Challengers facing challenges

African Digital Banks Make Money Moves Despite Challenge Before Challengers


November 13, 2020

The buzzing news that hit the African startup ecosystem at the start of the week was the announcement of the impressive USD 10 Mn seed round closed by Nigeria-based Kuda Bank, one of a fresh crop of digital challenger banks in Africa.

This seed raise is a significant win for the local startup ecosystem, as it appears to be one of the singular largest seed rounds ever raised by an African startup.  

Kuda Bank calls itself the “bank of the free” and has gone all out to provide banking services that are as close to “free” as one can get. The bank aims to rid customers of long-standing issues typical with the legacy financial institutions that the traditional banks are.

Beyond that, the bank also assists its customers in making better financial decisions through proper financial planning, like budgeting.

The central plan for its recent raise is geometric growth and scale, and according to its CEO, Babs Ogundeyi, the target is “to become the go-to bank, not just for those living on the continent, but for the African diaspora”.

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The go-to bank? This brings up a puzzle that demands attention. As they are seeking to expand and win more customers, do they stand a chance of becoming the go-to bank as targeted? Do digital banks even have what it takes to challenge and maybe even usurp the long-existing traditional banks?

In any case, these questions extend far beyond Kuda Bank and what it hopes to achieve in its home market, Nigeria. It’s a question that can be asked of Africa’s digital banking ecosystem in general. What is the state of digital banking in Africa, to begin with? 

Africa’s digital banking ecosystem

The advent of digital banks in Africa can be tied to innovation and a desire to fix the long-problematic broken traditional banking system.

A digital bank is one without physical infrastructure, but yet offers similar services to traditional banks. It’s different from online banking which is but a facet of traditional banks. 

In Africa, the first fully digital bank called ALAT was launched in May 2017 by, guess who, one of Nigeria’s oldest banks of course — Wema Bank. This suggests that digital banking efforts in Africa are still very much in their infancy.

Wema Bank was 72 years old when it launched ALAT, and since ALAT’s launch, every new year has seen the emergence of one or more digital banks in Africa.

The majority of the fully digital banks in Africa are found in Nigeria and South Africa. However, to narrow it down even further, it appears that South Africa doesn’t have a fully-digital bank per se, although it has one that is quite close to the definition of a digital bank, and that’s TymeBank.

Although TymeBank calls itself “the first fully digital bank in South Africa”, it technically isn’t. TymeBank, which has raised up to USD 60 Mn in funding since inception, is known to use a mix of both digital and brick-and-mortar strategies for banking. Although it operates online, it is known to have about 750 kiosks located in supermarkets across South Africa.

Nigeria, on the other hand, has a host of these fully digital banks, like Kuda Bank, Vbank, Rubies, and perhaps a couple of others that make up the lesser-knowns.

The catch for digital banks

Any statement that puts digital banks in the same sentence as banking the unbanked is a fib that should not be taken seriously. That’s because it is quite evident the target audience of these digital banks is anyone but the financially-excluded. Rather, digital banks exist to provide alternative options for the already banked.

They exist to prove that the word “bank” is beyond a physical structure. What these digital banks preach is ease, simplicity, convenience, personalization, and a beautiful user interface experience.

Its competitive advantage is the ease of the ability to open and operate a bank account in minutes from any location, with a mobile phone, which trumps the numerous processes that are the norm with traditional banks (even those ones that claim to be making aggressive progress in mobile banking).

Also, the provision of a banking experience that is almost free of charge is another common proposition with digital banks.

However, here is something to ponder on. Are these seemingly mouth-watering features enough for many individuals to completely let go of their already deeply-rooted ties with traditional banks and make digital banks their primary bank?

Without being mistaken, they certainly appear to offer cool stuff, but looking at the bigger picture, are a bunch of freebies and cool apps enough to help them reach considerable scale?

What are digital banks missing out on?

There are many areas in which traditional banks are deficient, and top of the list is in the dreadful customer service offered. This gap is rightfully expected to be filled by digital banks, but the gap still exists, even with these new-age digital banks.

In plain terms, any digital innovation that isn’t customer-centric is likely to be gone too soon. This means that regardless of the level of technology and innovation used in solving a problem, a customer-centered business is more likely to succeed than one that is not.

To give the full picture of the importance of a good customer support culture and how it influences customer’s decisions; think about a situation where the primary or only bank of a user is a digital bank, and in the process of a failed transaction made, a debit alert is received and there is no reversal. Imagine a situation where there’s no responsive customer support in place to attend to this issue and rectify it? Dreadful, isn’t it?

Hence, it cannot be overstated that digital banks need to have a superb customer-facing unit and must be ready to treat every customer as king.

Another likely challenge that digital banks in Africa would face is that there’s still probably only a small fraction of customers who would consider a digital bank to be their primary provider, mostly because, as of yet, they aren’t as all-encompassing as traditional banks are.

For example, many digital banks in Africa still lack the provision of credit facilities, and this is one of the usual determinants for a customer’s bank of choice. Many customers, especially SME owners, are known to open specific bank accounts because they are aware of the likelihood of credit offerings that can potentially follow. And digital banks appear to be missing out on this.

Niching: The seemingly hidden problem

It’s a given that for anyone to use a digital bank, they must have a smartphone and working internet. Current data suggest that internet penetration in Africa currently stands at 28.7 percent of the population, leaving an overwhelming majority of the continent’s population offline.

Since this small class of people with smartphones and the internet are the primary targets for digital banks, it means there is a very limited market share to go after at present.

As digital banks clearly do not target the unbanked since their model isn’t viable for those categories of people, would drilling down to the already-banked population be the way out for them?

Kuda Bank, for example, though undefined, appears to have a niche focus, as it seems to now also target individuals offering freelance services online, by enabling them to receive money across borders, as seen in its recent partnership with Payoneer.

Well, only time would tell how the digital banking endeavour would turn out in Africa as it is still a very nascent space. Notwithstanding, execution would have to match ambition if digital banks are to mount a real challenge in Africa and become the norm and not the “cool alternative” that they are at present.

Featured Image Courtesy: Tearsheet

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