Neo-banks in crisis over zero fees, unsecured overdrafts, other

Odundeyi, CEO of Kuda Bank


Nigerian neo-banks continued to stumble, revealing mounting losses and facing customer complaints.

When they stormed the country’s financial landscape in the early 2000s with a vengeance, digital challenger banks, also known as neo-banks, threatened the dominance of traditional banks, which had for more than a century dominated the Nigerian banking space with the provision of banking services such as instant loans, zero fees on withdrawals and deposits among other customer services.

They were touted for their innovative offerings and efficient digital operating models, as their main strength was providing customers with alternative ways of banking through digital means, such as mobile apps and online platforms, compared to physical branches used by traditional banks.

The last 10 years have seen the steady rise of neo-banks, with pundits pointing to the sky as the only way to the top.

And they did not disappoint. In addition to receiving waves of congratulations from customers, who sang their praises to the highest heavens, the startups received more than $1.2 billion in funding between 2014 and June 2022 from foreign companies. venture capitalists (VC), who had hoped to amass fortunes.

However, most so-called neo-banks have struggled lately, with companies like Kudu Bank and Revolut revealing mounting losses and receiving a slew of customer complaints about the service.

What initially appeared to be perfect policy actions and decisions by bank managements has now turned out to be their nemesis.

It is worth recalling that banks have been widely accepted due to most of their customer offers and incentives, especially zero transaction fees, instant/unsecured loans as well as higher operating expenses.

In September, Nigeria’s leading neo-bank, Kuda, to the surprise of many, reported another loss of 6.1 billion naira ($14,214,681) in its 2021 financial statements.

The loss represents an increase of around 602% from the 868 million naira ($2,025,295) reported in the 2020 financial year report.

According to the bank’s 2022 financial report obtained by BH, its revenue increased by 4,315% from N72 million in 2020 to N3 billion in 2021.

However, that’s where the good news ends. Despite a revenue increase of 4,315%, the bank closed the year with a net loss of N6.93 billion after deducting all expenses.

BH’s analysis of the report showed that several factors, including high credit losses (bad loans), as well as rising operating expenses, were primarily responsible for the poor performance.

The bank’s almost zero fees on financial transactions, especially on transfers and debit cards, turn out to be a bad decision after all.

When the bank first opened in Nigeria in 2019, transfers on its app were free and it distributes its debit cards to customers without charging the normal quarterly maintenance fee.

As expected, the incentive propelled a rush for the bank’s free services. From an initial customer base of around 50,000, Kuda now has 4.2 million customers using its app.

According to data taken from the bank’s website, more than 500 million transactions worth over 50 billion naira have been made on the app.

The increase in the customer population necessitated the hiring of more staff to meet their needs.

However, this comes at a huge cost. According to the 2021 financial statements released by the bank, its staff costs increased by 500% from N215 million in 2020 to N1.3 billion in 2021 due to the steady increase in its workforce.

Besides having a massive staff on its payroll, the bank also had to deal with depreciation and amortization of equipment such as desks, furniture, laptops and others.

Depreciation and amortization expense stands at N64,326,473, a massive jump of 246% from the N18,590,000 the bank spent in 2019.

In 2021, Kuda’s operating expenses (OPEX) increased from N936 million (652%) to N7 billion in 2022.

“The company’s revenues do not justify these expenses in the short period of time,” the bank said in the report.

BH reliably gathered that the digital bank had 450 employees, of which more than 95% were high-income professionals earning more than 1 million naira per month.

“The bank’s workforce is heavy from bottom to top. They have the best hands in the business. These are the top IT and management staff earning over $5,000 per month.

“The lowest paid worker, I’m not talking about drivers and office cleaners, but young IT whiz kids, earn over 1 million naira a month.

“While the payroll kills them, workers need to be well paid and made happy or they will be chased away by their competitors,” an industry source revealed.

Just as high operating expenses are pushing Kuda to financial ruin, the bank is also grappling with high non-performing loans (NPLs) from overdrafts it has extended to “assessed” and “trusted” customers.

It’s worth remembering that Kuda launched its highly sought-after overdraft product in 2021, which it made available to over 2,500 of its most active users.

Subscriptions to the product (discovered) had reached 50,000 per week in the first week of June 2021.

By the end of June 2021, the bank had disbursed $20 million in unsecured loans to over 200,000 qualified users, with a repayment period of 30 days.

Kuda co-founder and CEO, Babs Ogundeyi, while speaking on last year’s lending performance in June, claimed the neo-bank had experienced minimal default due to its diligent approach in verification candidates.

“We use all the data we have for a customer and assign the overdraft proportion based on the customer’s activities, with the aim that it is not burdensome,” Ogundeyi proudly said in June 2021.

However, after a rapid advance of six months later, the loans, unfortunately, largely failed.

According to the bank, its NPLs as of December 31, 2021 stand at N2.3 billion, or around 69% of its loan disbursements.

The writedown, the bank further explained to shareholders in the financial statements, eroded 96% of interest income from customer loans.

The bank, unlike its core banking services, seems to fare better in non-banking services like airtime purchases and utility payments like energy, garbage bills, and cellular subscriptions. cable television.

In an effort to shore up its earnings in core banking activities, Kuda Bank management implemented in July 2022 a charge of N50 on transfers and deposits of N10,000 and above.

He attributed the resort to fee collection to the directive of the Central Bank of Nigeria (CBN) which mandated him to do so.

Financial experts, however, see the sudden resort to fee-charging as a face-saving measure, along with pressure from investors to start reporting profits.

Other neo-banks like Revolut and OPay, BH has learned, face similar challenges, which may not go away any time soon unless digital banks change tack.

“Banks need to explore how to monetize their services. They should get customers to pay for the solution they provide,” he advised.

Speaking on the development, a corporate communications professional and public affairs analyst, Elvis Eromosele, criticized the neo-banks’ business models, particularly their near-free transaction policy.

“Banking isn’t free anywhere, and disruption doesn’t have to be free. What’s important is access, simplicity and ease of use.

“It should be mentioned that traditional banks derive a large part of their income from loans.

“In fact, while Kuda’s NPL ratio ended the year at 69%, the average ratio in traditional banking fell to 4.8% over the same period.

“Traditional banks mainly extend credit to a few low-risk businesses with substantial collateral that mitigates defaults, while neobanks only work with user activity on their apps,” Eromosele explained.

The corporate communications expert also advised Kuda Bank to incorporate more risk assessment into its overdraft offering or drop it altogether.

“However, abandoning the offer would be unwise as the loan, if done well, has the potential to push the company’s bottom line to a high positive bottom line.

“Kuda’s risk appetite, criteria and strategy in retail and commercial lending calls for immediate restructuring,” he warned.

Rosalie M. Dehner