Pipe vs Platform Business Model for African Fintech
“Phase 3(?) of african tech looks fantastic.”
If you’re reading this article, it means I finally decided to publish something after taking a long hiatus. I write sometimes, but I never find the courage to publish.
I felt this sense of urgency to write about the Pipe vs Platform Business model after observing trends in the fintech space in Africa and Nigeria to be precise. Over a couple of years, I have reviewed hundreds of pitch decks, business models and rough ideas. This is not because I am a busy investor(I'm not), but because I lead a local community of startup founders and I also organise accelerator programs, hackathons and pitch events for early-stage startups across different industries. Currently, I work for a global payments company as a Technical Sales Consultant, I get to work with Fintech Startups of different sizes and understand different business models with a closeup lens.
The Fintech boom in Africa is still very much early but strategic. Startup teams are capitalising on the slow innovation processes of traditional banking and the growing youth population receptive to adopting new technologies and redefining social norm. With cut-throat competition and regulatory oversight, Fintech startups in Nigeria are innovating at a record speed to increase growth, scale operations and make their investors happy.
I felt the need to write this article because I believe Fintechs in Nigeria need to establish a moat with their business model that can resist the regulatory policing going on at the moment. Within the last 6 months, the CBN and the SEC have both taken regulatory policies that have affected the revenue model of some Fintechs with operations in Crypto and Wealth tech respectively. Though startups quickly innovate their way out of these restrictive policies before it affects their operations, I believe developing a platform business model as opposed to the regular linear business model can deepen the moats for Fintechs in Nigeria and sub-Saharan Africa.
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A business model comprises of different things, but since my audience for this article range from an office intern to a startup founder, let us define a business model as “how your business makes money.” The ordinary and simple way of making money is called Pipe Model (Pipe because it is linear.) There is also a complex or advanced way of making money let us call that the Platform Model.
PIPE Business Model
A Pipe business model draws a linear line from a service provider/Fintech to the users. It is a direct link with the users from an app, web app or any interface be it USSD, retail or physical content consumption. Some Pipe model company use the word Platform a lot to describe their product but they are not, it is an illusion or should I call it delusion their marketing team came up with to entice people. A pipe business model is about control and ownership. In this model, you are in control of all the systems from production till it gets to the hands of the users. Even companies like Netflix, HBO, Disney+ describe themselves as platforms but since they all work in a closed environment, fund their own movies and deliver via an app, they run a linear pipe business model, it is just a long pipe with different juncture point.
Platform Business Model
The platform business model is an engine that provides an exchange of value — product, services or content between independent groups. The independent groups can be between other service providers and users, this is where customers get to interact with other products/services on your platform. It can also be where devs get to build tools on the back of your platform for some targeted users. An example is Shopify apps, Square app marketplace etc. It is a popular myth that the platform model needs a lot of resources to scale operations and that this eats into cash hence the platform model is not sustainable for early-stage or growth-stage startups. This myth is unfounded because a platform doesn't have to own all of its resources, in fact, any platform that claims to own all of its resources cannot grow. Uber doesn’t own a taxi, Airbnb doesn’t own a hotel. User Content platforms like Github, Instagram and eBay do not create content to maintain their platforms too.
Platform Scenarios
A lot of products exist as a platform today in a subtle way that is so simple to understand. Companies like Uber, Airbnb, Github may have started the platform model from the getgo, but other companies like Instagram, Amazon and Super apps like Wechat started by integrating product upon product and adding value to their customers at scale.
I picked these examples from alternating industries to bring a contrast to the platform model and how it can work in different ways outside of Fintech.
The Instagram revenue model is powered by advertising quite alright, but what Instagram does is connect creators to their audience, same with Tiktok, Twitter, Substack, Onlyfans and many other creator platforms out there. You’re either a creator, a fan of both. It is quite obvious how Amazon is a platform.
Types of Platform Models
Currently, there are two popular Platform Models, but with the current record pace of innovation, I believe more types are being birthed every second they only get acknowledged when they scale.
Ecosystem Platform Model
Platforms like Apple (App Store), Google (Playstore) and Microsoft (Azure IoT Suite) are all innovation ecosystem platforms. They provide a foundation for others to innovate on top of by creating complementary applications, technologies, products or services. They also give users free access to use these products.
Exchange Platform Model
These are platforms designed to serve as a value exchange portal between two customer segments. Companies like Airbnb, Amazon, PayPal and Uber are value exchange platforms. They do a match-making function that matches buyers with sellers, producers and consumers, e.t.c.
Platform Model in Fintech?
In this section, I try to do a breakdown of different aspects of Fintech and current players in the Platform model.
Digital Banking
Building a Platform Business model for a Digital Bank is almost inevitable because that is what all Digital Banks end up with. It is best to accept this reality early by developing a seamless playbook for integrating other existing services into the product. Existing Digital Banks in Nigeria, already use third-party APIs to do bills payment, airtime top-up and card issuance. For now, many Digital banks still let their users perceive their services as inbuilt and not an addon. Digital banks connect their users to telecommunications companies and some selected service businesses, this seem to be the norm at the moment. For advanced communities in Europe, Digital Banks and Neo banks allow their users do more than that. Neo banks negotiate revenue sharing with other microservices and marketplace services including micro insurance, eCommerce flash sales and a myriad of other selected service integration.
Recently, Kuda launched “Overdraft” for some selected customers, to give their customers easy access to on-demand loans. This is a way of expanding their product offering, sometimes leveraging partnerships with traditional banks, other times
This way, Digital Banks add more value and creating a marketplace. According to CGPA, “This frees up resources to invest in the part of the business that differentiates them and adds value for consumers.”
Alternative Credit scoring
An alternative credit score is a better reflection of a borrower’s current creditworthiness as opposed to using their credit report. Institutional lenders have always relied on traditional credit systems to calculate the risk premium of a loan. However, this traditional method of credit assessment often excludes a major portion of the market. Unbanked Borrowers with a weak or nonexistent credit history may still have the financial ability to repay loans, yet they are often overlooked due to the standards set by traditional credit scoring models.
Alternative credit scoring allows lenders the opportunity to reach new borrowers by using different a non-traditional approach to understand a borrower’s reliability. One of the pros of alternative credit scoring is that it helps bring the unbanked into the closed banked system. Facts point that Nigeria’s unbanked population is cash flushed, leading to the question of how best Fintechs can attract the unbanked headon. It is safe to say that it is impossible for credit bureaus to capture the credit history of unbanked people regardless of the fact that they are poor or not.
According to GDSlinks Alternative credit scoring gives borrowers without a strong past of credit a chance to receive a loan by basing their score on different criteria other than pulling data historical from the credit bureau. For example, to determine a borrower’s alternative credit score a lender could evaluate data such as:
Rent, utility, cable and/or cell phones payments — does a borrower pay them on time and in full?
Checking account data — does a borrower have sound financial backing?
Shopping history — does a borrower make unnecessary/frivolous purchases without the financial means to back them up?
Property records — has a borrower invested in their own property?
In addition to these factors, some alternative credit scoring models will also take a deeper look into a borrower’s education, occupation and even social media presence. With all of this information, lenders have a comprehensive profile of the potential borrower and can determine their risk level based on more information than just a traditional credit score.
An example of a startup building a Marketplace for loans in Nigeria is Evolve Credit. We are yet to see a tech solution build a marketplace for reselling bank loans the same way we have micro-insurance services. I believe more startups are coming along to tackle the data aspect of credit scoring by providing more than a loan marketplace but also by building an unofficial credit bureau solely based on alternative credit scoring for exiting loan apps to tap via an API. If this already exists, let me know in the comments. To put this in perspective, a recent article by Adedeji Olowe estimates the credit gap in Nigeria at N74 Trillion ($181B).
Savings & Investments (maybe Digital Wallets too)
I believe Savings apps are the easiest to become platforms because many digital banks started as savings apps before transitioning into other core banking services. PiggyBank and Cowrywise already lead the platform model by allowing their users access third party investments and also organise savings challenge amongst their friends and colleagues. In Nigeria, saving platforms already extend the financial services of traditional banks to their users. For example, many saving apps issue virtual bank accounts to their users on the back of an existing bank.
The interesting thing is that saving platforms have the ability to unbundle financial services and focus on them one after the other. Other services that reinforce the platform model for savings and investments include; Card issuance, Crowdfunding projects, Crowd donation, crowdlending and crowd investing which is currently gaining momentum for startups in Europe and LATAM.
Insurance
The fundamental idea of Insurance is that the insurer will ensure instalment for an unsure future occasion while another party, the insured or the policyholder pays a small premium to the insurer in return for security on that uncertain future occurrence. This brings us to the harmonization of Technology and Insurance which in turn births INSURTECH.
Insurance penetration in Nigeria remains lower than expectations and well below the African and international averages, despite some growth in recent years, total asset size is low relative to the size of the Nigerian financial sector. As of 2019, the insurance penetration was about 0.5%. The current stagnancy in the Insurance sector does not correlate with the fact that Nigeria is the largest economy in Africa. The insurance market exhibits typical characteristics of a market in the second stage of development:
A Business Day report placed the number of Insurance companies in Nigeria at 57 comprising of 14 life insurers and 43 non-life insurance. There are also two reinsurance companies whose roles are to provide technical security and capacity for the insurance companies. Other stakeholders of insurance in Nigeria include agents (individual and corporate), brokers, surveyors and third party administrators servicing health insurance.
There are 460 registered insurance brokers and about 15,000 insurance agents. The Nigerian insurance market has been described as the brokers’ market because presently, brokers control over 90% of the premium income, this can change with the introduction of technology powering microservices, with less than 10% for insurance agents and even direct marketing channel by insurers.
In October 2018, fintech startup PiggyVest partnered with insurance company Avon HMO to provide monthly health plan payments for users to engender flexibility and affordability to their largely Nigerian youth users.
In March 2020, Zenith Insurance entered into a partnership with telecommunications company — MTN to launch a USSD service for easy mobile insurance service. With over 64 million subscribers in Nigeria, MTN has a veritable platform to significantly drive insurance growth if the partnership is well harnessed. Jumia, the largest e-commerce platform in Nigeria also partnered with AXA Mansard to deliver microinsurance plans on mobile devices and gadgets for her customers.
Existing Insurtech startups in Nigeria sell Microservices or serve as digital brokers and scale their operations through partnerships with traditional licensed insurers. A Platform model for insurance translates to Startups providing flexible and affordable insurance plans to their users with less regulatory scrutiny.
According to a recent report from KPMG, Insurtech startups are pushing the edge of technology by driving more partnership with traditional Insurance providers — and even speeding adoption amongst customers. In recent conversations with insurance leaders, there was zero inclination to either pull back on existing Insurtech relationships or switch from an Insurtech company to a larger, more established technology provider. Insurance carriers continue to see opportunity and value in their Insurtech relationships.
Cloud Banking (Bank as a Service)
Cloud Banks or API-based bank-as-a-service platform work like a back-office that hosts the operations of Fintech startups and other FSIs on our real-time operation process. Cloud Banks are built originally as a platform because they serve as a point of integration with traditional banks and the services that they offer.
With the help of API-based banks, Financial institutions can easily start their products and bring them to new markets. This gives non-banks the opportunity to launch financial products and expand into a new market in a cost-effective way. A perfect example of this in the Nigerian market is Woodcore.
Pathways & Argument for Platform Business Model
Democratisation
A platform business model is democratised from the get-go. This means that you give your users a voice to communicate what they perceive as value. Even for business-facing products, you need to understand the importance of democratising your product by creating a simple feedback loop to understand how to synthesize value.
How do you know what next to integrate?
What other feature should there be?
What service provider should you replace?
What API is slowing your process down?
Do you need to go on with your roadmap or pause?
Democratisation is more about building a better way of understanding and visualising the data that you have. This way, you allow your users to leave cues on your product by intentionally giving open suggestions on how to use your product.
Tech & Optimisation
At the early stage of building a platform business, it is important to build a scalable foundation and infrastructure for the platform. A scalable infrastructure lets you adopt the most suitable “Base Platform Services”.
For a platform model, Base Platform Services consists of core service layers for cloud infrastructure, security and governance, data and analytics, service integration and management, as well as a service catalogue and industry-focused microservices.
It’s important to note that, from an IT perspective, a platform is much more than just API management and an integration layer, it’s a complete environment for developing and deploying applications with value-added services from core partners. It is impossible to build a platform business without integration with some other core platform services that make them run smoothly. Whether you are integrating with some legacy banking system or connecting with a cloud provider, you should understand the stack perfectly.
Data
Data help Platform models learn to build better platforms and make intelligent decisions that optimise the platform. Platform Businesses must understand the importance of data from the get go. Infact there’s no business without data. Data helps businesses understand and focus on the right metrics for growth.
Data also help platform businesses develop better UX by understanding Behaviourial patterns from the user groups.
Partnership and Dependencies
Many platform business model aggregate other services or partner with service providers to deliver on their own service. For a new Business working with a platform model, the business needs to understand how to structure partnerships and manage dependencies through process flow that is being fed by live data. This means that a platform need to build a process flow and set proper metric before plugging to a service to offer her users on both ends.
Narration (Story)
Narration for a lack of better word is the way a company tells their story to the their customers. This is very tricky because Platform businesses have multifaceted customer segments. Exchange platforms have Buyers and Sellers while Ecosystem Platforms are developed with more than two customer segments. A platform like Spotify passes different narrations to Artists, Podcasters, creators, Concert organisers and Listeners, but their focus segment is the Listening audience. Same way, a Platform Fintech should understand how to tell different stories but retain the same rhetorics of the base product being a platform.
Conclusion
This is a lengthy read, I did not intend to make it so. but I wanted to make more simple for everyone to understand, that was why I had to do a proper breakdown of the topics I touched. I found Sangeet Paul’s talk on Youtube very useful for this article and you should check out his thesis for Platform Business Model. Perhaps, I didn’t mention your Fintech category in the examples up there, I had to remove some to make the article shorter. Don’t hesitate to correct my errors for me to become a better writer.
Thank you for your time.
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