Decode Fintech Logo
Issue 162
Feb 13 - Feb 19, 2023

Hi there,

As a Manchester United fan, it’s a great time to be alive. Our team is playing beautiful football, winning games, and appears to be on the path towards the top. Even when we’re down a goal or two, we have a strong belief and confidence that we’ll find a way to bounce back.

As a supporter of the great club, I hope we sustain this momentum into a title or two. Glory Glory Man United!

As a Nigerian, I’m looking forward to the Nigerian Presidential election coming up this Saturday. In many ways, the results of this election will be pivotal to the progress of Africa’s largest economy. If you’re a registered voter, please exercise your right to vote. The future is literally in your hands.

Tochukwu Ironsi
Market Intelligence Specialist
EthiopiaEthiopia proposes a $150 million license fee for mobile money operators. The National Bank of Ethiopia (NBE) has proposed a $150 million mobile money license fee for foreign-owned operators like M-Pesa looking to enter the Ethiopian Market. This comes after the NBE reportedly granted Safaricom approval to roll out M-Pesa across the country last year. Nasdaq
NigeriaShould Nigerian payment processors charge more? Jason Njoku (@JasonNjoku) advocates for raising the prices of payment gateways in Nigeria, citing the increased risk and prevalence of fraud in the market. Twitter

Here’s one way to look at the composition of fees in frontier fintech markets like Africa:

- There’s a component to cover the direct costs of providing the service. This is paid to payment partners and infrastructure providers.

- There’s a markup component to generate profits, invest in growth, and return value to shareholders. This markup could be applied in various ways depending on the business model.

- There’s a market learning component which is essentially an indirect tax levied on the entire customer base. This learning fee pays for fraud losses but is also used to build backend systems that reduce these losses over time.

In regions like Nigeria where trust is low and KYC systems are still nascent, the learning costs are high and need to be properly priced into financial products. As explained in previous issues, digital lenders offer very high-interest rates not just to take advantage of strong demand but also to account for the high risk of offering loans over the internet with no collateral.

Over time, market levers affect the different pricing components. The direct cost component is pressured by scale as fintechs grow their numbers and are able to negotiate for better rates with partners. Also, as a fintech grows, it's able to remove middlemen and seek direct (on-us, intra-agent) partnerships down the stack either through leverage or licensing or both.

Ultimately, the fintech acquires enough users to move a portion of its transactions within its ecosystem. The goal is to turn enough external API calls into internal SQL queries which have near-zero marginal costs.

The learning fee is at first captured by bad actors and regulators punishing fintechs for not flagging said bad actors but eventually pressured downward as systems get smarter. The learning fee doesn’t disappear but converts to profit or is used to target and undercut the competition. Building systems that mitigate fraud better and faster than the competition directly saves fintechs money but also indirectly raises costs for competitors because fraud naturally navigates to the paths of least resistance.

Most of the industry focuses on the markup component which is strongly influenced by user demand, competition and regulation. With a high-cash, low-trust market like Nigeria, pricing can quickly become a barrier to entry and eventually a barrier to the overall growth of the ecosystem. Also, financial services and their associated fees are regulated by the Central Bank of Nigeria (CBN). With the charge to make digital payments affordable, fees are set to be very competitive with cash (which up until very recently had near-zero transaction costs).

This means that, at the point of market entry, payment companies have to balance the opportunity for margins with regulated price caps and seeding future growth of digital payments. When a new player enters the market, they either have to compete on price or product, which pressures the rest of the industry to not just improve their service but also adjust prices.

The eventual consequence of these pricing pressures is that the industry fees start off high but trend downwards over time. Many commentators quickly attribute this to just one factor but as we can see, it’s quite complex.

Today, it’s very common for fintechs to forego profits and even eat direct costs to drive the adoption of their products. These costs might be invisible to the customer but they don’t disappear. Relatively cheap VC funding has helped subsidise this strategy. But as capital becomes scarcer and companies focus on generating cash, many fintechs will have to engage in creative pricing strategies in the coming months.

Are fintechs fine with fewer customers but greater margins? In the end, the market will tell. 
AfricaUnderstanding the economics of VC returns in Africa. Peter Oriaifo, a VC at Oui Capital, breaks down the economics of the returns on VC investments and how this informs the type of investments that should be made in African companies. Medium
NigeriaDispelling myths about CBN's currency re-design. Adedayo Bakare, COO of Ladda, looks into the data behind the CBN’s new currency policies in a bid to separate fact from fiction. Stops and Gaps
NigeriaBlockfinex acquires Fluidcoins for an undisclosed sum. Blockfinex, a cryptocurrency exchange, has acquired Fluidcoins, a Nigerian crypto gateway and infrastructure company, for an undisclosed sum. The acquisition will be leveraged to launch BlockPay, a payment gateway and an API-based wallet as a service. TechCabal
AfricaSmile Identity completes $20 million Series B round. Smile Identity, an identity verification platform, has raised $20 million in Series B funding. The round was led by Costanoa and Norrsken22 and will be used to fund expansion into more African markets. TechCabal

In Issue 130, we highlighted the significance of fintech-adjacent services like identity verification, for the long-term development of financial services in Africa. As we pointed out above, figuring out KYC reduces the cost of operating financial services over time and in future, we expect to see more players building solutions in this space. 
South AfricaNaked raises $17 million in Series B funding. Naked, a South African-based insurtech solution, has completed a $17 million Series B funding round. The round was led by the International Financing Corporation (IFC) with participation from The German Development Finance Institution (DEG), Yellowwoods, and Hollard. Ventureburn

We covered Naked’s $11 million Series A round and explored the potential for digitalizing insurance in Africa.
KenyaPower Financial Wellness raises $3 million in seed funding. The Kenyan-based provider of lending, investments and insurance solutions for employees and gig workers has raised $3 million in seed funding. The round included investments from DOB Equity, Bolt by QED Investors, Quona Capital, Zephyr Acorn, and Norrksen Accelerator, and will be used to fuel expansion in Kenya and Zambia. TechMoran
NigeriaCuracel raises $3 million in seed funding. Nigeria’s Curacel, an API-based provider of insurance services, has raised $3 million in seed funding. Investors in the seed round include Tencent, BluePointe Capital Management, Pioneer Fund, Olive Tree Capital, Y Combinator, AAF Management, and Elefund. TechCrunch
Share a tip
Do you have an announcement, event, or job posting you'd like to share, or have you come across an interesting bit of African fintech news recently? Hit reply and let me know! I might be able to include it in next week's newsletter.
Know someone who'd enjoy Decode Fintech?
Blockchain Africa Conference
Mar 16, 2023 - Mar 17, 2023, Johannesburg, South Africa
Inclusive Fintech forum
Jun 20, 2023 - Jun 22, 2023, Kigali, Rwanda
Fintech Summit Africa
Jun 21, 2023 - Jun 22, 2023, Cape Town, South Africa
Central Bank Payment Conferene
Jun 26, 2023 - Jun 28, 2023, Cape Town, South Africa
The Global Payments Summit
Jun 28, 2023 - Jun 30, 2023, Cape Town, South Africa
Decode Fintech is powered by Paystack
Want to control the emails you receive from us? Update your preferences.
Want out of the loop? Unsubscribe.

We’re at 126 Joel Ogunnaike, Ikeja GRA, Lagos,