What's happening at Kuda Bank?

The bank of the free is facing regulatory reality

Nov 19, 2021

I haven't put out a newsletter in so long, I had to read my last post to remember what I sound like—it's tough out here. What have I been up to in the one month since I wrote the last newsletter? Work, getting used to stable electricity and tweeting about the shoddiness of Hundeyin's journalism.

That said, let's get into it!

There's no better place to begin than Jumia, a company that receives a lot of criticism, but one I can't help but feel sorry for. In a few years, the company has gone from “Amazon of Africa” to an underdog whose death a lot of people are betting on. Naturally, I’m now rooting for them.

Jumia’s silver lining

On Tuesday, the company released its financial report for the third quarter of 2021—you already know what's coming. As I said in August, "Jumia has been losing money for so long that no one cares anymore. Gone are the days when you could get some easy 30k website pageviews with the headline, "Jumia lost x and y millions in 2018" — those were the days."

So I'm not going down that road. Instead, I'll tell you some of the things that caught my eye from Jumia's report card.

The expectations that the pandemic would help grow Jumia's business didn't pan out. But most of that growth is happening now, with 7.3 million active users (up from 6.7m users last year) and 8.5 million orders (up from 6.6 million orders last year. There's still some iffy-ness around these metrics—Jumia counts customers who cancel their orders as active users. Despite that, you get the sense that Jumia is growing.
I’m not sure if this has always been a thing, but in the last 12 months, Jumia has been calling customers to follow up on purchases/orders. When you use the Jumia Food app and drop off before completing payment, a Jumia agent will call you. The point is, there’s a lot of work going into ensuring customers follow through with purchases.

With some $500 million in cash in Q2 2021, there's no big surprise that Jumia increased its advertising spend. It's spending money on brand awareness while trying to find new users, and one of the ways it's doing this is with influencers and key opinion leaders. When I saw this bit in their report, I searched ‘Jumia’ on Tweetdeck and found a Nigerian influencer tweeting about them. The hashtag #BigDealMoments—this is not an ad—shows you that Jumia is serious about this influencer business.

Diversification? Jumia seems to be trying a little of everything these days. I mentioned a few months ago that Jumia now offers loans, and the latest addition is that you can book buses on Jumia. It sounds a bit like Jumia is turning a whole company, QuickBus, into a feature. But on closer inspection, Jumia's feature is an online ticketing thing for ABC transport.

The market's response to Jumia’s Q3 report has been a big thumbs down, with its shares trading at $13.84 at the time of writing this. But with $198 million in cash, Jumia isn't going anywhere in the medium term, and they can keep experimenting until they become profitable.

The bank of the free faces regulatory reality

In the past week, Nigeria's Bank of the free, Kuda Bank, has caught a lot of heat. Most of that has been over allegations that the bank was setting up customers to be arrested by the EFCC. We also heard that Kuda was closing the accounts of customers trading cryptocurrency without warning.

workaholic🌟 @_SeunMacaulay

@kudabank is it true that you guys now do whistle blowing for efcc? Ordinary 800k you got someone arrested?? If this is true, I'm closing my account Asap.

Kuda responded to the barrage of bad press with an email to customers that had an edge to it.

"We have advised everyone not to use their Kuda account for cryptocurrency transactions of any kind, otherwise we'll be forced to close their account as demanded by regulations. As of today, licensed financial institutions like ours are prohibited from enabling cryptocurrency transactions and we are not allowed to ignore this prohibition. It is simply what the law demands."

The Backstory: While the Central Bank banned banks from transacting with crypto exchanges in February, traders continued to work around it using peer to peer trading. For a while, P2P trading didn’t attract regulatory attention, but two weeks ago, that tide turned. On November 10, the CBN directed banks to close the accounts of two firms accused of crypto trading. Things moved quickly from there, and on social media, several Kuda customers said their accounts were also closed without warning.

What's with the closures? The recent closures are due to Anti-Money Laundering and CBN’s crypto regulations. AML laws mandate banks to observe and report transactions above 5 million Naira; it also asks banks to report suspicious transactions. The guidelines on suspicious transactions are broad so the banks use their discretion to arrive at decisions.

A bank’s ability to navigate compliance measures is critical because they pay hefty fines if they violate AML/CFT measures. The CBN is also a powerful regulator, and its style is to slam you with fines first and ask questions later. Sure, you can go to court and spend months trying to fight those fines, but best believe you will pay up first.

As far as this goes, the banks are between Scylla and Charybdis. They take the easier path of falling in line and taking compliance very seriously and hire some thorough people to make it happen. Translation: if being liked at your job is essential to you, maybe you shouldn't choose a career in compliance. That said, most banks have internal AML policies to determine what’s what, and that may vary from bank to bank. But when it comes to crypto, the CBN’s directive has remained crystal clear: no Bueno.

This brings us to the present. A compliance officer at a commercial bank told me that his bank started stricter restrictions around crypto transactions two weeks ago. The banker, who declined to be identified, said, "We got word from top management that any branch found wanting will be fined ₦100 million. So we had to close any account that the CBN directed us to." Two other compliance officers confirmed that a CBN circular two weeks ago was likely the starting point for the recent actions. Other sources confirmed that a recent CBN audit showed that some banks have been complacent about enforcing the crypto directives.

That audit is translating to more stringent enforcement of AML rules. Banks are now closing accounts that show frequent transactions with different accounts every day. An account receiving funds with no apparent business could be deemed suspicious—remember, it is all within the bank's discretion.

Another compliance officer, who also spoke off the record, told me that the accounts of some Banking Agents whose business names had the word "coin" in them were flagged. Other people who transacted with those banking agents also had their accounts flagged. He told me, "the criteria used to flag customers is sometimes mundane." Everyone's feeling the heat, and compliance is becoming tighter. A recently leaked compliance advisory—an internal document by FCMB—showed that the bank considers inflows from Microfinance banks or fintechs a red flag.

While FMCB has not confirmed the authenticity of that document, it is clear that digital banks like Kuda are facing greater scrutiny. I didn’t have any luck getting a response from Kuda for this story, but my sense is that the bank knows CBN takes no prisoners. And if you have any doubts about the reach of the Central Bank, you should read this account of how Rubies Digital Bank was knocked offline by the CBN.

TL;DR: Like it or not, Kuda bank isn't taking any chances; banking licenses are expensive, and even when you can afford it, it takes 6 to 18 months to get. No one is trying to lose it over crypto advocacy.

With that bit of reporting out of the way, let’s get into other things.

What I’ve been reading

I guess it’s better late than never, but NITDA is finally ready to start taking action against loan apps that abuse data privacy.

Nothing has been more surprising to me than companies doing an about-face after talking up WFH as the future of work. This feature story does justice to a topic that is truly worth reporting on.

Many artists are trying to cash in on the NFT wave, so it was a bit of a surprise to read about this artist, who sold her work for some $4k to bring a new angle to the conversation.

This beast of a story, shared many times, is worth reading every day and twice on Sundays: Life Of Muri

Now let’s gather round for a pep talk….

It feels good to get back to regular programming after a month that’s been exciting but busy. The Friday and Sunday newsletters are now officially back and the Wednesday newsletter I prematurely announced-who remembers that-will also become part of the publishing schedule in December. I’m not telling you who’s writing the Wednesday newsletter yet—let’s not jinx it—but it’ll be worth the wait.

Where am I off to this Friday? Some cool bar in East Legon which I’ll be tweeting about later. What have you good people been up to, what’s new with you? Tell me in the comments!

Notadeepdive

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