Abstract
This case study analyses the Information & Communication Technology (ICT) sector of the West African country Nigeria; the growth of their internet services leading to online payment options. The rise of telecommunication companies and mobile payment options are also scrutinized here to some extent. The report discusses the overlying assumptions of weak online financial security issues that developing countries face and how payment aggregators are aiding in the process in order to achieve a smooth digital marketplace. Flutterwave, is a B2B digital payment Application Programming Interface (API) that allows processing of credit and debit for cards, other local alternative payments, such as mobile money and Automated Clearing House (ACH), across Africa. They ensure that global merchants are able to process payments like a local African company. The case of Flutterwave is discussed in detail with their business model—customer profiles, provided services, a landscape of their competitors and the challenges faced doing business; in order to shed some light on the aspect of making Nigeria a potential destination of investment for many Multinational Corporation (MNC’s) in the future.
Introduction
One of the key regional players in the West African market, Nigeria has about 202 million residents; which is approximately half of West Africa’s population. The National Information Technology Development Agency (NITDA) in Nigeria is a government agency established in 2007, implementing the National Information Technology (IT) policies. It plans to promote and develop IT penetration and projects. While the world economy was largely affected by the global pandemic, Nigeria’s digital industry has boomed during the lockdown phase to initiate more ways to maintain social distancing using the digital world (NITDA, 2020). The National Space Research and Development Agency (NASRDA) of Nigeria launched in 2011 NigComSat-1R, the satellite which is currently providing broadcast and internet services in Nigeria. The telecommunications sector of Nigeria is liberalized, extremely competitive, and developing with time. Their telecommunications sector is growing fast being the most robust and the largest contributor to the economy’s growth. The telecoms industry in 2019 had a total subscriber of 184.7 m from 2.3 m in 2002. Similarly, the country’s tele density (measures the number of telephone lines for every 100 individuals in an area) rate increased from 1.9% in 2002 to 96.8% in 2019 focusing mainly on mobile use. While there has been a substantial growth of mobile telephones, the fixed telephone lines experienced a sheer drop in the usage. There are about 65,914 households which is 0.3% of total households in the country, who are using fixed telephone lines despite the demand for both types of telephone lines. On the contrary, the mobile telephone sector has been backed up by high investments which initiated efficient network infrastructure, thereby creating intense competition among the mobile service providers. Nigeria’s telecom market can be categorized as an oligopolistic market having four dominant players, namely AIRTEL, GLOBACOM, 9MOBILE, and MTNN. The network coverage technology in Nigeria like other parts of Africa, is still 3G, with 79% penetration. As per the report of Jumia Mobile (2020), 44% of mobile subscribers in Nigeria are using 3G technology, whereas only 4% are using 4G. The Head of Africa, GSMA, Akinwale Goodluck, mentioned that there are many operators who are willing to boost their investments to upgrade to 4G technologies 1 (The Guardian, 2020). The new entrants in this telecom sector are going to face huge challenges as the telecom companies are already established and leading the market; however, there is still a gap for strong growth in broadband penetration. As of July 2020, the broadband penetration index stands at 40.14% which was 39.58% in May 2020; indicating that Nigeria has been imposing growth in this sector especially with financial series and digital payment solutions during the global pandemic. The consumers are driving forward the mobile economy; 45% of Nigerian smartphone users are engaging in services such as digital commerce and financial services from home during this pandemic period. It is wise to state that, with a little focus and concentration on building strong broadband and internet connections, trajectory of growth in the digital finance sector can be achieved.
Cashless payment processing: Point of sale system
The internet and mobile phone penetration in Nigeria played the key role in shaping the payment landscape of the country. Gone are the days, when the people in Nigeria thought of payment as only a form of cash and bank transactions. In 2012, Central Bank of Nigeria (CBN), implemented the POS system which led the banks to issue cards to their clients resulting in the usage of POS in stores all over Nigeria (CBN, 2020). Prior to this period, the payment system in Nigeria was mainly by cash resulting in people carrying paper money which was a question of security apart from the other drawbacks. Therefore, at this point, Nigeria started to aggravate their banking system with POS in various parts of the country. This has also resulted in combating the money laundering issue the country was facing; making it possible to track the financial transactions of the people of Nigeria. Nonetheless, it was soon realized that this was not a very feasible solution to support and accelerate the cashless policy of the government. First, the POS system is a costly option and for a least developed country (LDC) like Nigeria, it was an expensive outtake (Nigerian Price, 2021). On top of that, issuing debit and credit cards was also not cost effective. Second, many of the rural population of the country were not under the radar of financial institutions like banks. Many of these people were reluctant to use any other forms of payment than cash and found it difficult to trust the notion of plastic money. This meant that a significant amount of the population was left behind from the government’s cashless policy. However, by the year 2016, the mobile penetration in Nigeria significantly increased to 20% and has been growing since then. The government took this as an opportunity to reach this population of mobile phone users and gradually propelled them to use various mobile phone financial services and contribute to making Nigeria cashless. Mobile Money Operators (MMOs) and Payment Service Banks (PSBs) are both licensed by the CBN and they use the infrastructures and technology of the telecommunication companies.
Mobile Money Operators
Mobile Money Operators are referred to as mobile financial services, mobile wallet and mobile payment (Ernst & Young, 2009). Although Nigeria finally started to digitize their payment system, it was way later than many developing economies and soon they needed to catch up with the era of digitalization. Therefore, CBN decided to provide an avenue for financial tech companies to start mobile payment services aligned with their cashless policy. There are apps that are used for receiving and sending digital payments and this was when the first boost hit the wave across Nigeria to make it cashless. Under the mobile money scheme, Telecom companies provide infrastructure to drive the exchange of messages for mobile payment and PSB licensees control mobile and digital channels for the delivery of their services, by this means provide financial services at the grassroot level of the nation. The CBN has licensed 22 MMOs 2 until today and intend to increase the numbers in the future (Statistica, 2020). Nigeria has around 15 million mobile money customers.
Payment service banks
The CBN has given the license 3 to set up PSBs to most of the rural and unbanked areas aiming for the population who were not a part of any financial institutions before. These banks facilitate the small businesses by providing payment and remittance services. In addition to that they provide high volume low value transactions to low income households and other financially excluded institutions. Moreover, PSBs are authorized to issue debit and prepaid cards, install ATMs and other technology-enabled banking services. They are also financial institutions with limited functionality and a focus on serving the excluded and marginalized population of the country (IFC, 2012). According to the CBN’s financial inclusion objective, the MMOs and the PSBs run simultaneously making another revenue stream for Telecom companies.
The payment gateway
Payment gateway is a form of technology that transfers payment data from the shopper to the acquirer and then transfers the payment receipt or failure back to the shopper. This process validates the customer’s card details with security, confirms the availability of funds, and thereafter makes the payments to the merchants acting as an interface between a merchant’s website and its acquirer. Although CBN has facilitated the nation with various payment systems, there was still a gap in the payment process as more and more people were taking part in online transactions both domestically and internationally. Many merchants were trying to receive payments through their websites; and the process was time consuming and sometimes very complicated.
Flutterwave: An overview
Iyinoluwa Aboyeji, a renowned African entrepreneur cofounded two successful startups in Africa prior to launching Flutterwave in 2016 (CNN Business, 2017). He mentioned that the idea of Flutterwave was initiated as he had some operational issues in Andela, another one of his ventures. As the company was recruiting and training some of the African developers to work remotely for large tech companies like International Business Machines Corporation (IBM) and Microsoft, they faced immense problems making payments to these developers. They had to integrate with every African country the developers were working from to make regular payments to them; resulting in delaying the payment period to every 3 months instead of monthly payments. On top of that, the fees were too high to make regular international payments. Iyinoluwa Aboyeji also mentioned that every time the payments processing took at least a week and cost them extra which hindered their business (Forbes, 2020). Founded in 2016 by a crew of ex-bankers, entrepreneurs, and engineers, Flutterwave was inaugurated with an idea to provide the award-winning technology core needed to provide businesses all around the world a powerful, dependable, and smart payment gateway. Flutterwave, headquartered in San Francisco, California, is a B2B digital payment Application Programming Interface (API) that allows processing of credit and debit cards, other local alternative payments, such as mobile money and Automated Clearing House (ACH) network, across Africa. They ensure that global merchants are able to process payments like a local African company. Flutterwave started its operation with the aim to transform digital payments across Africa (Figure 1). Flutterwave’s uniform payment system. Source: Adapted from Schneider (2017).
To provide all forms of payments for all types of transactions option, merchants, and payment service providers have to integrate with each form of payment individually; meaning that a POS has to accept both Visa and MasterCard. However, failed transactions are so common that many store owners gave up on the POS system. On the other hand, the banks did not have unified payments technology that could bring all these solutions to their merchants. As a result, Africa simply stuck to cash and then alternative payments like bank accounts or mobile money. Flutterwave came up with the technology that accepts traditional card-based payment processing, at the same time caters to more popular payment processing methods like ACH and mobile money payments.
Affordable pricing transaction
As one of the leading payment aggregators, the company has to be explicit and vivid about the charges and fees for transactions that go through them. The trust and dependability factor arise as dealing with people’s money requires a high level of commitment and faithfulness. Flutterwave ensures the best and most affordable pricing per transaction on the market. The standard charges for local transactions is 2.9% and 3.8% for international transactions which is the processing fee charged by Flutterwave. For a country specific processing fee calculation, one can go to their website and find out precisely the percentage charged for various country’s payment processes. Additionally, the payment aggregator also aids the merchants in finding out their frequent and top customers, the highest sale period and the peak times to maximize sales.
The services of Flutterwave
1. Checkout Service 2. Card Issuing and Management 3. Store 4. Invoice Service 5. Payment Links
Single charge
This is a one-time payment link generated towards the customers and the currency can be modified as needed.
Subscription link
This is a payment link for a periodic payment plans based on the preferred currency.
Donations
This payment link is created for one-time donations for any charity or cause related activity carried out by the businesses.
Market segmentation and customer group
The customer profiling of Flutterwave and their chosen market segmentation followed by the successful ways to position these markets. 1. Individuals 2. Hospitality sector 3. Transportation sector 4. Event organizers
Competition
Competitors and their operational activities.
Source: Devathon (2021).
It is evident in Table 1, Flutterwave is able to capture and maintain the Nigerian payment process market by offering some of the most unique features which other relevant competitors are not able to do so. If we consider the commission per transaction, Flutterwave is providing the overall lowest percentage of charges issued with each transaction both locally and internationally; the highlight here is, no hidden charges are associated with it. In addition to that, they accept the second highest method of payments after Remita, enabling merchants to accept payments from different sources. Moreover, they accept a wide range of currencies which their competitors are not able to accept at the moment. Furthermore, the foremost advantage Flutterwave has over its competitors, is the fact that they are the fastest payment processors, which is almost “immediately” whereas the other competitors can delay up to 5 days to process similar payments. Overall, it is apparent that the problem with payment gateways and payment aggregators is a crucial situation in African countries and many financial institutions have been trying to resolve these issues over the last decade. Nevertheless, Flutterwave with its strong team of efficient workers with exceptional industry experience are moving forward battling all the challenges coming their way.
Challenges
At the initial stage, the first challenge the company came across was regulation. The internal regulation of the country concerning transactions within and outside the country was hard to battle with. Nonetheless, Flutterwave focused on the technology and partnered up with local banks and providers of payment solutions in each country to build effective solutions. The other big challenge the company faced was the establishment of faith with international merchants and respective financial institutions. As they were dealing with such a sensitive topic like money, it was vital that they take this responsibility very seriously and ensure having the best technological infrastructure to prevent any sort of fraud and money laundering on the Flutterwave platform. The company highly focused on advanced KYC and two-factor authentication to confirm supreme compliance and safety, gradually helping them to be an established trustworthy payment aggregator.
The future: Flutterwave and Nigeria
Although a number of international companies have entered the African markets and eventually were not successful in carrying out their ventures, which poses the question why is it difficult to invest in African countries. Examining the trend, we can conclude that the payment process turns out to be a huge barrier for these companies, resulting in failed internationalization attempts. According to the current Chief Executive Officer (CEO) of Flutterwave, Olugbenga Agboola, merchants process 10 times more in transactions and volume with alternative payments than they do with card-based payments. Therefore, Flutterwave created an intermediate layer that payment service providers and global merchants can integrate and work across payment channels and local currencies in different African countries. Thus, the intention of MNCs is to enter the Nigerian market with a successful business model increase.
Flutterwave is currently operating in 20 African countries with an infrastructure reach in over 33 countries on the continent. While the world-wide pandemic was affecting companies negatively and businesses were losing money, Flutterwave was an exception in this era. According to the CEO, the company grew more than 100% in revenue within the past year due to the pandemic and eventually contributed to its compound annual growth rate (CAGR) of 226% from 2018 (TechCrunch, 2021). The CEO adds that the company plans to ride on “COVID beneficiary sectors” growth and continue in that path.
As the lockdown initiated people to lean towards more online shopping, the period was quite a positive financial outcome for the company by going live across 15 African countries, helping over 20,000 merchants to create storefronts and sell their products online (Techawk, 2020). In the upcoming years, Flutterwave intends to focus not only in the African market but also become a global payments company. It plans to utilize the funds to speed up customer acquisition in its current markets by introducing new offerings such as Flutterwave Mobile; aiming to turn merchant’s mobile devices into point of sale. Flutterwave believes that without the constant support of its staff members, investors, customers, and CBN, they would not be where they are today. According to the latest news by TechCrunch (2021), Flutterwave and PayPal collaborated to permit African merchants to accept and make payments. This partnership indicates that African businesses can connect with more than 377 million PayPal accounts globally and overcome the barriers presented by the highly fragmented and complex payment and banking infrastructure on the continent. The company’s vision is to ensure that the world’s best internet companies launch in Africa or launch from Africa from day one. Africa and Africans deserve to be fully included in the new global economy powered by the internet.
Discussion questions
Question 1. How did the growth of internet services in Nigeria lead to online payment?
Question 2. What are the services provided by Flutterwave?
Question 3. What are the competitions and challenges Flutterwave is facing? What are the steps to overcome these competitions and challenges?
Question 4. Discuss Flutterwave’s growth in the pandemic and its future plans.
Footnotes
Declaration of conflicting interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: The authors received financial support from InterResearch, Bangladesh.
