Branch’s Switch From Mobile Loans To Banking In Kenya Brings Challenges

Nine months after it was first reported as a pursuit in motion, digital lender, Branch, has successfully acquired 84.89 percent shareholding of Century Microfinance Bank (Century MFB) in Kenya. The amount involved in the transaction is undisclosed.

The acquisition dated January 1, 2022, was approved by the Central Bank of Kenya on December 30, 2021, under Section 19 (4) of the Microfinance Act and approved by the Cabinet Secretary for the National Treasury and Planning on January 7, 2022, pursuant to Section 19(3)(b) of the Microfinance Act.

Branch was incorporated in Kenya on April 2, 2015, and is wholly owned by Branch International Holding Ltd, a company incorporated in Mauritius. Branch International Holding Ltd is owned by Branch International Inc (BI), a company incorporated in the State of Delaware in the United States of America. Branch has raised a total of USD 274.3 M in funding over 9 rounds.

It is one of the largest mobile app-based lenders in the country and brings financial services to emerging markets digital rails, commonly known for offering quick, mobile micro-loans in Kenya and several other countries. Branch claims it has disbursed the better part of USD 330.4 M in loans to more than 3  million customers across Kenya, Tanzania, and Nigeria.

But it appears Branch now has its sights set on becoming a full-fledged financial institution. Apart from acquiring Kenya’s Century Bank, Branch also acquired a Micro-Finance Bank (MFB) license in Nigeria last year and now offers lending in addition to money transfers, payments, and most recently, savings in Africa’s most populous country.

According to the CBK, Branch’s total assets stood at KES 1.1 B (USD 9.6 M) as of December 31, 2020. The now-officially acquired Kenyan bank, Century MFB, was licensed by CBK in September 2012, to carry out a nationwide microfinance banking business. Century has two branches in Kenya and is categorised as a small microfinance bank with a market share of below 1 percent of the microfinance banking sector as of December 31, 2021.

At this point, it remains unclear whether Branch would, by virtue of the acquisition, take the route of a digital-only bank or adopt an omnichannel approach, though the latter seems a plausible possibility.

In any case, Branch has work cut out for it in finding an optimal model between digital-only and omnichannel and converting its borrower-heavy customer base to loyal depositors.

If all goes well, Branch might have a shot at reversing the fortunes of Kenya’s deposit-taking MFBs which have generally been in a rut for years. With the addition of seasoned industry professional, Rose Muturi (formerly of Tala), leading from the front as Branch’s Managing Director for East Africa, the fintech firm may have a good chance.

At a time when digital lending in Kenya and beyond is flooded with a slew of operators while also under the microscope for wrongdoings that could potentially draw suppressive sanctions, Branch’s transition from a mobile lending also-ran to a challenger bank looks a timely evolution. And it’s in line with an emerging trend that has African consumer-facing fintech startups increasingly (and eventually) becoming some version of a (neo)bank.

This model appears to be playing out with several African fintech startups including Chipper Cash, Carbon, Eversend, Fairmoney, Bitsika, OPay, etc. The competition in the space has become quite intense too.

As it is, it’s almost as if every business-to-consumer (B2C) fintech would eventually become a challenger bank seeking to claim and retain customers from the incumbents, or the original digital banks, while vying for a new generation of first-time account holders. At this point, the trend is moving towards rebundling or recoupling a collection of financial services that fintech initially set out to unbundle or decouple – with the overarching promise of a better experience.

Indeed, according to the Finnovating for Africa 2021 report by Disrupt Africa, nearly 25 percent of the 576 fintech startups studied are operating in multiple categories. This tops the 15 percent recorded in 2019 and 8 percent in 2017.

Venture-backed fintech startups that have built for the consumer are increasingly seeking growth to scale up. And this has necessitated diversification and expansion. While some of the expansion has been geographical, most have been vertical.

Fintech remains the toast of Africa’s evolving tech ecosystem, raking in record funding amounts and minting fresh unicorns each year. As fintech startups chase continuous growth to keep up with the influx of capital and continue to validate the high valuations in the sector, it’s become imperative to reach for a bigger pie, ergo: Become a one-stop-shop for financial services.

This evolution makes great business sense, per experts’ views, given that bundling multiple products – cards, transfers, savings, trading, crypto, and loans – seems the natural progression to increase average revenue per user (ARPU). Such a bundled setup makes the customer more valuable to the business and the platform more valuable to the customer as it provides more touchpoints for value exchange.

Also, maybe there’s a point in Branch becoming a regulated bank and taking advantage of cheap deposits instead of lending their own money at much greater risk and still having to deal with stiff regulations.

Well, like several fintechs, Branch seems well on its way to find out if this neobank-like maneuvre will prove the light at the end of the at-times bleak unit economics tunnel.

Featured Image Courtesy: Fusion