On embedded finance and Nigeria’s financial inclusion gaps

Ope Adeoye, chief plumber at One Pipe, a company building a platform that makes it possible for fintech operators to partner with banks and large corporates, holds an engineering degree from University of Ilorin, and certificates from Lagos Business School and Stanford CPD

In 2012, Nigeria set a target to reduce the financial exclusion rate to 20 percent by 2020, but at the end of that year, 35.9 percent of the target (adult) population remained financially excluded. In summary, the goal was missed after eight years. Now, let’s take a look at what the status was by 2012 and the eight years in between the missed goal, which actually may not be completely lost.

Enhancing Financial Innovation and Access (EFInA), the organisation that has been at the forefront of measuring and assessing financial inclusion in Nigeria, had conducted a survey in 2008, which revealed that 52.5 percent or 45.4 million of adults were excluded from financial services. Only 18.3 million Nigerians were banked, representing 21.1 percent of the adult population.

According to the Central Bank of Nigeria (CBN), the global pursuit of financial inclusion as a vehicle for economic development had a positive effect in Nigeria as the exclusion rate reduced from about 53 percent in 2008 to 46.3 percent in 2010. This, the CBN says, encouraged it to launch the National Financial Inclusion Strategy in 2012, aimed at further reducing the exclusion rate to 20 percent by 2020. Now, this was where the eight-year race started.

The EFInA survey conducted every two-years showed that from 53 percent of the adult population that was financially excluded in 2008, it improved to 46 percent in 2010, but was stuck at 40 percent in 2012 and 2014, before relapsing to 42 percent in 2016. It would later improve to 37 percent in 2018 and finally 36 percent by 2020.

While the percentage of financially excluded adults decreased slightly between 2018 and 2020, the actual number of financially excluded adults increased from 36.6 million to 38.1 million, as population growth outpaced the rate of financial inclusion growth.

In pursuing this financial inclusion goal, the major tools deployed by Nigeria’s apex bank were:

All of these were part of a sound, well-thought-out and broad strategy. While the target was not met, what was achieved remains remarkable, worthy of applause, but that success can be consolidated through a new strategy; embedded finance.

The 38.1 million Nigerian adults that remained financially excluded as at the last EFInA survey of 2020, spend money, likely on a daily basis. They make payments, take payments, but not within the coverage of existing financial services providers.

Yet, they can still be captured in the financial system. Clearly, the conventional brick and mortar structure of the banking industry in Africa’s most populous nation cannot capture every Nigerian. The agency banking services and the different forms of fintechs are also contributing to reduce exclusion, but, limitations that prevented the excluded population also remain; either from knowledge, access to technology, or plainly not seeing the need to embrace financial services at all.

Every vendor in the most remote parts of Nigeria can be turned into a financial service provider; they can offer bank accounts to the 38 million financially excluded and even many others, through third-party applications that connect each of these people to an existing financial service provider. While current efforts have tried to make it possible for non-banks to embed banking services to the audience or customers they already have access to, it can and should go beyond this. If it ends at ‘cash in, cash out’, then frankly, the incentive for excluded people to embrace financial inclusion may still not be there.

Many discussions around financial inclusion are about giving people accounts so they can cash in, cash out, but with embedded finance, we are going a step further to say that this is not where financial inclusion ends. While that cousin or uncle Mike in a remote community (maybe even in the city) has an account used only for receiving cash and withdrawing it maybe twice a month, this is not real financial inclusion. There are other things Mike should be working with a bank to ask for.

Nigeria has about 40 million Bank Verification Numbers (BVNs), which is an indication of unique account holders but there are roughly 100 million adults. This means a 60 million gap exists between those who have some sort of economic activity going on but are not doing any banking activity.

Even for those who are properly included, it is doubtful most can walk into a bank and ask for credit based on their financial transactions. In essence, only a few are able to use their economic activity to grow themselves.

However, it is very possible for everyone who has a record of financial transactions, to be able to have that data used to grow their businesses or meet other personal needs. As long as whoever they exchange money with, in their locality, has data showing financial inflow and outflow, they should be able to do beyond taking deposits and paying out.

With embedded finance, a civil servant that is well known by an employer/the union he belongs to or a retailer known by his or her distributor, can be better served by these entities that know them, in the form of non-financial service providers.

At different tiers of group associations; from religious to cultural or business, aggregation points for memberships can be used to offer financial services. Bank XYZ gives a petty trader an account but knows nothing of what he/she does, yet, there is a third party player in that person’s value chain, who can make sense of their transaction history to determine credit worthiness.

In essence, embedded finance can be used as a way to establish credit history and deepen financial access. No, the banks and every other financial player will not be threatened, they will only be riding on the back of embedded finance to reach the last miles that have remained elusive for several decades now. For many still excluded and even  those included, owning an account they would use once in a blue moon, with a provider that would hardly do more than take deposit and let them cash out, is hardly worth the hassle.

“At our current rate of progress, we will not reach the 2020 financial inclusion targets until around 2030,” Ashley Immanuel, CEO of EFInA is quoted to have said. But, who says we need to wait till 2030 before achieving this goal and possibly financially including every Nigerian adult; going above and beyond the target of 20 percent. It is possible, and we only need to embrace the new possibility represented in embedded finance.