Frontier Fintech GPS #4 - Sept 25th 2024
Revolut takes steps towards building a global financial platform, Syft Analytics sells to Xero in a win for African tech companies, Nigeria's failing CBDC experiment and other relevant news stories
Artwork by Mary Mogoi - Website
Hi All, Welcome to the 4th edition of Frontier Fintech GPS where I provide key insights on the top global Fintech news items that matter to you. This newsletter will be arriving in your inboxes every Wednesday morning. The idea behind Frontier Fintech GPS is to help you navigate the endless stream of Fintech news and get smart about global Fintech. To those who are yet to subscribe, hit the subscribe button below and share with your colleagues and friends. 🚀
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🌏 Revolut eyes expansion in Gulf with a licence application
Revolut Ltd., a London-based fintech company, is expanding into the Middle East by seeking licenses from the Central Bank of the UAE to operate as an electronic-money institution and offer remittance services, with plans to eventually apply for a full banking license. This expansion is part of Revolut’s global growth strategy, which includes recent moves into markets like Mexico, Brazil, and New Zealand and India. The company, which established an office in the UAE in 2022 and employs 140 people in Dubai, is also exploring opportunities in Saudi Arabia and hiring for key roles in the region. Targeting the UAE's significant expatriate population and remittance market, Revolut's push aligns with the UK’s broader efforts to strengthen trade ties with the Gulf nations, echoing its previous expansions into markets that align with UK trade strategies, such as Mexico and India.
The move by Revolut to expand into the Middle East and India rhymes with Nubank’s recent moves into the area. A strategy of global expansion may seem crazy but it needs to be viewed with the following in mind;
A proprietary tech platform that enables customisation and scale for whichever market they operate in;
A truly globalised emerging affluent class i.e. a Brazilian tech worker has a similar psychographic profile to a Middle Eastern tech worker - it is therefore likely that they would require a similar experience with their financial services provider;
Proof of increasing operating leverage i.e. increasing revenue without a proportionate increase in costs;
Citi has built a global banking business on the basis of working with tier 1 corporate clients in each of their markets, Revolut and Nubank can similarly build a global business targeting the same psychographic and demographic profile. Neobanks and Banks are well placed to think of their platforms and similarities in their client profiles.
🇿🇦 Xero will acquire South African analytics platform Syft for $70 million
Xero, a global accounting software company, will acquire South African analytics platform Syft Analytics for $70 million. The deal includes an initial $40 million payment and further earn-outs over three years. Syft, founded in 2016, provides AI-driven financial reporting tools to small and medium-sized businesses worldwide. The acquisition will enhance Xero’s reporting and analytics capabilities while allowing Syft to operate independently. This move reflects a broader trend of global tech giants acquiring South African SaaS startups.
South Africa continues to show a commercial maturity on two fronts;
The technical chops to build truly globally relevant products;
An economy that allows a company such as Syft to scale to a 70m$ acquisition;
The transaction validates a deeply-held Frontier Fintech thesis that the number of SMEs will continue to grow driven by demographics and technology. I’ve written about that here and here. Xero is leaning in on this trend and expanding its offering to be a one-stop shop for SME accounting and reporting requirements. Financial services institutions would be well served by integrating such tools into their products to drive stickiness in their SME segments.
🇳🇬 Nigeria Seeking to Expand eNaira Payments in Government Procurements to Boost Low Adoption
The Central Bank of Nigeria (CBN) is planning to expand the use of its digital currency, the eNaira, in government procurements to boost its low adoption rate. The CBN's new measures will enable payments into government accounts and allow ministries, departments, and agencies to process vendor and beneficiary payments using the eNaira. Despite its launch in 2021, the eNaira has struggled with low uptake, accounting for just 0.36% of currency in circulation as of Q1 2024. The CBN aims to enhance adoption through various initiatives, including the eNaira version 2.0.
I wrote about the eNaira here and the article then was very popular and I think it’s super relevant for understanding Nigeria’s dalliance with the e-Naira. I also wrote about CBDCs here so if you want a good grounding on CBDCs, you’d be well advised to read the article. The eNaira is a central bank digital currency distributed through the banking system. The e-Naira is nonetheless a wallet held by the Central Banks so in as much as banks are involved in onboarding, they suffer downside because having an e-Naira is the functional equivalent of withdrawing money from the bank and keeping cash. I wrote specifically;
Banks have to maintain the infrastructure behind onboarding into the eNaira i.e. the burden of KYC is managed by banks whereas the downside of losing your liquidity accrues solely to banks. I think a discussion is required here by the banking lobby as to how the Central Bank will manage this. One potential approach is to severely limit the balance each eNaira wallet can hold thus practically throttling deposit loss. This is a structural issue that the CBN needs to think about given that banks will be responsible for the initial launch and can thus kill this process given what’s at stake for their businesses but also for society at large. Maturity transformation is one of the secret sauces of the industrial revolution. If you disable it, then you kill economic growth. The current eNaira design will convert banks into peripheral players in the financial system.
An additional challenge is that you can classify Nigeria’s approach to financial inclusion as “Anything but Mobile Money”. This explains why in as much as there’s a lot of innovation in the Nigerian Fintech space, financial inclusion levels are still around 2,000 basis points lower than Kenya. The CBDC was intended as a low cost solution for financial inclusion, but the underlying infrastructure that includes banks and fintechs hasn’t changed. Due to this, it has not solved any core problem and therefore adoption is low. As I had predicted in my article, one solution would be to mandate government payments and we’ve come full circle. This won’t drive adoption as people will simply receive e-Naira and quickly convert it to Fiat for normal use.
🌎 Revolut to launch its own stablecoin
Revolut is set to launch its own stablecoin, joining a growing number of companies entering the stablecoin market. The launch will occur under the Markets in Crypto Assets (MiCA) regulatory framework, which provides guidelines on transparency, governance, and reserve backing for stablecoins. Revolut aims to ensure compliance with these regulations to offer a secure and transparent product, enhancing trust among users and investors. This move aligns with Revolut's broader strategy to expand its cryptocurrency services.
Two things need to be clarified;
The Markets in Crypto Assets (MiCA) regulations are a very simple yet logical set of rules that are guiding crypto markets in Europe. For Africans, they’re very simple. They rhyme very closely with African PSP rules as well as E-money (Mobile Money) regulations. If you understand these, then you have a framework for what MiCA means. If you’re regulating based on activity, then regulating stablecoins is similar to regulating mobile money. I will cover this in an upcoming article;
Stablecoins are asset backed cryptocurrencies with the assets being dollar or euro reserves held with a custodian. They enable all the benefits of crypto i.e. fast and cheap movement of money (especially on the Solana blockchain) whilst avoiding the volatility of cryptocurrencies such as Bitcoin and Ethereum.
The question then becomes, if you had a network of customers globally, would it make sense to enable them to send money to each other at the speed of light and at near zero cost? This in my view is the motivation behind this move by Revolut. The boldness of Revolut’s move is that they are building a closed loop network where they own the customers and the infrastructure. If it works it has the makings of a very valuable financial institution.
🇨🇮 AFG Holding SA acquires Access Microfinance Holding AG
AFG Holding SA is acquiring a controlling stake in Access Microfinance Holding AG and indirectly in it’s African subsidiaries. The transaction involves the exit of investors such as the International Finance Corporation (IFC), KfW, and Omidyar Network, who are divesting their stakes. The acquisition includes Access Microfinance’s various microfinance subsidiaries and assets across multiple countries, allowing AFG Holding to expand its footprint and impact in financial inclusion. Access Microfinance Holding AG’s portfolio includes several microfinance institutions across Africa and Eurasia. Key entities in the portfolio are AB Microfinance Bank Nigeria, AccessBank Liberia, AB Rwanda, AccessBank Madagascar, and AB Bank Zambia. These institutions focus on providing financial services to small businesses and entrepreneurs in developing markets. This is not to be confused with the Nigerian financial powerhouse Access Bank PLC.
The transaction will see the West African based AFG Holdings expand their portfolio. This is an interesting transaction and in my view rhymes with divestitures such as Diageo selling their stake in Guiness to Tolaram. African owned entities have built up capital and are able to take a long-term view on markets in which they have deep understanding. Moreover, they have the managerial expertise and empathy to execute in their local markets. Having said this, the experience of Atlas Mara should inform the AFG team as markets vary and what works in one market may not work in another. Nonetheless, the Atlas Mara transaction was riddled by poor decision making and was not reflective of the business of banking in Africa. If AFG know what they’re doing they will pull it off.
🇳🇬 GTCO’s fintech HabariPay begins recovery of ₦1.1 billion sent to customers in error
HabariPay, a fintech subsidiary of GTCO, is working to recover ₦1.1 billion mistakenly credited to multiple accounts. A Lagos federal high court has authorized the freezing of accounts involved, compelling recipients to return the funds. The error, linked to either a technical glitch or human mistake, highlights challenges in Nigeria’s financial sector, where fraud losses have surged. HabariPay initially sought to recover funds directly but turned to legal action when unable to reach some recipients.
Financial institutions in Africa are facing increasing cases of fraud. MTN Momo in Nigeria lost around US$ 14m in May 2022 and has since then recovered only half of that amount with the rest being absorbed by MTN Nigeria. I’ve had this debate with some friends. One approach is to increase the levels of cybersecurity and compliance and this is a valid response. However, the underlying issue is rampant criminality and therefore the only solution is proper jail time for perpetrators. Currently perpetrators of such crimes can get away with it if they invest in the right churches and politicians. Most cases are usually insider driven. AI will come in to help in terms of cyber-security but I think it will also make fraudsters even more potent. The long-term solution is fixing society and creating proper justice systems to deal with criminality. You can’t cyber-security your way out of this.
🇿🇦 Naspers gets CCI's clearance to buy minority stake in Vastu Housing Finance Corp
Naspers has received clearance from the Competition Commission of India (CCI) to acquire a minority stake in Vastu Housing Finance Corporation. Naspers is a global consumer internet group known for its major investments in companies such as Prosus, Tencent, and OLX. Vastu Housing Finance Corp, established in 2015, provides housing finance solutions in India, focusing on low and middle-income groups, especially in underserved areas.
Naspers continues to be a major player in the global tech scene and has continued to reap dividends from what is arguably the greatest investment ever. It’s investment in Tencent in the early 2000s. The Indian lending scene is booming across all lending verticals from consumer finance to supply chain finance. This is being driven by the India Stack and continued innovations in e-governance. Recently, India launched their United Lending Interface which will enable even more consumer credit given a centralised database on debt, debentures and collateral. It’s a lesson to the rest of the world that taking a first principles approach to government innovation can have outstanding multiplier effects in the real world with FDI such as this being a major outcome. To note, FDI in India stood at US$ 44b only 10 years ago. Now, equity flows alone i.e. foreigners investing in equity stakes stands at US$ 44b with total FDI coming in at US$ 70b.
In the US, the FOMC delivered a larger-than-expected 50 basis point rate cut due to favourable inflation data and concerns over labor market softening. The Fed is now shifting focus from inflation risks to employment risks, suggesting a series of consecutive rate cuts through mid-2025. This adjustment reflects a more aggressive approach to monetary easing than previously anticipated, driven by soft labor market data and heightened unemployment forecasts. The decision between a 25bp or 50bp cut in November will depend heavily on upcoming employment reports.
It’s anticipated that over the next year, we could see the Fed Funds rate settling at the 3-3.5% mark. This may be seen as a boon to start-up founders given that lower fed funds rate should make VC especially frontier VC a more acceptable risk. Nonetheless businesses in general not just in Africa need to think of their businesses outside of central bank policy and more on fundamentals. The obsession with the Fed Funds rate is an outcome of the excessive quantitative easing that was initiated post the global financial crisis. In as much as interest rates are important, in a world of commercial fundamentals, they’re not the primary concern.
🇦🇺 Australia gives priority to wholesale CBDC over retail
Australia is prioritizing the development of a wholesale Central Bank Digital Currency (CBDC) over a retail version. The Reserve Bank of Australia concluded that a wholesale CBDC offers more immediate benefits for financial markets and institutions, such as enhancing cross-border payments and settlement efficiency. The focus on wholesale CBDCs reflects a strategic approach to modernizing Australia’s financial system without the complexities and risks associated with retail CBDCs.
Wholesale CBDCs are targeted at financial institutions such as banks and are primarily targeted at settling inter-bank transactions. This could for instance be done with a view of making transactions smoother between financial intermediaries, a bank could quickly pledge its CBDC holdings as collateral to another bank. Wholesale financial infrastructure is quite mature and banks have built world class systems to enable them to settle transactions amongst themselves. I don’t see the killer application that wholesale CBDCs are coming to solve. The cynic in me suggests that it could be the case of a solution looking for a problem.
🇪🇺Wise launches invoicing tool for SMEs
Wise has launched an invoicing tool aimed at small and medium-sized enterprises (SMEs), allowing them to create, send, and manage invoices directly within the Wise platform. This tool integrates with Wise’s existing payment services, enabling businesses to streamline their invoicing and payment processes, receive payments faster, and manage multiple currencies efficiently. The feature is designed to simplify international business operations for SMEs by reducing costs and administrative burdens associated with cross-border transactions.
Typically apps like Wise and Revolut have engaged the financial tooling problem from a partnership perspective by partnering with the likes of Xero and Quickbooks. This move goes against that grain. It could be that Wise has a deeper opinion on how the problem should be solved and what the customer experience should be. Moreover, it could be a strategic approach to ensuring that customers are deeply engaged with a “Wise” ecosystem thereby making the product more sticky. It fits in with our themes of; a growing SME segment and AI enabling people to build more internally given the ease of building and deploying software that comes with AI driven productivity. Klarna’s CEO sensationally said that he’s abandoning Workday and Salesforce. In a world of AI, being opinionated will be important.