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The Nigerian startup ecosystem is made in America

The Nigerian startup ecosystem is made in America. While some may argue that this is a cheeky sentiment, it’s a hard truth—and founders know this too. The average Nigerian startup is a US incorporated entity with foreign investors who often ask startups to register as corporate entities in the US state of Delaware. Investors will balk at the thought of transferring funds to a Nigerian corporate bank account. So local startups are walking around with US bank accounts and mostly keep funds in Nigeria for operational purposes, like salary payments.

In the US, Mercury, a neobank for businesses, understands these corporate needs. They offer simple processes that allow African companies to open a US bank account, order debit cards and authorize wire transfers—three big needs. And in the last few years, Mercury has emerged as a popular partner for African startups, counting a significant chunk of them as clients. Yet, by virtue of operating from Nigeria or Africa, local tech companies remain vulnerable to the global financial system; it was a lesson that was again highlighted this week.

This week, Mercury—the one partner that offers an accelerated US account opening process—suspended the accounts of dozens of African startups. The email was a shock. Unprovoked, Mercury effectively cut off a good number of its African clients from their funds and account processes, leaving many confused and scrambling for an urgent fix. Mercury didn’t give much detail about its action. It only shared that its US banking partner—the licensed entity which provides cover for funds deposits—had detected “unusual activity” with a large number of accounts. So, it had temporarily blocked those accounts while it investigated their activities.

Mercury’s action has triggered a familiar patriotism and clarion call for “local solutions” to yet another problem limiting the continent. But the issue is bigger than any one company. The global financial system is in a trigger happy mood as it unites to block all things Russia following its unreasonable invasion of Ukraine. Banks across the world are reviewing their exposure to Russia and its politically exposed persons (PEP) who have been singled out by Western sanctions. While the implications of these actions are clear, African companies are feeling the second-order effects.

Already vulnerable to discriminatory antifraud and KYC rules by the global institutions, African tech companies are getting squeezed even further by banks’ compliance teams inspecting transactions from “high risk” locations. Meanwhile, Africa is not big business for a lot of banks and global fintechs. Over the last few months, they have frequently blocked accounts for Africans and persons using their services from Africa. Their actions have never been clear—some say that these companies are not legally required to disclose to their clients.

And when they detect higher than usual transactions from high-risk locations, a common response is not to understand the pattern for actual fraudulent practice. Instead, they’re more likely to block swathes of accounts or the whole region— a good example is PayPal. While the US service is licensed in Nigeria and offers its services to Nigerians, it is limited. For nearly a decade, it has blocked Nigerians from receiving funds from abroad. It still hasn’t given an official explanation for this decision till today, and likely won’t.

African startups’ dilemma with Mercury is just another episode in a long series of foreign companies taking unfair actions against the continent, even when the bad actors are few.

A letter from a reader I couldn’t resist publishing:

"I saw that Mercury blocked accounts of Nigerian Startups, due to a "routine check by their banking partner". Following an increasing trend of US and EU based alternate financial services providers blocking African owned accounts in the last few months.

When launching "Flutterwave Send" last year, Flutterwave’s CEO mentioned this worrying trend, stating that only Nigerian(and African) run companies can provide context on regular transactional user behaviour on the planet. The compliance person at Coinbase, Wise, Revolut, Mercury etc, does not have context on how we transact with multiple accounts and cards etc, but the person at Flutterwave, Kuda, GTB etc has a fair view of what kinds of behaviours look like fraud.

I empathise with the affected businesses, but a worrying concern I noticed was the philosophical posturing and resignation of defeat by some of the affected parties. These leaders have regaled us for the last 4 years on how they innovate better than established companies here, rightly and wrongly criticising the big Nigerian businesses when they step out of line(Think GTB, NIBBS, etc) often comparing them to the diaspora based services like Mercury they resort to. It is therefore disappointing that they do not have the same outrage and grace for Mercury that is extended to local players.

"We must build and own our own” is a common aphorism being thrown around as a response to this. The thing is ‘Our own’ exists and it's not perfect. But like Deji Olowe said, everyone is building in Silos and refusing to collaborate, hence we keep seeing everyone try to reinvent the wheel or run to abroad-based services, rather than collectively making our own better.

In the words of Damini Ogulu - “Do am if e easy”

What I’ve been reading

The biggest challenge fintechs and neobanks face isn’t growth or product differentiation; it’s the F word: Fraud.

In January, we talked about Shell’s decision to divest its assets in Nigeria. Yesterday, we learned that NNPC has blocked the $1.6bn sale of those assets to the local oil company, Seplat. It’s Nigeria, so you know there’s something afoot- send me an email if you’ve got theories!

Here’s a first-person account of an African founder whose Mercury account also got suspended.

I’m really bad at maths, but this opinion piece really put into perspective how Covid stole our time; thankfully, it also shares how we can reclaim our time.

How about this review of a restaurant run by the Nigerian chef, Ayo Balogun?

Writing credits: Abubakar Idris

Email contribution: Nnanna 

See you on Sunday when we’ll talk about why this is the right time for Nigeria to remove oil subsidies since it only benefits the rich and middle class. We’ll also talk about Jumia and how they need to get back to exciting investors with storytelling and new business efforts.