Payments in Africa’s largest market
How Interswitch has navigated increased competition to deliver value to all key players in Nigeria’s economy
Interswitch has enjoyed strong growth and cash flow generation across all areas of its business, with mid double digit revenue growth over the last decade. [1] The firm’s entrepreneurial culture flourished in the nascent but rapidly growing electronic payments industry in Nigeria, providing payment solutions to a broad set of clients and customers in every sector of the Nigerian economy. By focusing on developing innovative payments solutions for non-bank clients, today, Interswitch now has one of the largest online bill payment and collections platforms for both corporate and government entities in Nigeria.
Emerging competition
A few years ago, Interswitch owned and managed the largest card scheme in Nigeria by a large margin, enjoying market share dominance with little competition. As Visa and Mastercard increased their presence in the country however, banks pounced on the opportunity to offer their high-end depositors cards that were usable internationally. Interswitch’s lower fees, denominated in local currency have enabled significant customer retention, but competitive pressures in the card market will only increase as Nigeria’s middle class continues to emerge.
Furthermore, competition from agile Nigerian start-up Union Pay, and pan-African platform EMPH have added pricing pressure to Interswitch’s payments processing business.
Time to pivot
The company has deftly responded by investing in ways to serve several key segments of the Nigerian economy:
Government and corporates – In a country striving to establish a cash-less economy to reduce corruption and theft, Interswitch’s payments and collections platform has been central to stem cash handled by billers, tax authorities and government entities. A recent example of this is the company’s recent partnership with a Nigerian state government to develop a bulk-payments solution that now allows the government to pay regular benefits to civil workers, track such payments and identify any ghost workers, thus reducing overall leakage in the system.
Retailers – Interswitch has developed an integrated POS (point of sale) product to retailers which allows for the collection of multiple forms of payment at the till, including mobile payments, supported by an integrated inventory management system. This has been particularly useful for retailers with a diverse customer base with various levels of financial sophistication. The availability of Interswitch’s secure payment gateway has also provided the enabling infrastructure for various online retailers to accept electronic payments from their customers and grow their online footprint.
Consumers – After failed attempts to drum up support for the Verve card in London and Dubai, the top travel destinations of Nigeria’s elite, Interswitch shifted its focus to developing Quickteller. This is an e-platform that allows customers to buy mobile phone airtime, pay bills and transfer funds at various touch points, including ATMs, POS terminals, the Internet and mobile devices. Users can now withdraw cash from their mobile money accounts at Quickteller-supported ATMs across Nigeria by entering a numerical code.
The unbanked – Despite Nigeria boasting a natural resource-rich economy larger than that of South Africa, with mature telecoms, and banking industries, income inequality has resulted in 54% of the adult population living off less than $2 a day, and 40% without access to a bank account.[2,3] Interswitch recently began the development of Quickteller Paypoint, an agent network, similar to that of East Africa’s M-Pesa, through which these individuals can save, transfer funds and one day borrow from kiosks spread throughout urban and rural Nigeria. By utilising existing third-party shops, and simple technology, this is a minimal capital intensive way to develop a 150,000 agent network over the next 5 years.[4]
Tech start-ups – Interswitch recently launched a $10m e-payments growth fund designed to make investments in smaller, new payments technology and supporting businesses on the continent. The fund serves as a catalyst for funding innovation and disruptive businesses within the payment industry across Africa, and enables the company to collaborate with African entrepreneurs and start-up businesses developing innovative products and services.
Over the last few years, Interswitch has benefited from a leading market position, high switching costs, and favourable secular trends and regulation, but without its nimble, innovative approach to sudden headwinds, I doubt it would have retained its current position as Africa’s payments leader across the value chain. Further opportunities do exist, and Interswitch’s future will depend on its ability to capitalise on consumer’s demand for faster, simpler online payments, and the collection and analysis of the deep pool of data at its fingertips.
[1] https://venturesafrica.com/interswitch-ranked-fastest-growing-technology-company-in-africa/
[2] http://povertydata.worldbank.org/poverty/country/NGA
[3] http://www.efina.org.ng/about-us/financial-inclusion/
[4] http://www.vanguardngr.com/2016/09/interswitch-plans-network-agent-growth-150000/
Would love to know more about the secret sauce which lets Interswitch provide low cost services to its consumers. For instance, how are they able to offer lower fees on international transactions, given a lot of the costs remain nearly the same for them and competitors?
Dear TOMchallenged, I found your article very interesting. It is great to see how a Nigerian company focused on payments has grown so fast and defeated competition in such an efficient way. The question however is how they will make that growth sustainable. I would love to hear about the company business and operating model and all the steps they have taken in other to enable such a rapid technological disruption. As you mentioned in the post, the company tend to have an entrepreneurial spirit, which enables innovation. Also, researching on the theme, one of the things that I found interesting was the fact that most of Nigerian’s banks were supporting Interswitch activity. That is such an important partnership for the company, as it makes the banks move away from being potential competitors to become partners. IN the article wrote by Raheem Akingbolu (link below) he highlights how government agencies, ministeries and public departments have also partnered with Interswitch, widening is network. As Akingbolu mentions, Interswitch’s tentacles in the area of e-payment have also taken root in the sectors of healthcare, education and community life, generating incremental revenues and showing a positive sign that the company its finding its way to grow sustainably.
http://allafrica.com/stories/201512170348.html
Found this post really interesting – Interswitch has clearly thought through the gaps in Nigeria’s financial services sector and created an integrated payments product. The one thing I wonder about is the risk that Interswitch is taking on. While I completely hear your point on increased transparency through an e-payments model, I think that corruption is still a possibility and I wonder what level of responsibility Interswitch is assuming as the platform for these payments. I can see Interswitch running into significant PR issues if they aren’t able to establish some boundaries around responsibility.
A great write up. Its really incredible what Interswitch has done in the last few years. Value creation at its finest. I think a key question for me would be where do you think that Interswitch’s future growth markets will come from? They have done a tremendous amount in a short period of time. Are they at the top of their growth cycle?
TOMchallenged, thank you for the post. Having used Interswitch in Lagos, I understand that there would be major switching costs for Interswitch’s current customers. It would be nice to learn about the barriers to entry, for, let’s say international players. Are there regulations that put international players at a disadvantage (even if they have the economies of scale to drive costs down)?
Hi TOM Challenged! I loved this article! One of the most impressive aspects of Interswitch’s business model is that they were able to aggregate close to 3,000+ billers onto the QucikTeller platform. In the US, most bills (utilities, cable, phone etc), are paid directly through payment pages on websites of the respective companies or online banking, this ability was not available for many merchants in Nigeria. With a 160+ million person population, long queues to pay in person and traffic made QuickTeller the “one-stop” shop to pay for bills and services. Interswitch was able to establish relationships with most banking players in the market because it was a competitive advantage to allow your customers to be able to pay using this platform. They also have a flat fee structure. For example the merchants may be charged $1 per transaction which is split between Interswitch and the participating bank. When using card schemes like Visa and Mastercard usually the merchants are charged anywwhere from 2-5% by the bank that is managing the merchant’s check-out page.
Great piece! This is a really interesting company; thanks for sharing. One question I have is — does Interswitch uses the returns from e-payments growth fund for their operational needs? Or, is monetary gain secondary to eliminating the growing competition? Given the material difference in capabilities required to roll out a 150,000 strong agency network across rural Nigeria, how is the company operationally adapting to successfully find, engage and manage these branches?
I think developing Quickteller is a smart move. Nigeria as many other developing countries needs to adopt new technologies and avoid as much as possible old technologies such as credit cards. Mobile technologies are quite cheaper and easier to roll out than other forms of payments for both consumers and retailers, making the adoption of mobile technologies the most cost-efficient way to reduce cash payments.