Digital Challenger Banks (Digital Lenders) in Africa - Business Model Rethink

Introduction

In the past few years, I have watched the evolution of Fintech in Nigeria. The typical model is simple, offer consumers credit, so that these consumers can one day trust you with their deposits. Abi, it is "give and take"... in that order, not take and give.

I know you will raise the questions about digital savings platforms - PiggyVest and Cowrywise being the leaders. Think about it, they offered you >10% on savings in order to attract you to save with them. After all, you cannot get that rate from your local banks... So you have no little or no choice. In addition, they have automated your savings, so that you won't have to think about it - all you see is the debit alert.

We have however seen that those that started as savings businesses are tilting more to becoming Asset Managers. You can buy treasury bills, invest in mutual funds and other securities. However, those that started out as lenders are now trying to mop up deposits, by offering even much higher interest rates on savings compared to the traditional banks and other digital savings players.

The rationale is simple, Digital Lenders issue out loans at between 7.5% to over 20% monthly interest rate, implying an average ~122% Annual Percentage Rate (APR). What this means in English is that for every successful loan, the lender is effectively earning 122% in annual interest. So, the job of the lender is simple (maybe not so simple) - ensure that you pick borrowers that are willing and able to pay back, and those who actually pay back. But given the amount of information these digital lenders have of their borrowers, this can be a herculean task. That is why they all claim to depend on some form of Artificial Intelligence to help them pick these winners.

In my own opinion, all they do is that they offer you a small amount on your first loan. If you do not pay back, they will cut their losses and never lend to you again. But if you do, they will then offer you a slightly higher amount, with a slightly lower monthly interest rate. Essentially, they are trying to reward good behavior and severely punish bad ones.

Ideally, what should happen to defaulters will be that they are reported to the credit bureau so that when this same borrower approaches another lender to borrow, his existing default will be flagged. Meaning that he won't be able to borrow from any financial institutions until he pays his debt. Ask me if this is happening...

Back to my core. Essentially, these digital lenders are now offering loans and taking deposits. This sounds like what a bank should be doing. So, essentially, these digital lenders are banks

Little Pig, Little Pig, Let me in...

When I was leaving home to the university, I opened my first bank account, say with Agbalumo Bank (You know the Bank). Agbalumo noticed that they just got an account from a student. The noticed that there is only one consistent deposit source - my parents. Yeah, occasionally, I received money on behalf of my friends. That is easy to flag as well - 5k deposited by a strange person, 10 minutes later - 5k withdrawn from the school ATM. Agbalumo knows not to lend me money.

Agbalumo also noticed when I graduated from school and was jobless for a few months before enrolling for the National Youth Service Corps (NYSC) program. Agbalumo knows when my Alawee (Stipend paid by the Government of Nigeria to members of the NYSC) of 9k lands in my account. They know when my state Alawee of 5k drops as well. Agbalumo noticed when my Alawee moved from 9k to 18k. I'm sure Agbalumo noticed that I started eating at Mr. Biggs every Friday After my Community Development Service (CDS) meeting - As a big boy.

Agbalumo noticed when Alawee dried up, and I was jobless again. This time for slightly longer than a few months.

Hooray! Agbalomo noticed when a strange amount of over 100k dropped in my account after over 1 year of job search. I'm sure they wanted to report me to the Nigerian Financial Intelligence Unit (NFIU) until they saw that it was my Salary from Afrinvest. Agbalumo would have noticed how the salary kept on increasing as I got promoted. Agbalumo also noticed when I left Afrinvest for EchoVC.

So, when Agbalumo decided to offer me "Q-Credit", they didn't offer me 10k first. I got multiples of that. Agbalumo didn't offer me a loan for 1 month, neither did they offer me at 10% per month - I was offered ~21% per annum!

Agbalumo can afford to do this because they KNOW me! It is that simple. They have my history. They didn't have to scrape my phone to get look at my text messages. They didn't have to ask me if I was a boy or a girl. They have all of the information.

Agbalumo has an unfair advantage over ALL of the digital lenders!

Not by the hair of my chinny chin chin

A lot of us believe that Open Banking will help solve this problem. However, if I know how the Nigerian Banking regulatory environment work. Open Banking will take a long time to be a reality in Nigeria. If TelCos cannot take mobile money off the banks, I'm not sure which startup can. Hope is not a strategy, I will assume that Open Banking might not happen - so what will I do?

I will Huff and Puff and Blow you House Down

Technology alone cannot be your only competitive advantage. Agbalumo and his cohorts are coming to blow that out. 20 years ago, banks pride in their branch network. In 2020, the branch network is seen as a cost centre. So, these banks are thinking and leveraging technology to keep them nimble and cost-efficient.

By full year 2019, Guaranty Trust Bank's Cost to Income ratio (CIR) - the biggest measure of efficiency, stood at 36.11%. In English, this means that - for every NGN 100 that GTBank made, they only spent NGN 36.11 on operations! In has been trending downwards for over 5 years. Who can show me any digital lender, payment company, challenger bank, neo bank, International Money Transfer Operator (IMTO), digital wallet operator, mobile money operator, agency banking operator etc that operates that efficiently? I remember during my Investment Banking days (2015) when GTBank posted an unprecedented CIR of 44%, I thought to myself, how more efficient can they get? My opinion was that GTBank should focus on growing their revenues rather than shedding more fats. I believe that they could only deliver greater shareholder value if revenues continue to grow exponentially. I guess I was wrong. GTBank has proven that it could continue to reduce costs while growing revenue.

In 2019 only, GTB processed; NGN 3.5 trillion and 575 billion in USSD transfer value and volume respectively. NGN 8.7 trillion and 154 million in mobile banking (GTB Mobile App) transaction value and volume respectively. The same bank earned NGN 11.2 billion, NGN 2.1 billion NGN 1.9 billion, and NGN 3.2 billion in Commissions from NIBSS Instant Payment, USSD Convenience Fees, Bills Payment, and Card respectively.'

So, my point is - being digital alone is not good enough. legacy banks can be digital too. So as a challenger bank, you have to challenge.

Leaving GTBank for a minute. Wema Bank launched its own digital-only bank - Alat a few years ago. In line with my job, I downloaded the app and tried to use it, but I guess the One Time Password never came, so I moved on. I never returned there.

Just yesterday, Sterling Bank announced the launch of its own fully digital bank - OneBank. *737# was a revolution. Every bank jumped on the bandwagon. I'm not sure I can remember the shortcode by any "Technology" Startup. "Traditional banks" are not quite traditional again. Not to be overly pessimistic, these traditional banks are winning the digital battle.

Digital banks need to do much more!

Built with Bricks, Wood, or Straw?

Remember where I started from - Agbalumo unboarded me at the point I was getting into the University. You have to do that hard work. You need to get these younger folks to know that they don't have to bank with Agbalumo. That Kuli Digital Bank is good enough. You need to ensure that their ATM Cards are delivered to them in their houses (Since you don't have the branch network Agbalumo has). You might want to offer free banking. No N65 charge when they use other banks' ATM, since you do not have a single ATM to your name. No Annual Card Maintenance fees. No fees for text message alert. Just free banking.

For lending to be profitable for you as a digital bank, your cost of funds needs to drop. Retail deposit is the most guaranteed way of dropping your cost of funds. You cannot attract retail deposits if young people do not see you as their PRIMARY bank. You cannot afford to be an alternative.

I remembered when Agbalumo's digital banking channels were unresponsive for just one weekend - the world was going to end. You need that type of dependency.

I love B2B. Since you cannot attract MTN and Dangote Cement, you can attract the Igbo trader that Agbalumo takes for granted. That food vendor in Victoria Island. You can attract that Instagram seller (They make a lot of money). You can help finance their international trade (They import from China and Turkey). You can issue them POS terminals for free. Encourage him to use it as his primary was of collecting payment. Help them integrate with Paystack and Flutterwave, so that every online card payment comes to your bank. Offer them loans! You can attract that Mallam that has never gotten a business account before. He will grow to become more dependent on your bank and you are able to attract cheaper deposits.

Did you also notice that most of the assault by traditional banks is being targetted at retail customers? The informal retail space remains wide open for digital banks to take. In case you know someone building a digital-first corporate bank, please reach out to me.

Final Thoughts

I guess the thinking has to change from being that cool Fintech to being a Bank. Challenger banks need to actually challenge! You need to stop playing defensive. Take that bank customer. Take that unbanked 17-year-old. Take that early-career starter. Make him receive his salary in your digital bank. Take that small bakery and plantain chips "manufacturer" and their staff.

Become the bank you actually want to be.