Over the last decade, Neo-Banks have well and truly shook up the financial services sector all over the world. Whether customers are looking for savings accounts, currency transfers or simple merchant pay-app’s, neo-banks have been eating up an ever bigger market share. Each day they tempt customers and their money away from the mega-banking behemoths that dominated the money markets for so long.
Whilst neo-banking has boomed from Brisbaine to Bahrain and from Bristol to Berlin, some commentators have pointed out that the trend almost seems to have forgotten about the earth’s single largest continent; Africa. In this article we are going to take a look at the neo-banking scene in Africa and ask, is it ever going to really happen?
All About Neo-Banks – A Potted History
Following the worldwide financial crisis of 2007-2008, trust and satisfaction with traditional banks was justifiably at an all time low.
Previously, banking and financial services had felt like something of an elite club, a racket tightly sewed up by old dynastic organisations which commanded, and abused, a market monopoly. Challenging them seemed almost impossible and even billionaire entrepreneurs like Richard Branon struggled to get his Virgin Money company moving. But then again, the complete collapse and dissolution of banking institutions like The Lehman Brothers also seemed impossible until it very quickly happened and all of a sudden, everything felt like it was up for grabs.
By 2009, silicon valley tech-companies were pitching hard for capital investment and banking licences and the fin-tech sector was well and truly born. Ever since then, fin-tech start-ups and challenger banks have been popping up left, right and middle, handling more and more financial transactions.
Note that not all fin-tech companies can be classified as neo-banks/challenger banks (the 2 terms are often used interchangeably). For example companies like ‘Wise’ (formerly Transferwise) started out purely as an e-money transfer service and even though their remit now includes debit cards and current accounts, they are yet not a “bank” in any classical sense and do not offer the full range of services.
On the other hand, the US based Chime, UK favourite Monzo and Germany’s N26 do satisfy the criteria to be classed as neo-banks and have truly established themselves in both the personal, and business credit space.
Challenger banks have primarily proven popular with customers the world over as their smaller size and innovative interfaces make them easier to use – accounts can be opened via a phone app and direct debits created at the click of a button whilst on a bathroom break. They are also able to take advantage of banking rules to offer lower fees and better interest rates. Frankly, challenger banks are leaving the “old guard” standing looking like cumbersome, dusty dinosaurs.
But…what the traditional banks do have is stability (2008 crisis notwithstanding…) and, in some cases, literal licences to print money (a little quantitative easing never hurt anybody right?). In reality most neo-banks have been forced into partnerships with traditional banks to underwrite them and increasingly, fin-tech is beginning to feel more and more like a young, hip store front for the same old banking monoliths we all know and loathe.
It’s Time For Africa?
Neo-banking is thriving in the Middle East where vast wealth and liberal financial service laws are allowing the sector to flourish. Europe and the US are also increasingly headed neo-wards although strict financial service rules are still limiting and impeding them to some degree – particularly in the lending and mortgage fields.
One potentially huge market for neo-banks is Africa. The continent covers 20% of the world’s physical landmass and is home to at least 16% of the global population (which is growing fast). Perhaps most interestingly of all though, an estimated 57% – 66% of Africa’s population does not have a bank account making it, quite frankly, a truly unparalleled potential customer base. Africa also has a young, ambitious, forward looking middle-class which seems to churn out even more startups than India and Silicon Valley combined.
All of this therefore begs the question, where are the African Neo-Banks? Or is this just one more sad case of Africa seemingly failing to realise its enormous potential?
Any banking start up in Africa does face a number of hurdles. Firstly, a lot of Africans simply don’t want bank accounts. Vast swathes of the continent still operate “traditionally” with minimal monetary exchanges taking place. Then there are logistical factors – Africans living in remote towns and villages don’t want to travel miles and miles to visit a physical bank branch so prefer to keep their own cash secured at home. Whilst fin-tech, neo-banks can remedy this problem, they can’t do it until Africa has the communications infrastructure to support it (i.e. sufficient WiFI coverage plus sufficient smart-phones in hands) which is still not coming quite fast enough.
And then there is funding. Whilst venture capitalists will throw money at Silicon Valley startups, they are sadly less willing to take the risk on ones based in the Nile Delta Valley. That said, both the Bezo’s and Gate’s foundations have made funding commitments to neo-banks based in Uganda and Nigeria.
But, there are some positive signs. Nigeria is Africa’s mega boom economy and its OPay is the continent’s best funded and best established neo-bank handling 20% of merchant sales in Nigeria. Nigeria is seemingly brimming with neo-banks and Palm Pay and Migo are fast rivaling OPay.
Uganda is also punching above its weight and is home to the Silicon Valley backed Chipper Cash as well the P2P specialist Eversend.
Also remember that 8 west-African countries (Benin, Burkina Faso, Guinea-Bissau, Ivory Coast, Mali, Niger, Senegal and Togo) have entered in a single CEFA currency union meaning that a neo-bank founded in any of these countries could expand across borders rapidly and easily.
The benefits which neo-banks can really deliver to Africa though, is in business financing. As I said, there are a lot of innovators and ideas coming from the continent but securing funding to get them moving is proving a challenge. As soon as the neo-banks lock down their African B2B lending, then this will ensure faster start-up loans, more flexible credit and lower international fees. Optimists hope that fin-tech neo-banks can help African business kick into gear just as neo-bank lenders like Judo in Australia did for that continent.
After more than a few false dawns, it does feel like Africa’s time finally is coming.