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Issue 189
Mar 04 - Mar 10, 2024

Hi there,

I finally saw Dune 2 again the right way — on an IMAX screen — and it was a blast. Denis Villeneuve was able to capture the large scale of these galactic landscapes but also intricately present the stakes of the politics that unfold within these worlds. The actors are brilliant. Hans Zimmer’s score is beautifully ascendant. Cinema is truly back.

This newsletter was written to boygenius’ the record and some songs from Coldplay’s X&Y.

Tochukwu Ironsi
Market Intelligence Specialist, Paystack
Top News

Interswitch grew 2023 revenue by 23% to $42 million. According to reports filed with the United Kingdom’s Companies House in February, Interswitch generated ₦66.5 billion (~$42 million) in group revenue in the 2023 financial year (ending March 2023). This represented a 23% increase from the previous year and a 129% increase from 2019.

Interswitch is a leader and pioneer in digital payments in Nigeria. The fintech is a major alternative to NIBSS Instant Payments (NIP) for electronic transfers and has become a key payments processor for POS and online payments, a leading card issuer, and a provider of consumer bill payment products.

In 2019, Interswitch processed 2.7 billion transactions. By March 2023, the company crossed 1 billion in monthly transactions, almost as much as NIP processed in that same month.

Nigeria represented 94% of group revenue in 2023, just 1% less than the 95% reported in 2020. Despite an early expansion into Uganda in 2008, expansion across the continent has been muted with non-Nigerian operations largely present in East Africa.

The Companies House filings contain reports from 2019. However, Interswitch changed how revenues were categorized in 2021, so it’s hard to analyze how certain business and cost lines have changed over time. That said, it’s still possible to glean some interesting insights.

Verve's contribution to revenue growth

The bulk of their revenue comes from processing transactions for businesses, banks, and the government, but recent growth has been driven by the adoption of Verve cards in Nigeria. The card network, which started in 2013 as a competitor to international card brands Visa (which holds a 20% stake in Interswitch) and Mastercard, has grown to become one of the biggest card issuers in Nigeria.

In July 2023, Verve crossed a milestone of 50 million issued cards, with 15 million of those cards issued in the preceding 16 months. This pace equates to nearly 1 million new cards being issued each month.

Card network revenue reached ₦10.3 billion in 2021, making up 26% of total revenue and growing 58% from 2019 to 2021. This revenue growth is higher than the 32% recorded for the entire period in the same period Card network revenue was no longer reported separately in later statements but was still highlighted as the key driver of growth in 2022 and 2023.

A key factor behind the increased Verve card adoption is cost. By serving as both processor and issuer to Nigerian financial institutions, Interswitch mirrors a closed-loop payments ecosystem that offers relatively lower card transaction fees to both acquirers and issuers (while still maintaining high gross margins!).

The CBN fixes and regulates card issuing costs and merchant processing fees for card transactions (especially offline POS transactions, which make up the bulk of card activity in Nigeria). The limits on possible revenue mean that issuers must significantly optimize their card operations to minimize losses and maximize possible income.

The biggest cost advantage, though, comes from being a local card network that processes and earns revenue in Naira.

International card brands Visa and Mastercard have been instrumental in establishing and expanding the capacity and quality of card payments technology in Nigeria. This has happened through partnerships, investments, expertise sharing, and the introduction of card payment standards that have benefited Nigerian businesses, customers, banks, and fintechs.

That said, the cost of issuing and processing cards branded by these international card schemes is priced in USD and higher than the associated costs for Verve cards. These include transaction fees, setup costs, and other recurring obligations. Some of the actual fees might be paid in Naira but are still set and settled using prevailing exchange rates.

Nigeria’s local currency has depreciated significantly compared to USD in the last few years. This has increased issuer and processor costs for Visa and Mastercard. Interswitch’s Verve, however, has no such FX obligations and has been able to largely maintain its pricing as competitors saw their fees automatically rise in Naira terms. This has made Verve an easy, attractive choice for issuing institutions that want to preserve their scarce foreign currency reserves and save costs.

Early on, Mastercard and Visa were able to capture significant market share and command higher fees from issuers because they enabled Naira cards to be accepted by businesses globally. Customers used these Mastercard and Visa cards tied to their local bank accounts to participate in cross-border eCommerce and spend in person when they travelled outside the country. Verve also attempted to make their cards internationally acceptable, but adoption was low.

Higher interchange revenue and additional FX conversion income from international card transactions also encouraged banks to issue cards from these international brands. This global advantage and associated incentives have now mostly disappeared, with international card spending on Naira cards suspended or heavily limited by many Nigerian banks due to the current FX challenges.

Today, Visa and Mastercard still have strong brand power and might be preferred by more affluent, higher-spending users, but banks are increasingly pushing Verve cards to the rest of their card customer base.

Interswitch’s interesting relationships with fintechs

The shift to Verve is not just happening with banks.

Big fintechs and mobile wallets like OPay, PalmPay, Moniepoint, and Pocket now issue Verve cards to their users. The motivation for these fintechs is not just to reduce costs and setup times but to actually turn card spending into a sizeable revenue line.

As explained in Issue 179, banks can afford to use cards as a loss leader to attract customer deposits for higher-margin business lines like lending and investments. Many fintechs, though, either lack similar structural advantages or the required financial resources to pursue similar strategies.

So a combination of regulation and currency depreciation has enabled Verve to capture significant market share from their international peers and increasingly become the default choice for fintechs issuing cards.

Emerging threats to future growth.

AfriGo, a local card scheme backed by the Central Bank of Nigeria (CBN), Nigeria Inter-Bank Settlement System (NIBSS), and the Nigerian Bankers Committee, was launched last year. Adoption is still early, and implementation is still ongoing, but as we wrote in Issue 152, the underlying cost-saving motivations, strong regulator support, and obvious distributive advantages from banks and the central switch position AfriGo as a potential contender to Verve in the near future.

But the biggest, long-term threat to Verve card adoption comes from non-card payments.

More than 9.5 billion NIP bank transfers worth ₦600 trillion were processed in 2023, an 88% rise in volume from 2022. Transfers by Mobile Money Operators alone (OPay, PalmPay, etc) grew by 326% to 46 trillion. This is in sharp contrast to the 1.3 billion transactions and 20% increase seen with POS card transactions on NIBSS in 2023.

Some of this low POS growth is due to shifting dynamics between NIBSS and its competitors (which include Interswitch). However, the adoption of bank and mobile money transfers for offline and online commerce is a non-trivial factor. Bank transfers have lower fees, are familiar to both merchants and consumers, and don’t require smart card chips or POS terminals — which have both been affected by inflation and currency depreciation — to complete transactions.

A modern, generational, and diversified Nigerian fintech

That said, Interswitch is still well-positioned to survive a disruption of card payments in Nigeria. The fintech remains a major competitor to NIBSS and a key processor for non-card payments. Interswitch is also a leading provider of consumer and bill payments through its Quickteller product and APIs.

Revenue from Consumer Financial Services reached ₦11.8 billion in 2021, contributing 30% of Interswitch’s group income for the year. Quickteller faces immense competition from fintechs like OPay and PalmPay, but its strong base of existing users offers a considerable advantage in a tussle for consumer digital spending.

Ultimately, Interswitch’s staying power in Nigerian payments is commendable. In the last 22 years, the fintech has successfully navigated multiple regulatory epochs and formidable competition to become a model of what a modern, generational, and diversified payments company should look like.

It’ll be interesting to see how one of Nigeria’s biggest and oldest fintechs adapts to yet another era of shifts in Nigerian payments. Interswitch. The Information. [Africa]

Deel acquires PaySpace. Global payroll fintech Deel has acquired PaySpace, a payroll provider based in South Africa with operations in other African countries. The value of the deal was undisclosed, but it’s reportedly Deel’s largest acquisition to date.

Payroll is very local. Leading providers combine a reliable payout experience with a dynamic and specific understanding of local tax, pensions, insurance, and regulatory considerations translated (and largely automated) through computer code.

Payroll can also be global. The above process can be scaled and repeated across regions where there is formal economic activity or a reasonable pace of company formation—which happens to be pretty much every country. Payroll can be a good entry point into offering other complementary employee-related services like HR management, employee training, and even payroll-backed loans.

These qualities make payroll an easy and early candidate for both product and geographic expansion.

Global companies typically have large, globally distributed teams, which means there can be immense value in helping them figure out these different local payroll obligations from a central platform. This is particularly true for companies that have just a small business presence in specific countries but still have to pay remote employees or contractors in those regions.

Deel’s acquisition of PaySpace helps them better serve these types of global enterprises. Deel already owns 150 entities across 70 countries and plans to be present in 100 countries in four years. As the fintech expands, so does the surface area of large companies that it can acquire as clients.

For PaySpace, the acquisition comes with resources to drive expansion into more African countries. It also represents a positive moment for African fintech which has seen few exits and an overall funding decline in the last few years. TechCrunch. [Africa]

Other News
  • Brass furloughs staff amidst complaints of delayed customer withdrawals. TechCabal [Nigeria]
  • Chipper Cash pauses US operations. Benjamin Dada [Africa]
  • A report on digital payments in South Africa. Payfast. [South Africa]
  • How to think about the business of digital lending. Medium [Nigeria]
  • Central Bank of Kenya approves 19 digital lenders. Kenyan Wall Street [Kenya]
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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.
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