Digital newcomers are worth more than Nigeria's big banks

With only a few million users, digital banks are commanding huge valuations

Aug 06, 2021

If you’ve ever used a Nigerian bank, you will understand why anyone who knows at least two full-stack engineers wants to start a digital bank. The problems with the big Nigerian banks are well-documented:

It still takes quite a bit of patience to open a basic savings account — some banks still need you to fill two-page forms.
Customers feel like the banks don’t act when they experience issues.
For entrepreneurs, trying to open a corporate account is more complicated than running a business.

On July 22, I tweeted about needing a second bank account to square away income from my side hustle(s) — I’m already anticipating the subscription $$ from you. Two weeks later, I realised that, although I got around to downloading a few digital banking apps, I hadn’t used any of them. I’m still with my “old ass, can’t do anything right, but at least I know what to expect” bank.

So let me tell you how my digital experience went — Standard Chartered, whose app I’d heard only good things about last year, was my first option. I downloaded the app, and to this day, every time I open the app, it closes right back. I did everything to fix this: uninstalled and reinstalled the app, turned off my VPN, put out a tweet yabbing them on Twitter hoping a customer rep would respond… Nope, nothing, zilch.

Me vs the Standard Chartered banking app

Off to Kuda I went, knowing that I had downloaded the app when they first launched but never got around to using it. It took some 20 minutes to get a One Time Password (OTP) for a password change. And since I was using the Kuda app on a different smartphone from the one I registered on a year ago, I needed another OTP — that took one hour. By this time, a few other people were recommending ALAT — whatever happened to them by the way? — but I was done with digital banks for the day. I live to fight this battle another day.

Now, this is probably not everyone’s experience with these apps, but for me, digital means I’m less likely to be patient. I don’t want to wait around for hours for my OTP when the twin distractions of Twitter and Whatsapp are calling my name.

And since we’re on the topic of digital banks, Kuda Bank raised $55 million in a Series B funding round that values the company at $500 million.

Kuda bank, valuation and the big picture

“At the end of the day, valuation is really what a buyer is willing to pay after gathering reasonable knowledge of the facts.” - Some wise guy like that.

With 1.4 million users — First Bank has 11.2 million customers — and a valuation of $500 million, Kuda is worth more than a lot of Nigerian banks, and people find this confusing. Most people see this: Nigerian banks make way more money than Kuda so how is it even possible the digital newcomer is worth more?

Well:

Private companies’ valuation is often different, and technology makes investors optimistic about what these startups can achieve, so they value them at higher prices.
A significant part of revenue reported by Nigerian banks comes from the lending service provided to a small pool of corporate clients, leaving millions of customers unable to get loans or any other real benefits from the bank.
These banks don’t offer many retail investment services either. So Nigerian banks are leaving so much on the table. Digital banks and the people who invest in them know there’s money to be made if they bridge the gap and offer these services.
Investors are excited about the prospects of digital banking generally, and that sentiment is crossing over to Nigeria.
Nigerian banks are listed on the local stock exchange and there’s only so much growth that can happen there — no shade intended, NGX

These fine bullet points don’t mean that starting a digital bank is a cakewalk. Instead, it is often a journey of bleeding cash - lots of it. The European digital bank Revolut, which was founded in 2015, reported losses of £106.5 million in 2019, despite a 180% increase in revenues to £162.7 million.

So, it was no big surprise for me when recent figures from reliable sources showed that Kuda Bank lost $2.7 million in the first quarter of 2021 on revenues of $159k. The figures also showed that Kuda Bank had a transaction value of $3.5 billion in March 2021. I reached out to Kuda Bank via email, and here’s what they said: “Unfortunately, we cannot confirm the authenticity or accuracy of quoted data in general. What I can say for sure is that we've never shared any financial statements publicly.”

TL;DR: It’s costly to build a digital bank, and with a “no fees” promise, revenues can be tricky to come by, but here’s one expert’s prediction: “If digital banks can turn great customer affinity and numbers into revenue growth whilst maintaining their cost advantage, profitability will follow.”

Speaking of profits, MTN Nigeria released its unaudited financial results for the first half of 2021. While I won’t bore you with the details of their record profits — who knew people cared so little about the finances of big companies?

Borrowing airtime is big business

MTN Nigeria often reports revenue from a segment it calls “fintech” and I’ve always been curious about what made up its fintech business. It turns out all I needed to do was listen to their earnings conference call.

Here’s what MTN Nigeria’s Chief Operations Officer, Mazen Mroue, had to say about that: “On the fintech, we have two main revenue streams. We have the Xtratime and the core fintech services. The majority of the fintech revenue is coming from Xtratime.”

In a revenue segment with its mobile money business, MoMo, MTN Nigeria says Xtratime, which is the service that lets users borrow airtime, is the primary driver of revenue. I’ll leave you to draw your conclusions, but for me, that’s just massive.

But it’s not only MTN that has good news…

Let’s feast!

“A man who calls his kinsmen to a feast does not do so to save them from starving. They all have food in their own homes.” - Chinua Achebe

It’s time to win some merch.

Our first subscriber gets one of these shirts for free and our 1,000th subscriber gets a shirt as well. If you haven’t already subscribed, fix up and you can get one of these babies.

What happens to everyone else? All you need to do is tell your friends to sign up to this newsletter by clicking here. The top three people who refer the most friends before August 13 will get free merch delivered to them.

But I’m still feeling generous, so here’s an extra section for you.

Two months without VPN-less Twitter

It’s now been two months since Nigeria banned Twitter. Despite the public pushback against it, the government has remained unmoved. A lot is going on in the background; the government’s representatives are “negotiating” with Twitter in a deal some say will involve the government having backchannel control over Twitter. Notably, a class-action lawsuit has been filed against MTN, Globacom, 9 mobile and Airtel for their role in working with the government to deny access to customers to use Twitter. It’s a lot.

In all of that, the Indian app, Koo, which is basically a Twitter clone, is trying to make inroads into Nigeria to fill the VPN-less gap. I even received a direct message on Twitter from one of Koo’s representatives — I wish I was making this up.

Beyond all of that bit of intrigue, what are you guys drinking this weekend? For me, it’s overpriced beers somewhere in Victoria Island at this Friday thing all the kids seem to be going to these days. Might as well check it out, what with FOMO and everything.

Speaking of, here’s something I saw on Twitter: “At the end of the day, I’m in business to make money, not to solve Nigeria’s problems.”

Let’s bring this home with some of the other stuff I’ve read this week…

What I read this week

Alexander Onukwue, who was my colleague at TechCabal and is now at the media publication, Quartz, as a West African correspondent — yes, I’m famzing him — wrote this fantastic article on the sham that has been Nigeria’s Olympic outing.
Good writing is hard to describe, but here’s the thing: you know you’re reading god-level writing when you read 2,000 words and get mad when you get to the end - that’s Fu’ad Lawal recently published “Travel guide for the unhinged.”
I never quite got to the end of this conversation about the media publication, The Economist, and some worrying history behind it. However, I still reckon it’s something you smart people will like, so here goes.
I’m not always reading serious stuff, so, here’s this week’s Zikoko Love Life series which I read this week.
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See you on Sunday people!