At 2 pm, West African Time, TechCrunch broke the big news: one of Nigeria’s digital banks, Kuda Bank, had raised $10m in a seed round.
The bank of the free: “Kuda, a startup out of Nigeria that operates a popular mobile-first challenger bank for consumers and (soon) small businesses, is announcing that it has raised $10 million — the biggest seed round ever to be raised in Africa.”
Abubakar sent me a message asking, “Is this the biggest seed round ever to be raised in Africa?”
No, it isn’t – that would be PalmPay’s $40 million seed round. We can fact-check Techcrunch’s claim with its own article on PalmPay’s funding round in November 2019.
With that out of the way, let’s get down to it. Digital banks in Nigeria are an interesting topic for me. They talk about the inefficiencies of Nigeria’s legacy banks and say catchy stuff like, “we are the bank of the free.”
Away from Nigeria, digital banks are facing a reckoning and are finding that if people don’t pay for banking services, it’s pretty hard to turn a profit.
It’s why, in September, I wrote this article arguing that digital banks should consider “thinking small.”
This is in contrast to how digital banks are currently thinking. Babs Ogundeyi, Kuda’s CEO told TechCrunch, “We want to bank every African on the planet, wherever you are in the world.”
So far, Kuda says it has 300k customers who complete transactions worth $700k every month.
While those numbers are impressive, it is important to remember that digital banks like Monzo (2 million users), N26 (3.5 million users) and Revolut (1.8 million users) are all loss making businesses.
So the answer may not lie in thinking big and expanding the user base.
What is thinking small? Jeroen De Bel, the founder and a partner at Fincog, argues that the digital banks that are going to survive are the ones with a core niche.
While his thinking was specifically about Europe, it’s worth wondering if his predictions may hold true for Nigerian digital banks seeing as the business models are similar.
Legacy banks are stepping up: Nigeria’s retail banks may be inefficient, but they’re trusted by millions of customers.
Interestingly, many legacy banks are now showing real ambition. They’re creating holding structures to compete with the fintechs. On the lending front, they also offer better rates than digital lenders while earning revenue from the kind of charges digital banks say their customers shouldn’t have to pay.
Will any digital bank be able to be as robust as their legacy competitors while effectively discounting the cost of banking services for customers?
Kuda certainly thinks so, and it’ll be interesting to see how much ground they cover in the next few years.
Go deeper: For digital banks, growth may mean thinking small