Why Nigeria's biggest fintechs are racing to become banks

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Fintechs built their reputation by making payments faster and replacing many physical banking functions with smartphones. Now, they are becoming banks, or at least a particular kind of bank.

This year, Nigeria’s biggest fintechs have accelerated their push into banking through microfinance bank (MFB) licences as they seek to expand beyond their core businesses into full-service financial institutions.

In January, Paystack, the payments technology company now owned by The Stack Group (TSG), acquired Ladder Microfinance Bank. In April, Flutterwave, Africa’s largest payments startup, secured a national MFB licence through its acquisition of open banking startup Mono.

In May, Sycamore, a financial service group with lending and asset management businesses, told TechCabal it plans to build a deposit base of more than ₦40 billion ($29.13 million) as it expands from digital lending into banking and payments after acquiring an MFB.

An MFB licence allows fintechs to accept deposits, give loans, and earn interest income from lending, reducing their reliance on transaction fees.

But the licence does more than unlock new products. It changes the business that fintechs are expected to build. Unlike payment companies, which earn money every time customers move money, banks earn by keeping deposits, lending them out and managing the risks that come with that business.

Yet a microfinance bank is not a commercial bank. It is a specialised banking institution with a narrower mission to mobilise deposits, lend primarily to households and small businesses, and operate within strict prudential limits set by the Central Bank of Nigeria (CBN).

Deposits change the economics

Payment businesses make money when customers move money. Banks make money when customers leave money behind.

Deposits become a permanent funding base. Fintechs can earn a transfer fee on customer accounts. At least ₦10 on transfers between ₦5,000 and ₦50,000, and ₦50 on those above ₦50,000, and interest income on loans.