Why the growth of neobanks is good for the African retail banking user
Innovation has two main consequences; one is that it positions a specific company to create better solutions for customers and sets a standard for service delivery, which ultimately leads to the second consequence; everyone is lining up to conform to the new normal to avoid being disrupted.
Around 2014, some payment gateways were charging users an “onboarding fee” to use their products, new business models emerged among upcoming fintech startups that made this model partially moribund. If you told a merchant today that they would have to pay an onboarding fee, on top of the standard processing fees the gateway will likely collect to receive payments, they would probably think you were crazy.
Although I made it clear in a previous post While the growth and proliferation of fintech may not pose a deadly threat to traditional banks, I strongly believe that the growth, spread and acceptance of digital banking has two key implications for the banking industry; one is its ability to create a new standard of service delivery in retail banking, and the second is the mild disruption of tier 1 and 2 banks offering digital retail banking solutions that refuse to rapidly scale. While it is largely utopian to think that digital banks will disrupt the retail and mobile payments game of traditional banks, I believe they have the ability to put traditional banks on their toes and completely elevate the standards of what a mobile retail payment is. banking application should offer its users, and what should be unacceptable.
While this probably doesn’t happen very often during a conventional retail user’s entire banking cycle, the fact that a user still has to walk to a bank teller to fill out a manual physical form to open an account Banking is one of the scourges of traditional retail banking and one of the assets from which neo-banks benefit. The majority of neo-banks allow you to onboard directly from a mobile device without the need for paperwork or walking to any banking hall for any purpose.
There’s nothing stopping the majority of banks from adopting this model (as I’m personally not aware of any CBN regulations prohibiting it), they will eventually when digital banks (Kuda, Fairmoney, VFD, etc.) will become the top banks of choice among users considering a secondary account over traditional banks due to ease of integration.
This unique approach to onboarding is likely to become the future of onboarding for bank customers, as people become less tolerant of visiting physical banking halls, and more banks decide to reduce the number of branches and physical bank locations to reduce costs.
Although there are traditional banks that already allow users to do this (to some extent), with the exception of Standard Chartered and ALAT by Wema, I don’t know of any other tier 1/2 traditional banks that allows you to have a fully functional bank account without transactions. fully numerical limits.
The neo-banks will punish the errant traditional banks that use their customers to play “Jangulova”. Just before writing this, my younger sister called me from a supermarket to help her run a bank transfer to pay a merchant because for some unknown reason her mobile banking app refused to show up. The same bank that unwittingly deducts money from their account for no justifiable reason (and sometimes without a debit alert) for frivolous charges. She and my younger brother use the same “red” bank and are already making a concerted effort to completely switch to Kuda (waiting for them to get their debit cards before making this switch completely).
Neo-banks will gradually begin to absorb retail customers from banks that have downplayed the importance of providing their customers with an exceptional customer experience and by the time banks find out, it may be too late. Kuda Bank said it has grown to 2 million customers in 2021. Kuda Bank cannot issue BVNs, so these are not new users, these are traditional banking customers who are jumping ship and carrying their cheap retail deposits.
While some banks accept this, many do not. I find it hard to understand why a traditional bank will have access to a user’s transaction inputs and outputs but cannot qualify the user’s creditworthiness and offer the user a meaningful loan. Neo-banks taking a credit-first approach like Fairmoney, and more established neo-banks like Kuda Bank beginning to venture into this space have a unique opportunity and proposition for their customers – do business with us, and you can access loans based on our analysis of your creditworthiness in relation to taking credit from “somewhat deranged” online lenders who will call your father, mother, brother, pastor and even your ex to a small loan of 20,000 that you have not repaid.
Kuda would have granted $180 million in credit (overdraft) in 2021 alonewhile Fairmoney reportedly distributed 117 billion naira ($234 million) in the same year. With cheaper access to floating, some of these lenders MAY decide to lower their interest rates to become more competitive while playing in this space. More growth is expected in the coming months
I personally believe that at some point payments (transfers to be precise) will eventually become a utility (value-added services becoming gambling), and digital banks make this proposition more real than ever. Kuda Bank, FairMoney, VFD and some other neo-banks now offer free bank transfers to their users. Although not all digital banks necessarily do this (Kuda and Fairmoney are both unique cases having raised US$55 million and US$42 million Series B respectively), the market for it may start to grow as that free transfers become a compelling use case (a use case strong enough to drive sustainable customer acquisition, adoption, and retention). No traditional bank currently does this for transactions outside of its ecosystem (i.e. outside of its core banking app), and it will likely take a large exodus of retail users to neo-banks for traditional banks plan to leave money on the table and offer it to their users. .
The key idea here is not that digital banks will shut down retail banking from traditional banks, the key idea here is that customers start to see digital banking offerings as the norm (in the same way that customers viewed smartphones with full-screen touchscreens like the norm and RIMs BlackBerry with its keyboard that died a slow death) will push the majority of traditional banks to adopt these new offers or risk losing their individual customers.
It really becomes an “innovate or die” scenario. Most banks won’t die (if rigid banking regulation didn’t kill them, will neo-banks kill them?), they will innovate, and that will be good for the consumer. When fintechs like Sparkle and Brass start offering more personalized services to SMBs with traditional bank accounts, and those SMBs start to switch primary allegiances, it will only be a matter of time before traditional banks start to offer more personalized services to SMEs.
However, digital banks still have some problems. One is that their smartphone-dependent business models, coupled with a mobile internet user penetration rate of 48.12% in Nigeria, means that there is still a large proportion of retail customers (c i.e. USSD-dependent users of feature phones) in traditional banks who may still not be at hand. their reach (given that is their target audience as they cannot issue BVN and go after new users).
Beyond that, however, are the logistics, especially when it comes to distributing debit cards. More than one person(s) told me that they are still holding back and plan to continue to embrace and fully utilize their digital bank accounts (in this case, Kuda Bank) when they get their debit cards. For my part, I placed an order since last December and I have not received mine. If anyone from Kuda is reading this please expedite my card delivery bike!
That’s not to say that digital banks are perfect; they also have network outages and suffer from service issues, but at the end of the day, they are very concerned about creating a great customer experience for their users and serving their users well, something more traditional banks may not be. not be too motivated to do.
The neo-banking space is expected to grow rapidly in the coming years, the barrier to entry is also not very high as a simple MFB Tier 1 unit license (cost: N200 million deposit with the Central Bank of Nigeria) is enough to legally position you to run a digital bank. New market entrants like Bloomm, Mintyn, digital bank Stellas with unique value propositions can give more traditional banks a hard time.
The growth of digital banks will likely cause errant traditional banks to lose some of their retail users, but beyond that it will put them in a position to be nimble and innovative, to learn to be more customer-centric with their retail games, and to offer solutions that have a net positive and material effect on the lives of their retail users, which will ultimately lead to higher standards and create a better overall experience for those users.
With increased competitive pressure expected to intensify in the coming years, especially among Millennials and Gen Z users, who may likely begin to see certain digital bank accounts as status symbols (like bank Zenith was back then (Zenith Bank is still a big bank BTW)) more traditional banks can start transforming their retail gaming offerings to look more like what their digital counterparts are offering to allow them to compete effectively in the retail space. Interesting times ahead. /Inspired by the Holy Spirit