Introduction
At the middle of every financial cycle, we save a part of disposable income earned from salaries and sales. Savings represent the bridge between financial performance (current income and expenses) and financial position (future earnings and obligations).
We mostly think of savings usually in very small amounts, after much has been spent, hence nobody plans to leverage and preserve wealth through savings. Since this was not part of the savings goal in a financial cycle; many lose value of money by passage of time, in the wrong or risky accounts and assets. Everyone goes through this saving problem, at every aspect of our lives, families, companies or governance.
Money is not just a currency of legal tender but a tool for solving problems and creating value for quality living. From time past and till date, many have been schooled into believing that they can save more now and be rich later. Savings is a financial vehicle deployed to finance, leverage, protect or transfer wealth; but not the wealth plan or product or portfolio itself.
In a world obsessed with becoming affluent – very rich and powerful, many believe that keeping excess money in savings is the fastest and safest road to wealth. Sadly, savings do not give the same outcomes as what investments and owned assets bring to the table.
Unlike investing which carries high or moderate risks and power to compound value, savings provide the much-needed cash flow. Unlike earnings which allow you to spend like the rich and powerful, savings help to defer some wants and reduce debt burden. Your savings and the riches are not from the same mother.
If cash does not flow between savings accounts and wealth offerings, then the real value of money falls by passage of time. There has been no single time in history where interest on deposit savings outgrew the cost of inflation, emergencies and uncertainties. Hence, it is only smart to move savings from income and expenditure accounts to investment activities.
“From time past and till date, many have been schooled into believing that they can save more now and be rich later. Yet savings is a financial vehicle to get you prepared for wealth supplies and not the wealth plan or product or portfolio itself. “- Dr. Wonders Pibowei
Who and Where Are the Nigerian Savings Public?
For decades, traditional savers commit most of their disposable income to deposit accounts, that are principally loss-making for asset owners and operators until they get leveraged. Many of them were told to keep running their accounts until such time when they can qualify and secure certain financial products such as payday, business and/or mortgage facilities.
Sadly, savings in deposit accounts irrespective of tenure were never programmed to create wealth for account holders or get bankable with asset financiers. However, these traditional savers meant to benefit from wealth products and lending facilities, have become abandoned by the financial system due to lack of knowledge.
Broadly speaking, a segment of the population who actively set aside part of their disposable income into special fund accounts or financial instruments are known as the Savings Public. The savings public consists of retail investors, low-income earnings and citizens looking for secure accessible investment options, largely mobilized between financial products but mostly processed through the banking system.
These savers move money from income and expenditure accounts to other accounts used for investment activities. What has led to instant payments and settlement of fees across value chains has also led to instant deposits, savings and withdrawals of money across bank systems.
The Savings Public are divided into three categories:
1) Households:
Everyday workers and veterans who keep money with financial institutions such as deposit money banks, microfinance banks and cooperative societies. These savings could be made through deposit money accounts, fixed-income accounts, cooperative accounts, pension funds accounts, or mortgage accounts, for the purpose of improving current standard of living at a future time.
2) Businesses:
Corporate entities that retain some earnings to cover any future operating expenses or recover from loss-making events or reinvest in other entities. These savings could be made for fire and peril insurance, third party insurance, life assurance, employer pension contribution, investment in corporate bonds, investment in private placements, and other financial products.
3) Government:
Representing Federal or State Ministries, Department, Parastatals and Commissions, with budget surplus where fund allocations or additional earnings are not spent entirely on public goods or services. Government-backed savings can be mobilized to or from income-generating financial instruments which are managed by Debt Management Office or Sovereign Wealth Authority.
Key characteristics of the Savings Public are as follows:
1) Level of Access:
Most retail financial instruments are designed for the inclusion of micro-savers who can invest as little as five thousand naira (N5000) only with additional multiples of one thousand naira (N1000) only, over a fixed tenure.
2) Income Class:
Most retail financial instruments are designed for the inclusion of people with lower disposable income above the national minimum wage ranging from thirty thousand naira (N30,000) and seventy thousand naira (N70,000) only.
3) Owner Profile:
The savings public mostly include everyday citizens, international residents, corporate bodies, staff microfinance banks, and cooperative societies in an any emerging or advanced economy, such as the Federal Republic of Nigeria.
4) Investment Goal:
The savings public mostly invest in low-risk and/or tax-free alternative investments which can attract fixed and guaranteed interests quarterly or yearly or by end of tenure, different from traditional savings deposit account.
Notable functions of the Saving Public in the economy:
1) Bank Capital Formation:
By depositing money with financial institutions, the savings public provide liquidity to banks, necessary to unlock cash reserve requirements of the Central Bank, to issue loans and guarantees for people or corporates and to earn interest on their lending products and services.
2) Driving Capital Markets:
When individual savers buy equities in corporate bonds, private placements and other assets, they transition into micro or large-cap retail investors. This directly reduces the volume of unclaimed corporate assets while helping local institutions to grow and scale with backing of the savings public.
3) Funding Public Debt:
Through government-back financing and regulatory bodies such as the Debt Management Office of Nigeria; the federal and state government borrows money from the savings public by issuing tenor-based financial instruments to back development programs and projects.
Lower Cost, Profit Later Model in the Finance Sector
Institutions operating within the finance sector, across digital savings, payments and lending verticals, aim to keep cost to serve at the lowest minimum or near-zero fees with their customers. By doing this, they build an exponential and insurmountable user base for their financial products, which they can leverage upon as they monetize later to generate revenue, run profitable operations and give back to investors.
Here is why the lower cost, profit later model has been the industry experience:
1) Winner Takes All Effect:
In banking and fintech domain, the market often rewards a single or a few dominant players who control more than a quarter of the market share. These players prioritize rapid and lower-cost user acquisition over early profits, to establish a market share lead, which makes it incredibly difficult for new entrants. For example,
- LAPO, Opay, Moniepoint, FairMoney, Renmoney, Kuda, Sparkle, Carbon, Piggyvest, and Sycamore out of 1000-plus Microfinance Bank licensees in Nigeria;
- Airtel Mobile, GLO MoneyMaster, MTN Yello, Interswitch and NIPOST out of 61-plus Super-Agent Operator licensees in Nigeria;
- Capricorn Digital, Computer Warehouse Group, Funds Konnect and Global Accelerex out of 47-plus Payment Terminal Service Provider licensees in Nigeria;
- Remitta, Paystack, Flutterwave, Interswitch, eTranzact and Chamswitch out of 19-plus Switching and Processing Company licensees in Nigeria; as well as
- Opay, Chams Mobile, KongaPay, Pagatech, Palmpay and eTranzact out of 17-plus Money Money Operator licensees in Nigeria.
2) Product Network Effects:
Many digital savings, lending and payment companies operate on network effects, allowing value of their solution or services to increase exponentially as millions of people and thousands of businesses who frequently use it. By subsidizing the product to keep it artificially cheap or entirely free, user adoption scales very fast while creating an ecosystem that is highly valuable and sticky for both individual savers and enterprise merchants.
This positions them for either new markets in outside economies, mergers with another organization or buyouts from a larger company in the very distant future. Companies like Vanso acquired by Interswitch; Disha, Kopo-Kopo and Mono acquired by Flutterwave; Brass and Ladder acquired by Paystack; Payforce acquired by FairMoney; and Orda Africa acquired by Moniepoint, all leveraged on the network effects.
3) Venture Capital Incentives:
Digital banks and fintech companies that are mostly backed by venture capital or private equity; model their business strategy and roadmap for future unicorn advantage, rather than steady revenue generation and profitable returns in the current period. There is an increased probability of failing and shut down when there are no follow-on investments and other incomes by the end of such runway.
Seed or Series capital is provided with a long enough runway that must sustain the years of lower-priced and loss-making operations; while betting on capturing a massive global or regional market share that will yield enormous payouts to investors at exit, through business merger or leveraged buyout or public placement. There is an increased probability of failing and shut down when there are no follow-on investments and other incomes by the end of such runway.
4) High Gross Profit Margins:
Software and digital finance platforms have exceptionally low marginal cost to serve as they expand; it costs them almost nothing to onboard the millionth user compared to the first hundred users. However, building the first product and going to market is very expensive, until diminishing returns set-in at later stages.
Early profitability is always sacrificed for consumer base growth and market dominance, allowing them to reach break-even and get profitable later. Because long term profit margins are very high, investors are willing to endure years of initial heavy spending on technology, human resources, product research, development and marketing activities.
5) High Switching Costs:
Once any software or digital finance platform becomes deeply integrated into a user’s daily life or business workflow (often referred to as vendor lock-in), the firm or platform owner gains immense pricing power. At this stage, they can increase prices or introduce premium subscription tiers, enabling them to generate steady revenue and grow profitably.
Additionally, the vendor lock-in helps retain customer loyalty and prevent defection to new platforms; while users who have invested their time in one highly effective and efficient platform will stay back even under a new price regime. The cost of switching from one platform to another comes with loss of personal or business savings data, loss of former bank account offerings and loss of time in change management.
The Savings Public as the Product, not the Producers
In a traditional financial system, banks and other financial institutions treat savers as the product rather than the ultimate producers or beneficiaries of capital deployed through deposit savings. In other words, savers are regarded as sources of raw materials, such as deposit savings, which are channeled by traditional finance players into productive investment opportunities. On the other hand, modern digital financial systems come with yield-generating financial products that are packaged, monetized and traded with depositors known as the savings public. In essence, the financial system and structure where savers operate determine how they are rewarded either as products or producers.
Let’s see how the current financial system unleashes the savings public as a product.
1) Savings Arbitrage:
Free savings platform generates billions of naira by communicating your financial position and performance to high-frequency trading companies (being payment for order flow). These companies now utilize this information to cross-sell high-yield savings financial products offering 10% to 21% interest per annum.
Notable examples include: Carbon Cash Vault, PiggyVest Target Savings, PiggyVest SafeLock, FairMoney SafeLock, Baobab Jollof+, Kuda Fixed Savings, Cowrywise Mutual Funds, Sterling Doubble, Stanbic IBTC MaxYield Account, Access High Interest Deposit Account, Leadway Smart Cash Plan and others.
2) Float Interest Access:
Asset owners and operators earn deposit yields known as float interest or interest spread on idle funds temporarily held for some days or weeks in system accounts until they get settled or withdrawn.
They sweep these aggregated idle funds into short-term and low-risk interest-bearing accounts or institutional financial products, with returns that never compensate depositors enough. They generate revenue through the difference between low interest paid on deposit savings and higher interest charged on deposit lending and other financial products, alongside processing fees and other incomes.
3) Data Accumulation:
Free savings platform come with valuable behavioral data of account users, which are needed by asset owners and operators for important uses. Since billions of naira are processed for millions of account owners/users through banks and financial gateways, a large pool of individual or enterprise data is available on the platform.
The platform algorithm improves with larger data pools from millions of people involved in depositing money, transferring money, and lending money on the platform. Data gets monetized though Ads, while Better Ads create enormous unbeatable competitive advantage for asset owners and operators who manage the savings public.
4) Liquidity Advantage:
In the finance sector, retail savers provide exit liquidity, when their pooled capital via mutual funds or pension funds – absorbs the sale of overvalued assets by institutional investors.
When there are illiquid portfolios or complex assets, top institutional investors across private equity, venture capital or corporate lending segments help to package them into fractional publicly traded vehicles which the savings public can buy. Instead of direct cash withdrawals, this process relies on financial engineering to seamlessly convert some of the profit earned by institutional funds to retail portfolios of the savings public.
Let’s see how the current financial system exploits the savings public as a product.
1) Information Gap:
Complex financial jargon hides the true value of savings deposit that could have been invested in retail financial products. Where some financial institutions hold structural advantage over participants in retail financial instruments, the ability of the savings public to benefit from it is hampered.
It leads to adverse selection (that is, choosing unsuitable financial products), wealth erosion (that is, loss of value due to hidden fees), and loss of market trust (where savers do not believe in the financial system players). All this ultimately causes the savings public to abandon formal savings and the wealth therein. Through financial literacy programs and digital securities platforms, we can close this gap.
2) Risk Asymmetry:
Depositors mostly bear the risk of inflation and uncertainty alone, while the financial system takes larger part of the market rewards entirely with some rewards going to the savings public. With information gaps creating mis-aligned risk-reward trade-offs, the ability of the savings public to benefit from retail financial products is impaired and undermined.
Because financial institutions possess superior knowledge regarding product structures, hidden fees and market risks, the savings public mostly bear the downside losses while missing out on the proportional upside at exit or over the fund’s lifecycle.
3) Direct Market Access:
Retail investors are given direct access to government-backed and corporate financial instruments such as FGN savings bond, FGN Euro bonds, FGN Dollar bonds, and treasury bills; without needing a standalone fund broker. When the savings public buy into some of these primary market financial products, they skip brokerage-dealer processes on investment activities including fees charged by middlemen on interest earned.
These platforms eliminate the heavy paperwork requirements of brokers while placing trades into the order books of the Stock Exchange, Central Bank or Debt Management Office. Sadly, many investment opportunities are not available through direct market access, which frequently discourages the savings public from creating real wealth.
4) Hidden Costs:
Most retail financial products subscribed by the savings public, bear some hidden costs, which are not immediately obvious at point of access or acquisition but erode returns on portfolio and value of principal savings. Expense ratios are annual fees charged by a fund manager to cover operating expenses and deducted directly from your fund’s assets.
Sales load fees are commissions paid to a broker or financial advisor when you buy or sell any fund or securities. Bid-ask spreads represent the difference between what you pay for an investment product and how much the dealer is willing to buy it back. Other hidden costs such as account maintenance fees, card maintenance fees and transaction fees, are applicable on your receiving or processing bank account.
Exits as the Real Paying Client in a Free Savings World
In a free digital finance world, the deposit customers or the savings public are the product while the capital providers are the real paying client. The deposit customers or savings public, give-up both their monies and data to the platform, in lieu of a near-zero or lower-cost financial system, which makes them the product ultimately. Receiving or processing banks and other financial institutions, generate revenue and returns through multiple hidden-client streams until an investor exit happens with capital providers.
Examples of paying client streams deployed by financial systems until an exit:
1) Merchant Processing:
Digital finance companies and banks charge merchants, governments and other entities a processing fee (e.g., 0.5% to 3.9% of the total sum), when a savings deposit or payment is made using their financial system.
2) Interchange Fees:
Whenever you use a debit card, the savings and/or payment platform earns a small percentage of the transaction amount from the merchant’s acquiring bank (a financial institution enabling merchants or suppliers to accept, process and receive card payments from customers).
3) Data Monetization:
Platforms aggregate anonymized user savings and spending behavior, which they package and provide as insights to use by asset owners and operators, who now deploy Target Ads for uptake of retail financial products.
4) Cross-selling Offers:
Free savings platform are often integrated with value-added products or services by financial or non-financial institutions such as high-margin insurance policy, buy now pay later credit, loyalty business packages and others.
5) Premium Upgrades:
While basic digital finance wallets are free to everyone, some high-income or merchant users may pay for special features such as expedited transfers, investing tools, physical debit cards, credit score insights and others.
6) FX Markup Rates:
Platforms that offer multi-currency savings and cross-border transfers mostly charge a spread or margin on foreign currency conversion to absorb any positive or negative changes in foreign currency transactions.
With over 600 million mobile money users, leveraging bank switches and processors, payment terminal service providers, payment service providers, and mobile money operators across Africa; finance sector players are now shifting to wealth generating and forever revenue models that keep the financial system running without bleeding.
Historically, observable investment exit ratio in emerging economies like Nigeria, has been very low due to loss-making business models. Hence, mega corporations and fund consortiums acquiring platforms and portfolios of the savings public have become the real and last-resort paying client in a free savings world. Without them, none is saved!
About the Pre-Money Insider
Backed by Wonders Pibowei and Chris Emejuru of Lowase Capital Partners, The Pre-Money Insider is a series designed to advance million-dollars investment opportunities through knowledge sharing and wealth partnerships in the Global South.
The Series comes with a blend of training, publications, networking and summits that help first-time investors and high net-worth individuals to actively engage in high-stakes funding and partnership deals with key accounts across industries and economies.
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