Nigeria's fintechs built payments. Now they're becoming banks

As Nigeria's fintechs continue to grow, they're taking a significant step into uncharted territory: becoming banks. For fintechs like Paystack, Flutterwave, and Sycamore, this means more than just expanding their services - it's a fundamental shift in their business model. By acquiring microfinance bank (MFB) licences, they're no longer just payment companies, but institutions that will accept deposits, give loans, and earn interest income from lending. This change, however, is not without its consequences.

Fintechs built their reputation on making payments faster and more convenient. But with deposits, the economics change completely. Unlike payment companies, which earn money every time customers move money, banks earn by keeping deposits, lending them out, and managing the risks associated with that business. This shift in focus means fintechs will have to adapt their business strategies to accommodate the new reality. For instance, Flutterwave's acquisition of Mono, an open banking startup, has enabled it to secure a national MFB licence. This move is a clear indication that fintechs are willing to invest in building a deposit base, which will allow them to earn interest income from lending and reduce their reliance on transaction fees.

While MFBs are not commercial banks, they are still subject to strict prudential limits set by the Central Bank of Nigeria (CBN). These limits dictate how much fintechs can lend, how much they can borrow, and how they manage their risks. This is a crucial aspect of microfinance banking, as it ensures that fintechs operate within a framework that protects customers and maintains financial stability. However, this also means that fintechs will have to navigate a complex regulatory environment, which can be time-consuming and costly.

Fintechs used to make money when customers moved money. But with deposits, the revenue engine changes completely. Transfer fees are strictly regulated, but when combined with a deposit base, fintechs can earn interest income on loans. For instance, if a fintech has an average deposit balance of ₦15,000 per user, and each user makes 10 small transfers and 2 large transfers monthly, the fintech can earn ₦10 on transfers between ₦5,000 and ₦50,000, and ₦50 on those above ₦50,000. This is a significant increase in revenue potential, but it also means that fintechs will have to manage their deposits effectively to maximize their earnings.

As Nigeria's fintechs become banks, there are several unspoken consequences that need to be considered. For instance, how will fintechs manage their risks, especially when lending to households and small businesses? How will they balance their need for growth with the need to maintain financial stability? And what implications will this have for the wider financial sector? These are questions that need to be addressed as fintechs continue to evolve into banks.

In the next few years, we can expect to see more fintechs acquire MFB licences and expand their services into full-service financial institutions. This will be a significant shift in the Nigerian fintech landscape, and it will have far-reaching consequences for the industry and the wider economy. As fintechs become banks, they will have to adapt to a new reality, one that requires them to manage deposits, lend money, and manage risks. It's a challenging but exciting time for Nigeria's fintechs, and one that will shape the future of the industry for years to come.