Nigerian fintechs are shifting their focus towards building consumer-focused cross-border transaction products, drawn to the stability of dollar-based transactions. This collective push is expected to benefit consumers through more options and a possible price war, but it may also erode already slim margins for FX-based transactions as startups compete in an over-saturated market.

The remittance space has seen a significant increase in competitors, leading to a 20-30% margin erosion in the last six years, according to Anupam Majumdar, partner at Flagship Partners, a fintech consultancy firm. Despite this, FX transactions remain a lucrative revenue stream for fintechs, with the Central Bank of Nigeria (CBN) reporting a 130% increase in remittance inflows to $553 million in July 2024, the highest monthly total on record.

Processing a fraction of this amount with take rates ranging from 1 to 1.5% represents a healthy revenue line for any fintech. However, the eventual race to the bottom will leave few winners, as smaller startups struggle to compete with larger players. Kay Akinwunmi, former founder of Zazuu, a defunct fintech marketplace for remittances, notes that building a sustainable, scalable business in FX is very challenging in the long term.

The regulatory uncertainty that once presented Nigerian remittance startups with an opportunity has been erased with the CBN's 2024 reforms, which mandate naira payouts and adopt a willing seller, willing buyer model. This has led to global players like Wise and TapTap reentering Nigeria, intensifying competition against well-funded growth-stage startups like Lemfi, Nala, and Flutterwave.

These startups serve many remittance corridors, increasing their revenue base and creating a stickier user base. However, for smaller startups, the capital requirements to set up operations in multiple countries are significant, especially in a sector prone to fraud. Multiple countries mean multiple licenses and highly experienced legal and compliance staff to handle reporting and compliance with regulators, which are costly.

An oversaturated market strains unit economics, making it difficult for smaller fintechs to compete. Spoilt with options, customers are expensive to acquire, and they remain fickle, willing to switch to competition with lower pricing. According to Akinwunmi, now the CEO of CSL Pay, a Pan-African payment network, the big players are likely to win because they can sustain extended periods of offering discounted fees, which naturally attract customers.

Smaller fintechs also have to deal with securing liquidity, which is critical for maximum reach on the recipient side. Obtaining liquidity for foreign currency payouts is expensive, particularly for smaller fintechs. Liquidity costs directly impact exchange rates offered to customers, making it challenging for fintechs to remain competitive.

However, partnering with aggregators or third-party providers like Kora or Fincra can help fintechs access multiple accounts through a single integration, allowing them to reach multiple accounts through a single integration. Stablecoins can also solve this problem, but a reality where stablecoins can fully power transactions is still quite far off.

Startups entering the remittance market can thrive by operating in niche markets or adding a complementary fintech service to processing FX transactions. Targeting specific corridors, such as China-to-Francophone Africa, can be a strategic move, as low liquidity creates higher margins. According to Satoshi Shinada, a partner at Verod-Kepple, startups need to focus on niche corridors rather than trying to compete head-on with larger players.

Startups can also process business-focused transactions, which offer higher margins due to increased regulatory scrutiny for large cross-border transactions. However, this comes with higher compliance costs, making it essential for fintechs to carefully consider their market approach and focus on creating stickiness and higher margins rather than building vanilla remittance products where scale wins and margins vanish.