By Mayowa Adegoke on The Capitalphoto credit: citymarkThe Fintech Roadmap Committee (FRC), a committee created by the Securities & Exchange Commission (SEC) to oversee the development of a regulatory framework for the fintech industry in Nigeria, released a report outlining major highlights in the fintech space as well as bottlenecks impeding the ability of the industry to soar higher than it currently does.Interestingly, while this report aptly titled “The Future of Fintech in Nigeria” fails to clearly state what the future of Fintech looks like in the most populated country in Africa, the bottlenecks the committee outlined to be facing the Fintech industry gives an idea of what the future of Fintech currently (and should, when necessaries are put in place) look like in Nigeria.BackgroundStarting with the numbers, as of 2018, the Hong Kong Trade Development Council (HKTDC) reported Nigeria’s Gross Domestic Product (GDP) to be $376.28bn with a GDP per capita of $1,994. WorldBank also published Nigeria’s population to be 195.9m people. Of this number, there are 115m people below the age of 35; 99.6m adult Nigerians; 36.8% eligible yet financially excluded inhabitants; more than 150m mobile phones; 162m mobile network lines in operation; an internet penetration of 47.9%; and 50m bank accounts. 82% of transactions in Nigeria are still done by physical cash, even though 68.9% of Nigerians have access to internet-enabled smartphones.In 2017, $115m was invested in tech companies in Nigeria. By 2018, that number shot up to $178m, with 58% of this sum going to fintech companies specifically. In 2011, an average of $5m was transacted monthly through mobile money services. As of 2016, this number was reported to be $142.8m a month on the average. Some time within this year 2020, the global fintech software space is projected to become a $45bn market with 7.1% compounded annual growth rate.These numbers show the enormous potentials of the Nigerian fintech industry, which is poised to take banking and flow of money generally in Nigeria to the next level.the trend of fintech investments in ChinaChallenges beleaguering Fintechs in NigeriaThis heading essentially points out why the fintech industry in Nigeria still lags behind its peers globally. The FRC report identifies the following challenges:1. Lack of clarity of regulations as well as effectively zero regulations for cryptocurrency in Nigeriaphoto credit: makemoney.ngFintechs often face difficulties in dealing with what licenses need to be obtained, where these licenses are to be obtained (SEC? CBN?), the duration of time it takes to obtain those licenses and the stifling regulatory environment generally.2. Lack of access to dataOn this, the FRC reports that regulations such as Nigerian Data Protection Regulations (NDPR) make it difficult for Fintechs to collect and mine data needed to supercharge their operations. I, however, disagree to tag this as one of the legitimate challenges Fintechs face in the country. It would be a great disservice to consumers — who all this is to ultimately benefit — where a company is allowed to collect, transfer & mine personal data willy-nilly and without proper security measures in place to avoid leakages of such data.3. Cybersecurity attacksDue to the volume of data Fintechs need to collect to optimise their operations for the benefit of users, Fintechs are vulnerable & high-profile targets for cybersecurity attacks and theft/leakage of sensitive user data.photo credit: memurlarThe implication of this is the increased expenditure Fintechs incur to keep users’ data secured. In the United Kingdom (UK) alone, about $5bn was spent on cybersecurity. In the United States (US), private companies are on track to spend nearly $1trn on cybersecurity in 2021.4. Lack of capital market stability due to overdependence on foreign capitalAs of December 2018, the amount of foreign capital in the Nigerian Capital Market (NCM) hovered around N100bn which is roughly the same amount of local capital in the NCM. This poses liquidity problems should there be a capital flight. More particularly, it is also a problem for Nigerian Fintechs who heavily depend on investments to scale.5. Lack of market confidence in FintechsAccording to Business Post, the top 5 banks in Nigeria employ more than 36,000 people and have annual revenues of over N2trn. The same cannot be said of Fintechs in the same country, Nigeria.This lack of cushion and the support banks get in the form of insurance by Nigeria Deposit Insurance Corporation (NDIC) makes it an upheaval task for Fintechs when trying to convince investors to invest in Digital Financial Service Providers (DFSPs) versus their physical counterparts.6. The overly conservative approach to investing in Nigeriaphoto credit: seeksafelyAccording to Sankore Research, 89% of retail investors prefer to invest in the form of Bank Deposits that could be withdrawn later. 32% prefer to invest in real estate. 19% in stocks and 10% in currency. Investment in Fintechs doesn’t even feature, no matter how slightly, as a preferred form of investment. This is due to the lack of financial literacy on the part of retail investors.Moving upscale to pension managers (who make up a significant base of the segment of investors that invest the most amount), the narrative largely remains the same for Fintechs. Nigerian pension managers are conservative investors, and thus prefer to invest more in government securities versus in companies for equity stakes. This is in sharp contrast with Namibia where pension managers invest more in equities than in government securities.the trend of fintech investments in the UK7. Lack of adequate collaborations between Fintechs and banksAs wide as this space is, many Fintechs still innovate in isolation. This is particularly problematic because the structure of regulations and capital base needed to provide an end-to-end Digital Financial Service makes it very tasking where there is little to no collaboration. And this lack of collaboration can be ultimately tied to the lack of incentives to collaborate.8. The high costs of running operations for FintechsAmong other expenditures, Fintechs expend heavy sums to generate electricity; build, run and maintain servers; transfer data to users of the internet; process & settle payments. To put it succinctly, this is not sustainable.9. Undeveloped local venture capital/growth funding structureCompared to startup hubs in places like San Francisco, Hong Kong, etc, in Nigeria, there is very low participation of local venture capitalists & angel investors in seed fundraising by Fintechs to acquire necessary licenses, scale operations, etc.There is also a dearth of platforms (like Kickstarter in the US) for funding of Fintechs via alternative means. As such, it doesn’t come as a surprise that the major Fintechs have had to heavily rely on foreign investors to raise requisite funds to run their businesses.the trend of fintech investments in Singapore10. A low number of major accelerators & incubatorsIn the early stages, Fintechs often need support to thrive in the ecosystem. And everywhere around the globe, Accelerators & Incubators are popular providers of this support mechanism. They often support in the form of provision of capital; office space; legal, marketing, and regulatory know-how; accounting & tax advisory; managerial guidance, etc.Unfortunately, in Nigeria, this support system isn’t well developed. There is still heavy reliance on foreign capital & support, even at the earliest stage of operations.Suggested solutions to the challenges identified1. A Fintech-friendly regulatory environmentFor one, regulators need to be transparent. There also needs to be consistent engagement with stakeholders in the Fintech industry before rolling out regulations. This is to ensure that there is adequate input from those who are to be affected by these regulations.photo credit: redwood logisticsThe FRC recommends that SEC works with other regulators to create a central committee that consists of all regulatory bodies saddled with the responsibilities of formulating policies for Fintechs. Thus, this committee should house a representative of the Central Bank of Nigeria (CBN) being the chief regulator for the payments and lending legs of Fintech; NAICOM being the chief regulator for insurtechs; SEC being the chief regulator for equity financing of Fintechs, etc.All regulators should also nudge players in the Fintech industry to use the regulatory sandbox built by the Nigeria Inter-Bank Settlement System (NIBSS) instead of each regulator building its regulatory sandbox for Fintechs under its purview.On cryptocurrency, it is recommended that SEC classifies cryptocurrencies as securities or commodities and not as a currency. SEC should further develop a framework for the regulation of Virtual Financial Asset Exchanges (VFAEs).On crowdfunding, SEC should regulate equity-based crowdfunding, while CBN regulates interested-based crowdfunding. Also, as it applies in ‘the blockchain island’, Malta, cryptocurrency tokens should be classified to be: (i) Payment tokens (ii) Asset tokens and (iii) Utility tokens.2. Investment in security and data minimisation practicesFintechs should embrace and embed best security practices into their product’s architecture from the ground up. This helps to minimise the likelihood of the existence of loopholes through which malicious actors can siphon user data.photo credit: plixerFintechs should also develop a ‘Sensitive Data Utilisation Map’ which documents how sensitive data flow in their systems and networks. This map should then be periodically assessed for possible systemic vulnerabilities using the ‘Vulnerability Assessments and Penetration Testing’ (VAPT) assessment mechanism.Collection of data should further be streamlined. Fintechs need to collect only data they need to be able to carry out a function for the user. The less the data collected, the less the ‘data load’ Fintechs have to deal with securing.3. Expansion of investment options for Fintechsphoto credIT: hunterbusinesslawFintechs need more options outside NCM to source for funds. Thus, as highlighted in Point 1, crowdfunding should be encouraged and not stifled as an investment option. FRC suggests that SEC creates appropriate licensing mechanisms for players in the crowdfunding ecosystem.SEC needs to establish a clear vision for its role as a regulator and promoter of Fintech. It should create “Speed Funds” which attract High Networth Individuals (HNIs) to invest in Fintechs. SEC should further shorten the timeline for registering with it, to encourage participation in the NCM. Listing requirements should, also, be Fintech-friendly, with a simplified procedure for raising capital.4. Increase in investors’ trust in & knowledge of FintechsFintech literacy is still very low among investors. FRC recommends that SEC takes on the task of educating the market about the opportunities and upsides available on investments in Fintechs.SEC is advised to further establish a Fintech office whose functions include: managing Fintech-investor relations, clarifying processes and procedures to new Fintech entrants, facilitating SEC-Fintech-Investor engagements & seminars, and coordinating the dissemination of investment opportunities in Fintechs.5. Increase in collaboration across boardRegulators are to create an environment that encourages collaboration between not just Fintechs and banks, but with Fintechs and even the regulators themselves.To start with, CBN should streamline the onboarding of users, such that users can use as simple as only BVN details to create accounts in Fintech products.National Pension Commission (PENCOM) should also smoothen the relationship between Pension Fund Managers (PFMs) and Fintechs to boost investments in Fintechs. There should also be increased knowledge sharing among players in all stakeholder industries.6. Upgrade in necessary infrastructureThe major pain point under this heading is electricity. The quality and quantity of electricity supply in the country need to drastically improve if we are to have a sustainable environment for Fintechs who rely a lot on this amenity to run their operations.photo credit: nairametrics7. Mobilisation of local investors to invest in FintechTop investors in Nigeria still prefer to invest in oil, sugar, rice and a host of other old Millennium products. In countries like the US, China, technology is the biggest driver of several stock exchanges in these countries. Nigeria needs to replicate this. Incentives to invest in new Millennium products should be put in place and actively promoted to set the country up for a brighter future in the NCM.What is the future of fintech in Nigeria?photo credit: e-ziguratFrom the above review and analysis, in the event nothing changes, we are looking at a Fintech industry with a fairly bleak future. While entrepreneurs in this space keep pushing the envelope of what is possible, the stifling environment means the industry would be moving at a pace slower than that of top countries such as the US. The implication of this is a possibility of having in 2040 a Fintech industry that is stuck in 2025 infrastructures & regulatory environments.Where these changes (and many more changes correctly highlighted by other industry observers) are affected, it then wouldn’t be surprising for Nigeria to be a premier country for investment and development of Fintech products not just in Africa but in the globe as a whole.The question now is: Can we make these changes/advancements? Yes. Would it be tasking and require a whole lot of changes in mindset and approach? For sure. But overall, is it a change worth undertaking? The author affirms to this with a resounding ‘yes’.Mayowa Samuel Adegoke is a lawyer and chartered mediator with strong interests in technology, tech law, and revolutionary advancements generally. He can be reached via email at [email protected] Capitalhttps://medium.com/media/3b6b127891c5c8711ad105e61d6cc81f/hrefThe Future Of Fintech In Nigeria: A Review Of The Report By The Fintech Roadmap Committee was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.