FinTech: Credit Management as a Pathway to Profitability

Nigeria's FinTech industry has experienced rapid growth, with over 200 FinTech companies now operating in the country, collectively valued at billions of dollars. 

Major players like Flutterwave, valued at over $3 billion, and Paystack, acquired by Stripe for $200 million, have made headlines for their contributions to the digital economy. In 2023, despite a challenging funding environment, Nigeria’s FinTech sector attracted significant capital, including Moove’s $76 million funding round and M-Kopa’s $250 million raise.

However, with this rapid expansion comes the critical challenge of managing credit risk to maintain liquidity and profitability.

Credit Management in FinTech: A Crucial Component

Credit management involves practices designed to mitigate credit losses, a vital aspect for FinTech companies that extend credit to underserved markets. In Nigeria, where traditional credit histories are often lacking, FinTechs rely on alternative data—such as mobile usage, social media behavior, and transaction histories—to assess creditworthiness. These alternative credit scoring models are crucial for minimizing defaults, maintaining a healthy loan portfolio, and ensuring liquidity.

Liquidity: The Lifeblood of FinTech Operations

Liquidity, the ability to meet short-term obligations, is essential for FinTech companies. Maintaining sufficient liquidity allows these firms to fund new loans, support operations, and comply with regulatory requirements, all of which are critical for sustaining business growth.

Impact of Credit Management on Liquidity

1.    Accurate Risk Assessment:
A robust credit management system that accurately assesses risk helps FinTech companies reduce the incidence of non-performing loans (NPLs). Lower NPLs mean more cash is available to meet operational needs, thus enhancing liquidity. By utilizing advanced data analytics and machine learning models, FinTech companies can refine their credit assessment processes, reducing the risk of extending credit to high-risk borrowers.

2.    Optimized Credit Terms:
The structuring of credit terms—such as the length of the repayment period, interest rates, and repayment schedules—directly affects liquidity. Offering shorter-term loans with regular repayment schedules can improve cash flow, ensuring that the company has sufficient funds to reinvest or meet other financial obligations.

3.    Efficient Collections Process:
Implementing efficient collections strategies, such as automated reminders and proactive follow-ups, ensures that repayments are made on time, thereby maintaining a steady cash inflow. This is particularly important in a market like Nigeria, where economic volatility can impact borrowers’ ability to repay loans.

Profitability: The Goal of Sustainable Growth

Profitability is the ultimate measure of a FinTech’s success. It is determined by the company’s ability to generate more revenue than its expenses, including the cost of managing credit risk. Effective credit management directly impacts profitability by minimizing losses due to defaults and optimizing the revenue generated from lending activities.

Impact of Credit Management on Profitability

1.    Revenue Optimization:
Proper credit risk management allows FinTechs to set competitive interest rates that attract borrowers while covering the risk of default. Despite a general decline in investment, with Nigerian and other African startups expected to face a $1.5 billion shortfall from 2022, FinTechs can still optimize revenue by segmenting borrowers based on risk profiles and adjusting interest rates accordingly.

2.    Cost Efficiency:
Technology-driven credit management strategies reduce operational costs associated with loan processing, risk assessment, and collections. The decrease in venture capital funding, which fell from $63.2 billion in H2 2022 to $52.4 billion in H1 2023 globally, underscores the importance of cost efficiency. By minimizing defaults, FinTechs also reduce the need for provisioning for bad debts, boosting profitability.

3.    Portfolio Quality:
Maintaining a high-quality loan portfolio with low default rates ensures that the majority of the interest income is realized as profit. A strong portfolio also enhances investor confidence, making it easier for FinTech companies to raise capital at favorable terms, further supporting profitability.

Challenges and Opportunities

Regulatory Landscape:

The Nigerian regulatory environment for FinTech companies is still evolving. While the Central Bank of Nigeria (CBN) has introduced guidelines to promote responsible lending practices, regulatory uncertainty remains a challenge. Adhering to these regulations can increase operational costs, impacting both liquidity and profitability. However, it also presents an opportunity for FinTech companies to differentiate themselves by demonstrating strong governance and compliance.

Economic Volatility:

Nigeria’s economic environment, characterized by inflation, currency fluctuations, and inconsistent growth, poses significant challenges for credit management. FinTech companies must develop flexible strategies that can adapt to changing economic conditions, such as dynamic credit scoring models that account for macroeconomic indicators.

Technological Innovation:

The use of technology, particularly in data analytics and machine learning, presents significant opportunities for improving credit management. By continuously refining credit models and adopting real-time monitoring tools, FinTech companies can better manage credit risk, thereby enhancing both liquidity and profitability.

Conclusion

Credit management strategies are pivotal in shaping the financial health of FinTech companies in Nigeria. Effective management enhances liquidity by reducing non-performing loans and optimizing cash flow, while supporting profitability through revenue optimization and cost efficiency. Despite a challenging funding environment, with a 54% decline in African startup funding and increased scrutiny from investors, FinTechs that invest in robust credit management systems are better positioned to navigate market challenges and achieve sustainable growth.

At Stransact, we specialize in providing comprehensive services to support FinTechs in managing their books, assessing risks, and offering insights for business sustainability. As the industry evolves, our expertise can help you adapt to financial pressures and maintain a strong financial foundation.

Written by:

Esther Yakubu

Audit Consultant