Can you make money by serving people of humble means? Can you sustain a business addressed to people outside of the global financial system? Limited market opportunities and few coins in the pocket don’t have to be a dead end. As Bill Gates once said: there’s a difference between banks and banking. If you need proof that FinTech companies can provide quality services to customers despite their financial status, look at neobanks in Africa.
Challenger banks were first called “digital banks”. Then, a new term—neobanks—was coined to make things even clearer. From then on, many neobanks have successfully captured the minds of investors and clients alike. Innovative FinTech businesses, based on offering digital-first or mobile-only financial services, now benefit millions of users. Services like managing accounts, processing payments and transfers, or even providing loans, are made possible thanks to end-to-end software development and fuelled by cutting-edge technology.
The rise of African neobanks is a particularly curious case. It points to the business models fit for the future. It also provokes the question of how to further improve what already works today. That’s where challenger banks come in, creating 4 major FinTech hubs in Africa: in Johannesburg, Lagos, Cape Town, and Nairobi.
Background for neobanking in Africa
A staggering 57% of the entire African population don’t have any kind of traditional bank account. And that’s 95 million people, according to the World Bank. Why such high numbers of the unbanked? A lot points to the backlash of Africa’s colonial past. Results: limited economic options, insufficient banking infrastructure, and public infrastructure in poor condition. What does it mean in practice?
Let’s say somebody living in a rural area has enough money to store in a bank and manage the account. It still doesn’t matter. They can’t afford to waste a day to reach the bank. All because the quality of public transportation leaves much to be desired. This applies to other means of transport as well. Driving on bumpy roads is risky and equals money on repairs—the money people are counting on to have in a bank. Problems upon problems.
Fortunately, where there are few roads—there are many smartphones and it makes a world of difference. According to the FDI Intelligence, sub-Saharan Africa alone had 456 million unique phone users in 2018. It is estimated, that an additional 167 million will join by the end of 2025. And that’s only one region of the continent. In 2019 alone, smartphone sales in Africa reached 6.6% of the global market. The continent is the fastest growing place for smartphone users in the entire world. What’s the trick?
How African neobanks solve problems?
People in this part of the world want the same things people want everywhere else: to stay connected with each other and prosper. The number of small businesses reached over 5.9 million in 2018. And that’s only for South Africa. Being able to manage a (mostly) local business and reach out to clients and suppliers is critical. Challenger and neobanks in Africa provide multiple services that big banks won’t or can’t afford to provide due to legacy systems and high customer acquisition costs.
Ingredients for success
Africa is a mobile-first continent, therefore every disruptive business has a human-centric mindset in place. It’s just easier to do business when everyone has a smartphone. Plus, according to 2019’s GSMA study, 3G coverage in sub-Saharan Africa reached 62%, with more than 120 4G networks already up and running.
Neobanking in Africa is popular because FinTech apps offer features which were once out-or-reach. Paying for food at the local store, sending money to family, paying bills and taxes. That’s basics. Apart from that, there are other services, like loans. In fact, digital lending is very popular among the unbanked. It’s also a way to reach them, making them comfortable with digital services and building an appetite for more.
By eliminating the middleman, neobanks in Africa embrace P2P lending to natural persons and businesses. A perfect example is the Kenya-based Kopo Kopo. It has a cash advance system that helps finance business-critical tools, like computers or phones. This way, local salesmen can afford to stay in business or open a new one. High-street banks simply can’t compete with this level of efficiency. What’s more, they often fail to recognize the need, not to mention address it.
Beyond fixing problems: expanding the market share
Covering basic needs alone would revolutionize African habits and empower the masses. Companies could call it a day. But challengers don’t want to stop there. African neobanks take elite financial services and make them mainstream. They enable especially younger consumers to fight for their future. Stock market investing is a good example. Tech-savvy young Africans are not only saving and managing their money but also put their capital to work and generate profit.
Top African neobanks
According to EY, the number of FinTech companies in Africa grew between 2009 and 2019 at an annual rate of 24%. The growth is fueled mostly by Nigeria, Kenya, and South Africa. As presented by Frost & Sullivan, FinTech revenues are forecast to grow from $153 m in 2017 to $543 m by 2022. All thanks to expanding payment services, the eCommerce market, and an even more dynamic smartphone market penetration. No wonder new African FinTechs and neobanks pop up almost overnight.
Here are some of the most interesting players on the African neobanking market:
Fundall is a Nigerian FinTech offering loans for individuals and businesses.
Most interesting features:
- users can request money from debtors via email or phone, with daily notifications
- automated savings while spending (users can set up a percentage of payouts to be secured on account)
- groups contributions and savings
- inventory and invoice management
Eversend solves the problem of cross-border transfers and offers:
- virtual debit cards
- multi-currency e-wallet
- insurance solutions
- offline access to funds (through Unstructured Supplementary Service Data: USSD).
Wallets.africa is a PayTech company supported by Y Combinator.
Most interesting features:
- credit and debit card access
- intuitive bill payments: from water and gas to Netflix and Amazon
- solutions for individual consumers and businesses alike
7aweshly is a money-saving app dedicated to the Egyptian youth.
Most interesting features:
- micro-saving platform for youth
- building habits for long-term saving
- ability to save money in gold
Carbon is a Nigerian lending platform.
Most interesting features:
- personal, business and investment loans
- free DStv/Gotv (African satellite TV) payments
- Bloom: a community of female entrepreneurs, built around the service
Small businesses, African neobanks and COVID-19
According to Dorothy Tembo, Deputy Executive Director of the International Trade Center (ITC), micro, small and medium-size businesses need to rethink their business plans. They will be the center of the post-pandemic recovery plan for Africa. For this to work, companies need to innovate more. It’s the only way to compete, even on the domestic market. But that’s easier said than done. High-street banks offer solid options but small firms lack resources to apply them. FinTech-driven open banking services can be a lifeline these small and medium businesses need to move forward.
Some neobanks want to obtain a “regular” banking license from their respected central banks and operate on an even larger scale. In 2019, a Lagos-based FinTech Kuda did just that. Some believe this is only the beginning. Many African FinTech companies already provide banking services. Becoming fully-fledged banks with official licenses and credentials backed by authorities will only make them stronger.
Unbanked + underdeveloped = hungry for quality services
Coming back to the opening question: can you make money by helping people with limited amounts of money? Of course you can! Especially if you keep up with open banking or offer bespoke alternative financing solutions that serve entire communities. As stated in McKinsey’s report, “Africa’s retail banking penetration stands at just 38 percent of GDP, half the global average for emerging markets.” As a result, the model of banking-as-a-service (BaaS) thrives in tight communities and there’s still room for innovative digital products.
Maybe the next one will be yours?
Check our case study of a Kenya-based FinTech and get inspired!
