As cryptocurrency usage grows in Nigeria, founders have started building hybrid finance applications to simplify access to crypto. These hybrid apps remove the overwhelming user experience flows and education barrier that are common in crypto trading applications. They allow users to interact with cryptocurrency just as easily as with fiat money through their traditional mobile banking app.
The hybrid finance apps combine traditional finance (TradFi), and decentralised (DeFi) features to allow users to convert crypto into Naira, buy, or sell it, without the need for escrows or peer-to–peer trading. Since mid-2023 startups like Taja Palremit Prestmit Azasend Pandar and Pandar have emerged to create these hybrid solutions. This will allow more Nigerians take part in the crypto industry. At least 20 startups are currently operating this hybrid finance model.
David Ayankoso is a non-frequent crypto-user based in Lagos. He said, “I only used Bybit if I had small amounts in my wallets of Dogecoin or Bitcoin.” “I find that the process of exchanging cryptocurrency on Bybit is complicated. The app is overloaded, and not as easy to use as other platforms. So instead, I purchase Solana or Bitcoin somewhere else [on hybrid finance apps] then transfer it to my Phantom Wallet to buy or trade random Altcoins.” Hotspots of crypto adoption are found all over the world, but this high transaction value is only shared by a few people who are knowledgeable in the Web3 area. The sending and receiving of crypto is not the same as fiat currencies at traditional banks. Many Nigerians are wary of digital assets because they can be lost with a single wrong click. Bank accounts can also freeze.
The pitches from these hybrid finance startups are often along the lines of: if you don’t know how to deal with escrows or worse, get scammed, use a hybrid app. Users can open an account and gain access to a virtual wallet (a service hybrid finace apps offer through partnerships with payment processors), then fund the account and buy crypto straight from the app.
Founders of these apps see a chance to profit from a “grassroots movement”said Ayo Adewuyi. The head of product for Prestmit claims that the startup has more than 700,000 users thanks to features such as gift card trading, which attracts users in different countries. “For instance, Patricia [one of the earliest to use this model] became a popular crypto hybrid app because it was perceived as a Nigerian company that wanted to localise cryptocurrency. Founders saw it and tapped into this.”
Adewuyi said that the clampdown on P2P Trading as well as the strict regulatory oversight of big crypto exchanges allowed hybrid apps to flourish. He claimed that Prestmit users increased significantly after large crypto-exchanges gave the Nigerian market less priority.
Hybrid finance apps are nothing new, but there is an increasing focus on integrating crypto payments into traditional finance systems. These apps allow users to manage digital assets as if they were local currencies, in addition to buying crypto for investment. They can pay bills, purchase airtime and data and trade gift cards. They can also pay for online services using crypto. Hybrid finance applications are also crucial for freelancers that earn crypto. They can convert their earnings to local currency without having to rely on the P2P market.
Operating a hybrid finance model, for example is much easier than building a crypto trading application. These startups offer three things: a platform (proprietary software like an app or web-app), virtual account management for user accounts, and crypto liquidity. Imagine walking into your local mom-and-pop store. You ask the storekeeper for a crypto asset like Bitcoin with your local currency. The storekeeper will collect your money and then do one of two things: either they will process your order, as they have the necessary means, or they will use a backdoor service to get the required amount to sell to you. In either case, the hybrid app is the counterparty for every trade. Some of these apps outsource liquidity to OTC traders and institutions who provide bulk crypto liquidity.
Adewuyi said, “Liquidity does not appear out of thin air. In some cases, liquidity providers are the P2P guys, but in this case they go through a more rigorous KYC procedure because startups want assurance that the funds that they receive are not illegal.”
This outsourced liquidity can lead to users having to follow the rules of the provider. Most liquidity providers limit the amount of crypto that users can buy or exchange. This can be a bad thing for people who are buying or exchanging smaller amounts. Luno is a hybrid startup that allows users to sell their Bitcoin liquidity starting at 0.000025 BTC. This means users can’t sell or off-ramp below this amount. Some apps have a higher minimum amount for selling crypto.
Hybrid finance apps make their money primarily from transaction fees. Therefore, they charge higher costs than trading platforms. Some platforms charge a percentage of the deposit, and when users try to exchange currencies, they are charged at a higher rate than official exchange rates. In P2P apps, where liquidity comes from traders who are directly accountable for their revenue stream, competition drives prices down.
Many people are not interested by the complex side of crypto and hybrid apps can help. Adewuyi said that they provide the liquidity users need at a certain rate and if the user is happy with it, the transaction can be completed.
Hybrid finance apps tout the value they offer, namely insurance from the risk factor that is found in trading apps. However, they charge customers a few dollars for the service. In the big picture, many of these apps do not operate as cryptocurrency exchanges. This eliminates token listing fees as an income source.
Despite being dual in nature, the majority of so-called hybrid financial apps lean more towards their traditional finance side rather than crypto, making them more fintechs than cryptocurrency startups. This distinction means that they are more bound to the fintech rules in Nigeria’s evolving regulatory framework than to the rules governing cryptocurrency startups.
TradFi platforms have been integrating DeFi solutions into products to try and find a balance. Eversend in Uganda and Grey in Nigeria, two traditional cross border fintechs have integrated stablecoin payment into their apps. This is to appeal to Web3 freelancing freelancers that earn money through digital assets. Hybrid finance apps were created by founders who believed that introducing users to crypto as everyday money is the way digital assets will develop in the future. It also suggests P2P has a lot of supporters who make crypto a very exclusive affair. These apps are the response of founders to all those who feel left behind.
