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Issue 182
Oct 02 - Oct 22, 2023

Hi there,

Welcome to a super-sized edition of the newsletter!

We just published a deep dive into the evolution of agency banking in Africa. In this long-form piece, we explore agent networks in Africa, how they converge with SMEs, and what the future of agency banking might mean for how money moves across the continent. You can read the article here, and share it with your network and communities.

On Wednesday, November 15, we’ll also be hosting a Decode Fintech Roundtable — a one-hour virtual chat where industry experts will further discuss the future of agency banking in Africa, and its impact on how money moves across the continent.

Book your free seat here and invite your friends ✨

This newsletter was written to Sampha's Lahai.

Tochukwu Ironsi
Market Intelligence Specialist
The evolution of agency banking in Africa

The agency model is the quiet backbone of Africa's financial system, building trust gaps in low-trust economies. In this long-form piece, explore agent networks, how they converge with SMEs, and the future of agency banking in Africa 👇🏾

Learn more on the Paystack blog ✨

NigeriaKippa shuts down KippaPay. Kippa, a Nigerian fintech provider of payments and bookkeeping tools, has discontinued operations of KippaPay, its suite of offline and agency banking tools. According to the CEO, the decision to shut down was due to prevailing market conditions that had affected profit margins in the segment. WeeTracker

It’s worth going deeper into the economics of offline payments in Nigeria to better understand why these changes are happening. In our recent agency banking piece, we wrote:

"In Nigeria, for example, the fees that providers charge agents for bank transfers and POS transactions are regulated and capped by the Central Bank of Nigeria (CBN)[…] The agency banking provider, who either takes an agreed cut of agent commissions or charges a percentage of the transaction value, earns the smaller share. The take rates for providers are small but large players are able to leverage their scale and transaction activity to negotiate better margins with payment partners and in some cases, cut out these middlemen entirely.

Smaller agency banking providers that lack the scale and leverage to obtain better terms with payment partners have to contend with thinner margins and usually struggle to compete in the market without losing money."

Revenue from offline POS payments in Nigeria is typically earned per transaction and limited to 0.5% (capped at ₦1000) of the transaction amount. From this tiny cut charged to merchants, offline payment providers still have to pay out a portion to partners: card issuers, acquiring banks, terminal service providers, and payment switches. This reduces the actual take rate per transaction to about 0.1-0.4% per transaction.

In March 2023, the Nigeria Inter-Bank Settlement System (NIBSS) processed 177 million POS transactions worth ₦1.15 trillion, amounting to an average transaction value of ₦6,475. By our estimates of take rates, offline payment providers in Nigeria earned an average of ₦6-₦26 per transaction in that period.

Beyond variable processing costs, there are the fixed costs of the POS terminals. These POS devices are manufactured outside Nigeria and typically cost between $50-$150 per terminal. Nigeria’s local currency has faced significant devaluation in the past year, affecting the local prices of these devices. Even at constant dollar prices, these devices now cost ~ ₦40K - ₦180K per terminal, a 70% increase on average from the previous year.

Ideally, merchants or banking agents are expected to purchase these devices and allow providers to pass on the costs from their books. However, the initial high cost of the POS terminal can deter adoption and limit how many businesses or agents a provider can onboard. Additionally, banks and large fintechs offer these devices at a discount and sometimes for free to win market share.

Consequently, the payment or agency banking provider bears the full or partial costs of these devices. The purchase and operation of multiple POS terminals require significant initial capital. And with thin margins, there’s a long payback period from processing transactions on these terminals to breakeven. By our estimates, offline payment providers will need to process at least ₦10 million in transactions per terminal before they can turn a profit.

This estimate doesn’t yet include other operational costs like transport, fuel, data, device maintenance, marketing, and payroll, which have also been affected by either inflation or currency devaluation this year. At 26% headline inflation, the prices of goods in Nigeria have gone up significantly, which should ideally be good for providers that charge a percentage cut per transaction. But this is neutered by the effects of inflation on consumer income and overall spending, which contracts as prices go up.

With the high fixed costs and slim margins, offline payments in Nigeria have become a game of scale and strategic acquisition. Providers need to optimize for high aggregate transaction volumes while being intentional about what kinds of businesses or regions get POS terminals.

Mature Nigerian fintechs have certain advantages when it comes to operating in offline payments. Firstly, these providers are well-capitalized and can afford the high capital requirements and survive long periods of low margins or losses. These players can also aggressively and quickly build out vast sales, operations, and support networks. Market leaders OPay, PalmPay, and Moniepoint have raised more than $700 million in combined venture funding from investors. With these significant resources, these players have been able to capture significant market share for both merchant payments and agency banking.

These players have also used their scale to improve their economics by negotiating better rates with payment partners and POS suppliers. The ability to make large POS terminal orders not only begets favourable discounts but also allows these players to hedge against future FX fluctuations. With time, these players obtain additional licenses or venture into new product lines like banking, lending, and online payments, which allow them to cut out middlemen and earn extra revenue.

The advantages of scale also apply to commercial banks. As we wrote in Issue 179, the long-term strategy for these legacy players is to offer offline payment solutions at cost or at a loss to attract deposits from customers and businesses. These deposits can then fuel higher-margin core business lines like lending and investments.

Small to mid-scale fintechs don’t have most of these advantages mentioned above. They are less capitalized and are limited in how much initial investments they can make towards device purchases, customer acquisition, and operations. Because these players process fewer transactions and purchase less inventory, they don’t have as much leverage when trying to negotiate better rates with partners or suppliers. These players consequently have worse unit economics compared to larger players.

So it’s unsurprising that Kippa has shuttered their offline payments product. We expect other players with a similar level of scale to face a similar dilemma. These fintechs will have to shut down, consolidate, or pivot into other business lines to stay alive.

Success is also not certain for the larger fintechs who can currently afford to sustain operations at these margins. They might have to borrow from the playbook of legacy banks that are happy to be loss-leading with offline payments in order to be profitable in other segments. As we point out in our article, this is already happening.

Players are also considering asset-light payment experiences that remove the need for a standalone POS device. Players like Paystack have launched Virtual Terminals that rely on other payment channels like bank transfers. There’s also some progress with tap-to-phone for offline payments.

Zooming out, there are hard, long questions that relevant stakeholders need to ask about the future of offline payments in Nigeria. As we noted in Issue 162, financial regulators are incentivized to drive payment costs down to encourage consumer adoption, but this puts systemic constraints on how much profit players can sustainably earn to continue running their businesses.

Ultimately, there has to be a healthy balance between market-driven profit-seeking and inclusive payment policies. Until then, players will have to play multiple games to remain in the arena or keep the arena from collapsing on itself. 
South AfricaEcentric Payments acquires Thumbzup. Ecentric Payments, a leading provider of enterprise payments in South Africa, has acquired Thumbzup, a multi-channel payments company, for an undisclosed sum. With this acquisition, Ecentric will be able to expand its suite of services to mid-market merchants and retailers in South Africa. Finextra
GhanaDash shuts down operations. Dash, a Ghanaian fintech that intended to build a new payments network in Africa, has shut down operations. This comes after clampdowns from the Ghanaian regulators and reports of mismanagement and misreporting of key metrics to investors. TechCabal
KenyaKenya joins PAPSS. Kenya has joined the Pan African Payments and Settlement System (PAPSS). Through this agreement, Kenyan businesses can leverage PAPSS to facilitate cross-border trade with other African businesses on the PAPSS network, using local currencies. Zawya
AfricaThunes partners with Access Africa and Smartcash for remittances. Thunes, a B2B cross-border payments platform, has partnered with Access Africa, a leading African institution, to process inward and outward remittances across 13 African markets. Thunes also partnered with Smartcash PSB, a fintech subsidiary in Nigeria, to process remittances into Nigeria. Thunes

In recent issues of the newsletter, we’ve noted an emergence of cross-border solutions for both consumers and businesses. This demand is driven by multiple factors: weakening local currencies, latent demand for cross-border trade, increased migration, capital flight from international investors, and regulators seeking inward remittances to shore up FX supply.

With the US dollar still in high demand and interest rates still very high, we expect this trend to continue. 
EthiopiaThe National Bank of Ethiopia (NBE) proposes new changes to mobile money regulations. The NBE has made significant revisions to the regulations guiding the issuance of payment instruments for mobile money operators in Ethiopia. Key changes include higher mobile money balance limits and the inclusion of non-banks in providing mobile money services. Afrikan Heroes

Here’s a link to the full revised directives by the NBE. 
AfricaMultigate gets remittance licenses in Uganda and Nigeria. Multigate, an African payments and remittance company, has received new money transfer licenses from the Central Banks of Uganda and Nigeria. The licenses will enable Multigate to compliantly process remittances in these markets. Business Insider
MoroccoCash Plus completes €57 million investment. Cash Plus, a Moroccan payment provider, has raised €57 million in new funding. Mediterrania Capital Partners, the International Finance Corporation (IFC), and the Dutch entrepreneurial development bank, also invested in the round.  Africa Global Funds
South AfricaStitch extends Series A round by $25 million. Stitch, a South African payments and commerce startup, has raised a $25 million Series A extension round. The round was led by Ribbit Capital, with participation from existing investors CRE Ventures, PayPal Ventures, and The Raba Partnership. TechCrunch
EgyptAmenli raises $1 million in new funding. Egypt’s Amenli, a provider of digital insurance products, has completed a $1 million funding round. The round was led by Alter Global and will be used to fund product development and marketing efforts. Disrupt Africa
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