It was bound to happen: after taking over entertainment and media, software is eating up financial services too. Every aspect of financial services is getting digital, reducing operational and distribution costs, which makes it affordable for the end-user.
Fintech—digital financial services—are multiplying rapidly due to the growth in African mobile phone users, currently 650 million users. Every mobile phone user now has access to savings, loans, and investments via a mobile app or USSD code.
In the last few years, digital banks, savings, and investment platforms have thrived to a large extent in Africa. There are more than five products for each of these types of digital financial services in most African countries. Majority of them target the same market, age demographics, and have similar business models.
Let’s evaluate each fintech type one after the other.
Users use their smartphones to open a new account, make payments and resolve account issues, without ever entering a physical branch. Challenger banks, as they are called, compete directly against the traditional banks, offering almost zero-cost individual and business bank accounts services through digital infrastructure.
They focus on digitally savvy, middle-aged and young affluent individuals who value great customer experience and beautiful user experience. Some of those products include Kuda, Umba and Eversend.
The business model is mostly predicated on acquiring lots of users cheaply through digital social channels so they can have enough deposits to monetise (by investing the deposits in safe financial instruments) and in the long run cross-sell customers with complementary services like Payday & business loans and other money management solutions that would generate fees. However, the major source of revenue is from lending, which is tied to the prevalent interest rate in each country.
Another value digital banks provide to users is the ability to easily settle everyday bills, like electricity, cable and internet. They take a percentage of the cost of these utilities as revenue (as much as 5%). This category still represents a significant revenue chunk of most digital banks, while they continue to figure out how to get good at lending.
Digital savings platforms have also cut out one of the core traditional banking services, savings. They offer users interest rate on savings accounts that’s way better than traditional banks. They also offer flexible and automated savings product, so it becomes a habit and helps retain users on the platform.
The market for this class of fintech is African millennials and the middle class with smartphones. Lots of these platforms have an asset management business model. They design products that users can put periodic payments for fixed higher interest rates. These platforms then re-invest the funds in financial securities like treasury bills and other short term commercial papers, the revenue for the startup is the difference between the returns on re-investing the funds and interests offered to savers.
Digital savings have grown fast in the past years with Piggyvest having over 2 million users and it’s just in Nigeria for now.
Digital Investment platforms
Recently, the African market has seen an influx of investment platforms. A young African population is also driving the growth in this sector. We had seen such a trend in the US and Europe where trading apps and Robo-advisors became the in thing for young people as these platforms made trading and investing exciting and interesting.
Currently, there are two major business models for investment platforms in Africa. Some platforms charge a fee per transaction and rely on individuals investing or trading regularly. Other platforms take fees on assets held on the platform (Asset Under Management) and profits made on the platform. For example, a user invests $1,000 in a basket of asset containing Apple, Amazon and Facebook. The platform could charge a fixed 1% on that invested amount per year and 3% on the gains made on the investment per year.
These platforms use digital social channels to attract young investors with low minimum investments like $10. Also, they build communities on Telegram around the product.
We could see investment platforms testing new models like monthly subscriptions in the next few years. There’s a possible reduction in fees to zero, just like we already see in US and European platforms like Robinhood and Revolut respectively. At zero fees, investment platforms would have to make money by cross-selling users with premium services like advanced trading tools and personalised wealth management products for high net worth individuals.