That’s “good morning” in Igbo
There are many descriptions of a neobank, one of my favourite is as a:
“Tech company with a banking license”.
One reason why I like this description is that it switches the frame of reference, what might seem completely hair-brained, if you were assessing the operations and viability of a traditional bank, could be completely normal when assessing a technology company.
Or should I say normalized?
In its latest funding round, Nigerian neobank Kudabank was valued at $500m. Shortly after the raise was announced, a meme
lumping the valuation of 6 Nigerian banks into Kuda’s went viral.
While the meme generated a lot of oohs and ahhs, it also brought out a lot of sceptics.
But like-for-like comparisons between traditional banks and
neobanks tech companies don’t tell the complete story.
Unlike banks that are valued on current performance, tech companies, especially high-growth tech companies, are valued on future performance.
Consider this: a report
by Ernst & Young about future trends in consumer finance pointed out that behaviors such as the subscription model are becoming more attractive, especially with digital natives. What this means is that millennials and Gen Zer are more open to the idea of paying for a banking subscription the same way they’d pay for a Netflix subscription.
So, now, in a future belonging to digital natives, who would you back to meet those kinds of needs - a traditional bank or a
neobank tech company?
The bubble, if any, isn’t local
Interestingly, a lot of the scepticism about Kuda’s valuation has come from within the tech ecosystem. Jason Njoku, IrokoTV founder, wrote in an op-ed
“We all agree raising money isn’t winning. Building sustainable companies is.”
But this sustainability debate is for most neobanks, not Kuda alone.
Whether the neobank business model is sustainable is still an open question.
Whether neobanks make it to that tech-enabled future that informs their high valuations is still an open question.
In 2020, London-based Starling Bank became the “first retail neobank to turn a profit”. They did it after 6 years of operations. It is instructive to note that not many have followed Starling.
Having reportedly lost $2.7 million in Q1, 2021, Kuda, too, is pre-profit. But the company is relatively young. And unless there’s a dramatic shift in overall investor confidence, should continue to have access to patient capital, which should give it time to grow out its revenue streams, which should also give it time to reach profitability.
According to CEO Babs Ogundeyi, that’s the plan
We take a very long-term view of what we are building. This is one of the oldest industries in the world.
Meanwhile, in South Africa, after years of delay, another neobank Bank Zero finally launched.
Commenting on its own business model, CEO Yatin Narsai claimed
“We don’t need a million customers to break even. Our break-even point is below 100,000 customers.”
That’s less than a tenth of Kuda’s customer base. If Bank Zero pulls this off, it would have reached sustainability before most, if not every, other neobank.