector, which hаѕ ѕhоwn
the most growth and ѕuссеѕѕ thus far, is рrimаrilу gоvеrnеd by the ѕаmе gеnеrаl
frаmеwоrk аѕ are traditional finаnсiаl inѕtitutiоnѕ рrоviding оfflinе finаnсiаl ѕеrviсеѕ
(e.g. mоnеу/рауmеnt trаnѕfеrѕ, сlеаring, ѕwitсhing, ѕеttlеmеnt еtс.), in addition to
regulations related unambiguously to that sub-sector. There exists the CBN Guidelines
on Mobile Money Services in Nigeria (which was created in 2015), as well as the CBN
guidelines on Operations оf Elесtrоniс Payment Chаnnеlѕ in Nigеriа, the CBN
Guidеlinеѕ on Intеrnаtiоnаl Money Trаnѕfеr Sеrviсеѕ in Nigeria and other rеgulаtiоnѕ
in force. There is no gainsaying at this point that all mobile payments in Nigeria are
controlled and regulated by the CBN7.

2. Market Reception/Consumer trust.

This is Nigeria. People are naturally weary of things they cannot seem to understand,
or processes that go yonder their standard traditional approach or undertaking of
various endeavors. Hence, a general aversion to the services proffered by most tech
companies, especially, if it is pertaining to finances. There can be various reasons for

7
Yinka Edu and Tolulope Osindero, ‘FinTech 2018| Nigeria’ (ICLG, 2018) https://iclg.com/practice-areas/fintech-
laws-and-regulations/nigeria, accessed 20th January 2019.
this antipathy, ranging from illiteracy to general data breaches and cyberattacks and their
adverse effects, such as electronic fraud. Change, however is inevitable, no matter how
slow the progression. FinTech enthusiasts should put this into consideration when
setting up a startup to make the right business decisions and attract the right investors.

3. Unique and Valuable Service

The FinTech industry is starting to get jam-packed, considering many pioneers have
broken technological/financial barriers, and forged a broad spectrum for new
ventures to follow. Regardless, a FinTech start-up must put into consideration the
novelty of services rendered, and its accompanying value to its targeted market. All
sections associated to money are open ended spaces FinTech companies can take
advantage of. FinTech start-ups have ventured into the realms of personal finance,
budgeting, payments, lending, investments and insurance. Basically, a FinTech start-
up’s selling point is its attempts in trying to find solutions to consumers’ problems
and offer new ways to do things. Therefore, there exists an implied jeopardy from
the get go if a start-up mimics the services of an already established FinTech, without
adding any new service that would make it distinct from those already in existence.
This is a fundamental entrepreneurial consideration FinTech start-ups must consider
before launching their business.

4. Funding.

Funding has to be the greatest of all challenges facing start-ups in the FinTech
industry. Having a FinTech start-up fully operational isn’t really cheap. Funding has
been a real heavy burden young entrepreneurs consider while setting up their ideas
into fruition, especially in the African continent, where access to funds to kick-start
businesses are meager in numbers. FinTech start-ups with a partnership between
experts who can develop the entire product, and investors who are mainly into
business development, have an easier footing when setting out. However, not all
FinTech startups do have access to investors willing to tackle the financial burden
of a FinTech. Also, as traditional institutions try to assimilate FinTech talent for
themselves, start-ups would surely face competition in the hiring. There are also the
typical capitalization and operating expenses associated with starting a business.

3.0. TYPES OF FUNDING.

Considering funding is one of the greatest challenges FinTech start-ups face, it is trite
to consider the various forms of funding available for the definite exposure of the
company to the market.

1. Seed funding:

This is a form of securities offering in which an investor invests capital in a startup

company in exchange for an equity stake in the company. The seed funding is the initial
fund used to start up a company. The term seed infers that it is a very early form of
investment, intended to render the start-up assistance until generates enough traction
of its own, or until the company is due for further investments. Seed money can be
gotten from friends and family funding, angel funding, and crowdfunding. This type of
funding is often obtained in exchange for an equity stake in the enterprise, although
with less formal contractual overhead than standard equity financing. However, huge
capital providers do wait until a business is more established before making larger
investments of venture capital funding.
 2. Series A

Series A funding is the nomenclature typically given to a company's first

substantial round of venture capital financing. The name refers to the class of preferred
stock sold to investors in exchange for their investment. It is usually the first series of
stock after the common stock and common stock options issued to company founders,
employees, angel investors and venture capital investors/firms8. This is the stage after
seed funding.

3. Series B

Series B funding is used to grow the company so that it can meet these levels of demand.
Series B appears similar to Series A in terms of processes and key players. Series B is
often led by many of the same characters as the earlier round, including a key anchor
investor that helps to draw in other investors. The difference with Series B is the
addition of a new wave of other venture capital firms that specialize in later stage
investing.

4. Series C.

Businesses that make it to Series C funding sessions are already quite successful. These
companies look for additional funding in order to help them develop new products,
expand into new markets, or even to acquire other companies. In Series C rounds,
investors inject capital into the meat of successful businesses, in an effort to receive

8
Nathan Reiff, ‘Series A, B and C. How it works’ (Investopedia 2018),
https://www.investopedia.com/articles/personal-finance/102015/series-b-c-funding-what-it-all-means-and-how-
it-works.asp, accessed 21st January 2019.
more than double that amount back. Series C funding is focused on scaling the
company, growing as quickly and as successfully as possible.

4.0. TYPES OF INVESTORS.

It is essential to note the various forms of investors that can assist a FinTech start-up
launch into the established market.

1. Personal Investor:

This is the simplest source of financing, because the FinTech enthusiast can use his/her
own money to jumpstart their business, without incurring any debt to any party in the
process.9 These are mainly for FinTech enthusiasts who believe in bootstrapping the
whole process, and have ample belief in the productivity of your technology in the
market.

2. Family/ Friends
FinTech enthusiast can request their friends, family or close associates to help fund
their businesses. This type of funding has more to do with the relationship itself, rather
than the assessment of a feasible business plan. The aim of this type of funding is to
help kick off a business to a point where it can seek and get other types of funding.

3. Angel Investors
Basically, Angel Investor is a person or group of persons who invests in a new or start
business venture, to assist with seed funding, or expansion, usually in exchange of
convertible debt or ownership of equity. Mainly, angel banking is in form of equity
financing, where the investor has a substantial amount of shares in the company. Angel
investors fill in the gap between small-scale financing of personal funds/family and

9
Team TechPanda, ‘Seven Types of Funding Sources for your Startup‘(The TechPanda, 2013)
https://thetechpanda.com/seven-types-of-funding-sources-for-your-startup/11238/, accessed 20th January 2019.
friends and venture capital. Attracting an angel investor, as expected, isn’t going to be
easy, as they are mostly prudent men of business who are all about making enviable
profit returns in the long run.

4. Venture Capital Investors/Firms

These are basically capitalist investors that inject a considerable amount of money in
exchange for equity in the business, and get returns when the business goes public or is
acquired by another company. Venture capital is a type of funding for a new or growing
business. It usually comes from venture capital firms that specialize in building high risk
financial portfolios. With venture capital, the venture capital firm gives funding to the
startup company in exchange for equity in the startup. This is most commonly found
in high growth technology industries like biotech and software.
Venture capitalists are all about the money, and only invest in businesses that have the
potential of providing good returns on their investment. They can also proffer
mentorship to start-ups on how to regulate the financial technology market, and make
the best out of their product. While angel Investors can just be one person, a venture
capital investor is a fir with the sole desire to invest in start-ups by providing seed capital
for the long running and standardization of the business, or a drive through, which
means the venture capital would sell off their shares within a short period of time.

Venture capital investors usually provide seed funds and Series A funds for start-ups.
It should be noted that the advances and preparations taken to acquire an angel investor
is similar, if not more stringent, to the manner in securing a venture capital, as it goes
beyond a specific individual however, but into an actual firm. The venture capitalist's
partnership fund actually becomes a partial owner of the startup. Additionally, venture
capital is usually only used with high growth industries, where risk is much higher. In
these cases, there are little or no assets to back the loan in the event of default so the
likelihood of obtaining a loan is much lower, and the potential payouts must be
drastically higher to result in a successful investment10. Henshaw Capital Partners Ltd,
Cordros Capital Ltd, Lighthouse Investment Ltd and StreSERT Services Limited are
some of the venture capital firms in Nigeria11.

4.1. WHAT INVESTORS LOOK OUT FOR IN START-UPS

A FinTech start-up, seeking for an angel investor/venture capital firm in Nigeria for
either seed capital or series A capital must put all these into recommendations into
succinct consideration.

a. A Standard Business Plan

A FinTech start-up must have a proficiently standard business plan, with a

well standard business team as well. These would attempt to create the air of
seriousness for the FinTech Company seeking funding from either angel
investors to venture capitals. Investors would not invest if there are no solid
plans envisaged for the company, its proposed trajectory and financial
predictions, inclusive of market plans and analysis. Also, the business team
must have their backgrounds and experiences, if any, readily available for the
Investor, as they would have the initial keen interest if initial conclusions are
drawn, and it would seem a profitable venture to the investing in capable
persons who have the technical, managerial and legal skills to float the startup.

10
Venture Capital, (Business Dictionary 2018) http://www.businessdictionary.com/definition/venture-capital.html,
accessed 19th January 2019.
11
Andrella Tersoo, ‘Top venture capital firms in Nigeria’ (Legit 2018), https://www.legit.ng/1147794-top-venture-
capital-firms-nigeria.html, accessed 20th January 2019.
b. Probable potential of higher returns of investments.

Investors are basically people that are willing to support a start-up, with
prospects of higher returns. A startup therefore has to possess the actual
potential of having on the long run a solid return for their investments before
funds can most likely be injected. This has to be considered by the start-up,
and adequately adapted into their business plan. This, as all things in the plan,
are meant to draw in the interest of the investor to give the much needed
capital.

c. Auxiliary veritable reasons.

Asides having a potential of higher returns, the start-up must offer the
potential investor additional veritable reasons why they would want to invest
into the startup. This means that a background check and pedigree of the
angel investor/venture capital firm is conducted, to ascertain the reasons and
strategy why there would be interest in investing in start-ups in the first place.
The reasons can vary from economic/profit making reason, to the self-
indulgent reason or plainly the philanthropic/altruistic reason. Once data is
ascertained, plotting a strategy by the start-up would be made much easier.

d. Structure of the business

Yes, the structure of the business. The structure of the start-up must be such
that any investor can invest into the business and acclaim some certain rights
and privileges, as investors look forward to owning minority equity position
in the business, and as such, gives them a certain level of authority in the
conduct of the affairs of the start-up. Also there must be, in the structure, a
viable means of escape for the investor, if the ‘ship begins to sink’. This
means that the investor can easily, with the structures already entrenched in
 the system, sell off his shares and relinquish his minority equity position, or,
a time-respective merger or sale of company plan.

4.0. CONCLUSION.

As has gleaned from this article, the FinTech industry is fast rising to become the next
major market, not only in the rest of the world, but in Nigeria/Africa as well. FinTech
companies in Nigeria have been able, upon the last decade, to pull heavy fiscal punches
in the financial market12, so much so that the Public and Private sector have noticed the
disruption it has introduced into the traditional modes of services. Lawyers have noticed
as well, and are fast becoming a notable alliance to the FinTech industry, ensuring
compliance with existing regulations are met, and also serving as a liaison between the
FinTech industry and the regulatory making institutions, in service of the former’s
interest. This is mainly important, as lawyers assist these regulatory bodies in proffering
regulations that will not stifle the budding FinTech industry in Nigeria.13

In conclusion, in the Nigerian market, there exists a lot of challenges rocking the
FinTech start-up industry in Nigeria, ranging from technical know-how, to finance, to
the receptivity of the technology in the market. As there are many FinTech companies
such as Paga and Interswitch, there also exists many that didn’t see the light of the date
in the stiff Nigerian market. However, this isn’t a disparaging call to FinTech start-ups,
rather, it is a clarion call for them to brace up for the challenges ahead to weather the
Nigerian storm.

12
Yomi Kazeem, ‘Global payment giants are starting to take note of Nigerian fintech companies’ {Quartz Africa
2018), https://qz.com/africa/1372066/nigerias-paystack-raises-8-million-in-series-a-funding-round/ accessed 20th
January 2019.
13
Tx Zhuo, ‘Regulations Is Strangling Fintech Startups: 4 Ways VCs Can Help’ (Entrepreneur 2018)
https://www.entrepreneur.com/article/280646, accessed 20th January 2018.