Monday, 15 April 2024

Rise of digital banks in Africa: Challenges and opportunities

5 min read

By Sana Louahidi

Africa-focused digital banks seeking to plug the financial services gap of the unbanked face a market of about 300 million potential customers. Having attracted significant investments, they are poised to challenge traditional banks.

Digital banks that seek to serve the unbanked in Africa are offering innovative and customer-centric services that are not only attracting more users but deep-pocketed long-term investors. What traditional banks lack in flexibility and speed, these new players or neo banks are quick to provide and improve on – especially during the COVID-19 pandemic.

Growing mobile phone use among some 300 million unbanked and underbanked Africans accelerated the move to digital services. Products are more oriented towards the younger generation, low income earners, and small businesses. According to the International Finance Corporation, the Internet economy has the potential to contribute nearly $180 billion to Africa’s economy by 2025.

But these challengers face several hurdles. Banking regulations of digital services in most of Africa are slow to evolve and fintech infrastructure is still in early stages of development, making expansion challenging. According to Africa Center for Strategic Studies, only 15 African countries have completed national cybersecurity strategies for threat monitoring and response.

Digital banks also still lack qualified talents and investment in cybersecurity to prevent attacks, exposing these to credit card fraud, phishing, and scams.

As their customer base grew, however, digital banks and other fintech companies in Africa have received considerable international investments, enabling them to expand their offerings in the continent. According to Digest Africa, a database for early-stage investments, African fintech firms raised  $906 million in the third quarter of 2021, representing more than 60% of all venture capital invested in the continent last year.  Nigeria received more than 60% of fintech investments in Africa last year.

Several leading digital banks in the region raised significant funding last year. TymeBank completed a $180 million series B capital raising in 2021. On the other hand, Kuda Bank raised  $55 million in a series B round to bring its valuation to $500 million.

Kuda, founded in 2017, entices customers with  free banking services such as zero card fees, free transfers, and automatic savings. It succeeded in attracting more than 1.4 million customers as of 2021. As it has a banking licence from the Central Bank of Nigeria, it can quickly develop personalised products. In November 2020, Kuda had around 300,000 customers, making  an average of $500 million worth of transactions per month. The number of registered users increased rapidly after five months to reach 650,000 in March 2021.

In South Africa, TymeBank offers a bank account with low monthly to zero fees. Since its launch in 2019, the bank has grown its customer base to four million as it onboards an average of 110,000 new customers monthly through physical kiosks.

Meanwhile, Bank Zero offers banking services for both individuals and businesses through its mutual banking license. It provides a free account but charges transactions with third parties. Customers can send money to anyone in the Bank Zero system for free by using a mobile number or a QR code.

In Egypt, Telda is an emerging digital bank with a focus on peer-to-peer payments. It offers free account opening with a money transfer option, as well as a payment card for withdrawals and  bills payment. Telda raised  $5 million in a pre-seed round in 2021 to roll out new services for Egyptians. According to Telda, it is the first one to have received a license under new regulations issued by the Central Bank of Egypt for digital onboarding of customers and issuance of cards. 

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