Over the last decade, neobanks in Nigeria have blazed a trail of innovation. However, most of these banks haven't become self-sustaining businesses; they still rely on constant fundraising. This was the first wave of new-generation banks in the 1990s, which all became profitable almost immediately. You have more chance of buying dollars at N600:$1 than finding a profitable neobank today. For the established Nigerian banks; profitability is not their problem but rather a deep-seated inability to innovate on their product offerings and make customers happy.
Nigerian fintech has a brief but significant opportunity for transformative partnerships. This is due to two key factors. First, traditional banks struggle with product innovation and a growing talent gap, particularly in the areas of machine learning and artificial intelligence. Second, neobanks now appreciate the difficulties in sourcing cheap capital or growing a customer base after many years of burning cash like pyromaniacs. There has also been a fundraising squeeze, and founders now remember that for all the issues with the Naira, it still pays salaries.
The time is ripe, the time is now.
The Opportunity
Nigerian banks are great at three things
collecting cheap retail deposits
making riskless profit by investing in treasury bills or lending to corporates only after receiving collateral 20x the value of the loan
wasting money on “we must build it here” fintech initiatives
Nigerian neobanks are great at three things
attracting the best and most driven minds to solve big problems (and sometimes very tiny ones)
building scaleable solutions at low cost leveraging technology
giving away their product for free to (sometimes entitled) customers
Previously, many Nigerian startups would not get out of bed unless you were going to make them millionaires by investing stupid amounts of money at a more stupid valuation and guaranteeing a ridiculous cash payout in secondary shares. I’m not bitter, honest, even though I never met any of these erm, savvy generous investors. And I can’t blame the founders - as a Greek philosopher once said, “Hate the game not the playa”.
Imagine you were barely making payroll. Then, after 3 months in an accelerator, Tiger Global and her peers tell you that you are a millionaire. Who are you to doubt their collective wisdom? These investors went to Harvard Business School, invested in WeWork, and are now telling you that you are the next startup messiah. Sheeeeet. Many founders went from barely making payroll to getting cheques that changed their lives in a very short space of time. I too would believe that my farts didn’t smell (Ngozi behave, this is a serious audience). Apologies.
Anyway, my point is that if you were paid say $1mm cash by so-called savvy investors, it is only rational that you would turn your nose up at partnerships of offers that were denominated in Naira.
And so we believed that even if our company had never turned a profit or even achieved yearly revenues up to our secondary cashout, we were demi-gods, at least compared to our local banking peers who still wore suits.
And it came to pass that the river of cheap capital in America dried up, leading to a funding winter. The crypto ecosystem fell, spreading fear far and wide.
My dear brothers and sisters, most founders are back to eating ramen and are a lot more humble. Look into their eyes and you will see red - not from anger but more hunger and fear. Which is how it was always meant to be. The best things are not created from a place of contentment but rather discomfort.
The UK case
The UK banking sector provides a great case study of the challenges and opportunities in evolving financial markets. Monzo announced some crazy numbers recently: 9 million customers and a $450mm raise. They still made a loss of over $100mm in 2023, but more concerningly, they don’t seem to be winning market share. The chart below shows the number of customers each bank gained and lost in the last quarter via the UK’s Current Account Switching Service.
More people have been switching out of Monzo than switching to Monzo. The net gainers are Natwest and HSBC, and this pattern repeats itself even if you go back several quarters. The empire is striking back.
In the UK, you have:
open banking which allows challenger banks to see all the data from all the banks regarding one particular customer.
credit bureaus that work extremely well. You have credit bureaus that are tailored for fintech or micro-lending.
a vibrant startup ecosystem with an amazing pool of talent who want to work with challenger banks.
investors that have shown a willingness to fund losses ad nauseam
So, almost ten years after the rise of the challenger banks, in a country where everything is working, Monzo is still struggling to become that default bank for consumers. If neobanks can’t make it in the UK, then is there any hope for neobanks in Nigeria?
If, with all the advantages in the UK, private banks are still winning, then it's hard to believe that the David versus Goliath fight is going to be won by David in Nigeria. Not impossible but it will take a concerted effort and cash. With the benefit of hindsight, the optimal strategy for neobanks a decade ago would have been to join forces to provide just one credible opponent. $200mm for just one challenger bank with founders of varied expertise. Oh what a sight that could have been. For now, though, the best chance for many is either a Voltron merger or a significant investment with a grown-up strategy that doesn’t include freebies to the consumer.
Similarly for banks they should have made minority investments in a host of challenger banks and other fintech almost as an external research department.
Victory for Nigerian banks?
It's a great time for Nigerian banks to partner for the reasons’ mentioned above but let’s be clear, that they are not coming to this discussion from a position of strength (erm, apart from their massive balance sheets - yum yum)
How many innovative services launched by banks that have hit the mainstream since GTB’s *737. I just need to grab a coffee - give me 5 mins.
Hello, do you need more time? Yeah, I didn’t think so.
Nigerian banks have also been humbled in the last decade. They too went through serious madness, seemingly fueled by the insecurity of seeing their sons and daughters getting accolades in international magazines and featured in Forbes’ infamous criminals thirty-under-thirty series.
This has led to billions wasted on in-house startup accelerators, competing fintech products barely thought through and destined for the dustbin. For context, *737* came out in 2015 or before, and since then, all the banks have put out are derivative copy-and-paste versions of what they have seen others do, but at a much greater cost. I remember a senior banking exec telling me they were slowing down their consumer loan growth, not because of the risk of higher default but because their operations and data analytics could not keep up with the growing demand. And this is what your average fintech excels at.
Going back to the UK, the legacy banks have not pursued an ‘only-built-here’ strategy but have been very pro-acquisition or partnership, and this has also been demonstrated by the likes of Goldman Sachs. This is why I am not surprised that Natwest is doing well because it has been relatively aggressive in fintech
This is a completely different approach from what I see in the streets, which is many banks hiring people whose individual salaries would fund the payroll of a few startups for a few years. And we can agree that the results have not been stellar. Given the scale of the banks and the opportunities that artificial intelligence presents, the need for motivated talent has never been greater. At the same time, the gravitational pull of the United States and Canada on Nigerian talent has never been stronger. Solution: grab a Nigerian startup team with high motivation, relatively low cost, and highly technical.
In conclusion
Ideally, the last few years should have seen either i) Fintechs combining their talents, strategies, and resources to create a formidable national entity or ii) legacy banks refraining from launching their own accelerators and projects and instead investing directly in Fintechs for more strategic corporate ventures.
Neither side did this and we are all suffering from the results.
So let bygones be bygones. We're all humble right now.
There is a choice to continue with the status quo, or take this transient opportunity to create long-term value. The truth is that time is not on our side; many of the startups may not make it to Christmas. Similarly, I believe that technological changes that are being seeded now will make at least a few banks obsolete in the future. Even with a paid ChatGPT subscription there are tricks you can pull on data that will probably cause people to accuse you of witchcraft. I doubt if bankers are looking at this right now. And they should.
The partnerships make sense so let’s make it happen. So Mrs/Mr Bank CEO - holla at your boys/gals 😀