The Roadmap for New Digital-Only Banks in Africa
Is it time for Africa to emerge digitally?
Over the past years, we have seen some prominent names emerge in various key African markets establishing and positioning themselves as digital-only banks, relying almost purely on their mobile application to deliver a bouquet of digital financial services with a customer-centric approach. Some call them neo banks, others challenger banks, or in more simple terms a digital-only bank with little to no physical branches at all.
However, there are many misconceptions about what digital banking is. Most assume that digital banks are nice savvy-looking applications with few branches and limited services but that image hardly accounts for what digital banking is. The whole concept is disrupting the traditional brick-and-mortar way of banking and how its different financial products are consumed by its customers.
The way products and services are delivered to customers is completely different. Services are personalized to each customer segment – whether it’s retail or business. The customer experiences in the short time between navigating the app, compared to a long time in bank office operations, no matter what the service is, show a seamless customer service experience. Various services such as risk assessment, credit approvals, and opening accounts happen at the click of a button. An actual digital bank restructures how operations work inside the bank, how the bank interacts with customers, and how agile and flexible they are to be able to adapt and hyper-personalize their various products and services as the business evolves and changes.
A big component in digital banking is the selection of the preferred technology strategy. Banks are now stuck between 1) adopting a white-label solution, 2) buying one, or 3) building one themselves. New digital banks have begun to tailor their services to this emergence, adopting customer preferences. The Vericash end-to-end digital banking platform offers a fully customizable full-fledged digital banking platform that tenders to the front-to-end digital channels to the back-office operations with all the supporting technology components such as anti-money laundry, card management, content management, credit scoring, eKYC, amongst others. So, whether you are building your new digital bank from scratch or an existing bank that intends on establishing a separate digital bank brand, the Vericash end-to-end digital banking platform empowers you to adopt a seamless fully digitized operation. From the front-to-end digital channels to the expedited back office operations, Vericash’s digital banking allows you to customize, configure and adapt your bank’s business model and it enables the fastest time to market. With all ease and a simple use configuration portal, creating your new and real digital bank has never been easier. With a cost-effective plan and a few clicks on the Vericash digital banking app, you can adapt your evolving bank business, launch new products quickly and flexibly, scale up your operations and even enable international expansion.
Below is a look at the different forms of digital banks we see popping up in Africa and the perceptions, pros & cons behind each.
What are Neobanks and Challenger Banks?
The rise of digital banking paved the way for technological advancements in the way people and entities handle their finances. Challenger banks and neobanks offer almost the same services as a traditional brick-and-mortar banks but they do so in a way that is fit for our more technologically advanced era. These banks function through a digital banking app that the customers can use to access all their services.
Challenger banks are smaller-sized banks that operate mainly online. They get their name from the fact that they “challenge” traditional banks. They have physical branches, even though they have fewer locations. This gives them an advantage as it allows them to be licensed and regulated as a banking institution. This means that challenger banks can offer a full range of financial services such as credit cards, overdrafts, and loans. Challenger banks are at an advantage because they have lower costs compared to traditional banks.
Neobanks on the other hand, stem from the idea of challenger banks but take on a completely digital approach. While they’re called neobanks, they aren’t actually considered banks. Neobanks are considered a financial institutions because they don’t have a physical location which means they can’t have a banking license. No banking license means that some neobanks are unable to offer certain services such as credit cards and loans. The only way a neobank could provide a full range of services is if they partner up with a traditional banking institution to allow them to provide customers with what they need without the process of obtaining a banking license. Neobanks also have lower upfront fees which allow for more resources to be allocated to research and development. This also means that overall fees are lower for their customers. Different from challenger banks and traditional banks, neobanks offer a complex number of services. On top of traditional banking services, they offer personal vaults, multiple-currency IBANs, commodities, and the ability to buy shares and engage in cryptocurrency trading through the banking app.
The downside to neobanks is that the lack of physical location means customers can’t physically deposit cash. All accounts need to be funded using credit/debit cards, This also means that there are no ATMs which causes certain limits or charges when customers withdraw cash from any ATM.
Neobanks vs Challenger Banks vs Traditional Banks
The main differences between challenger banks and neobanks are that neobanks function without physical branches, don’t provide credit history checks, and need to be regulated through third-party providers to give customers access to credit cards and loans. The differences between the new generation of banks and traditional banks are that they offer more user-friendly features and a greater range of services (cryptocurrency trading and stocks), at a lower cost.
The Rise of Challenger Banks and Neobanking
Challenger banks and Neobanks originated in the United Kingdom as a solution to the small number of traditional banks. Since the UK was not saturated with traditional brick-and-mortar banks, it made space for digital banking to come and take over the market. After the launch of Monzo and Revolut in the UK, challenger banks have started launching everywhere worldwide. The number of challenger banks and neobanks has reached over 250 worldwide. Since they aren’t burdened by legacy systems and organizational structures and also have fewer regulatory requirements, it is much easier to open a start-up challenger bank and take over the market in a country where traditional banking is lacking. This is what makes developing countries so attractive for challenger banks and neobanks.
Why Challenger Banks and Neobanks?
Traditional brick-and-mortar banks have been the trusted backbone of financial institutions for years and years. Although they have a trusted system, it is quite flawed. Challenger Banks and Neobanks take on a more evolved approach to the traditional banking system. With various services and new features designed for customer ease, they changed banking to be more focused on the customer and for each customer’s experience to be tailored to their needs. They were made to provide answers to customer complaints about traditional banking. Customers often complained over hidden fees, pricing policies, and hard-to-understand financial processing solutions. With lower fees and costs and user-friendly applications, customers can avoid the struggles they face with traditional banking. Neobanks and challenger banks also shortcut long services provided by conventional banks by taking advantage of different forms of technology such as AI and mobile banking applications.
Although the new digitized banking experience that neobanks and challenger banks provide answers to the prayers of many customers, the most important technique that the new banking era uses is conversational banking. Conversational banking is a multi-channel approach to selling to, marketing, and serving customers. Conversational banking creates a seamless customer experience through purposeful automation to make processes go more smoothly and to increase the bank’s operational efficiency. Neobanks and challenger banks provide interactional services to their customers and help them with their financial goals and life plans.
Neobanks and challenger banks also cater to “digital natives”. Digital natives are those who were brought up in the age of digital technology. Almost 50% of workers today consider themselves to be digital natives and this number will be seen to increase to 75% by 2025. The future of banking relies on the upcoming generations who need the banking experience to be tailored to their technology-proficient needs.
7 Tech Trends That Are Driving Development of Challenger Banks and Neobanks
1 – Open Banking
Open banking is an integration of financial institutions and third-party providers. This integration allows for access to clients’ data, enhances the development of software solutions, speeds up real-time payments, improves financial transparency, and boosts cross-selling opportunities. Open banking API has become mandatory and it paves the way for innovative banking. Smart onboarding is a feature of open banking API and it includes account and identity verification when opening a banking app. This ensures that consumer data is safely accessible to the consumer. Open banking API also provides an analytical approach to personal finance by providing consumers with dashboards and information on smart budgeting that is tailored using their own information. SME finances are also a feature of open banking API and that includes services such as affordability checks, automated accounting, and account aggregation.
Emerging Fintech trends are pushing banking systems to evolve and change to fit our modern digitized world. The below list of tech trends benefits both the banks and the start-ups by changing the way they interact with clients and the efficiency of their systems.
2 – Mobile Apps
Mobile apps have been emerging since the release of the smartphone but more recently, mobile banking apps have been becoming more and more popular. According to surveys, 89% of people use mobile banking applications. Mobile banking apps allow personalized analytics, easier access to customers’ funds, and improved security through biometrics.
3 – Cloud Adoptions and Microservices Architecture
Cloud adoption allows for various perks such as on-demand scalability, increased processing speed and improved performance, advanced security, and ecosystem connectivity. Ecosystem connectivity is important as it allows businesses to connect with third-party providers to deliver more services to clients and also eases businesses’ responses to market requirements for system integration.
4 – Advanced Analytics
Advanced analytics allow challenger banks and neobanks to collect data on customer preference, prepare fraud prevention software and introduce risk management algorithms. On the other hand, they benefit the client by helping them analyze their spending, set recurring payments, stay on top of debits and bills, see the overview of their financial situation, and access personalized financial advice to improve financial literacy.
5 – Artificial Intelligence and Machine Learning
AI boosts service offerings and internal processes of banks through credit scoring and churn production, process control, and optimization, customer service chatbots, improved fraud prevention, and personalized offerings and services.
6 – Blockchain
Adopting blockchain technology helps banks with customer identification, trade facilitation, fraud management, P2P transfers, and syndicated loan services.
7 – Engaging Underserved Markets
Arguably the most significant tech trend is the engagement of underserved markets. The World Bank has estimated there to be over 1.7 billion people who aren’t part of the formal financial system. 60% of the 1.7 billion don’t have enough money for a bank account. With digital banking’s low fees, they have the opportunity to provide banking services to those who can’t afford them. Countries like India, Peru, Columbia, and India are untapped markets with a lot of potential. Startups such as neobanks and challenger banks entering a developing market operate with little to no competition and can secure funding to capture the market share.
Top Neobanks and Challenger Banks in Africa
The highest-ranked neobanks and challenger banks earned their spot by providing unique services and an edge that traditional banks do not offer. Below is a list of the highest-ranked African neobanks and challenger banks, paired with what makes them unique.
Top Ranked African Neobanks
Eversend
Eversend is a neobank based in Uganda that offers multi-currency accounts as well as a virtual USD card. Its mobile banking app allows for various types of P2P transactions and can even be accessed without an internet connection
Chipper Cash
Also based in Uganda, Chipper Cash is a cross-border payments app that has fee-free money transfers and bill payments. Chipper Cash also has features such as buying and selling Bitcoin and allowing its users to invest in US stocks from Africa. Chipper Cash is unique for its feature “Chipper Checkout” which is a merchant-focused payment product that runs its free-of-charge services.
SOL Wallet
SOL Wallet is a South African mobile wallet that allows its users to create multi-currency accounts online, exchange currencies at interbank rates, trade FX, crypto, and stocks, pay for services and utilities, send money to friends, get an SOL debit card (issued by Standard Bank of South Africa) and purchase prepaid products such as airtime, electricity, and DSTV. SOL users can also withdraw cash from ATMs and stores.
Lidya
As a Nigerian neobank, Lidya is an online lending platform for small and midsize businesses, providing them easy access to flexible and affordable credit options. Lidya uses 100 data points to evaluate its applicants and build them unique credit scores. Users of Lidya can use proprietary dashboards and tools to manage their cash flow and invoices.
PiggyVest
Nigerian savings app PiggyVest is a startup with a 50-50 gender base level for employees. This app has features such as “safe lock” which allows customers to pre-set the dates of their possible money withdrawals and has favorable interest rates and micro-investment options. PiggyVest users get “Piggy Points” as rewards and can use them to make money.
7aweshly
As the only Egyptian neobank on the list, 7aweshly works as a savings platform for the unbanked or underbanked youth. Unique to its competitors, 7aweshly operates through a micro-savings mobile application that is targeted at the younger generation (aged 16-21). Through the app, users can set financial goals and make deposits via CIB ATMs.
Cowrywise
Cowrywise is a Nigerian neobank that was selected as one of the 50 winners of the Kairos K50 Tech Summit of 2019. Cowrywise provides its services through a wealth management app that enables its users to save for short and long-term goals, carry out P2P transactions, store money in a Stash account and invest in mutual funds.
Top-Ranked African Challenger Banks
TymeBank
TymeBank is a South African challenger bank based in Johannesburg. The bank offers “EveryDay Account” with a visa debit card and no monthly fees to its users. TymeBank also launched “Max” which is an AI-powered assistant that helps customers learn about their personal finances. They also work as a hybrid model of a digital bank and have some physical service points.
Kuda
As a Nigerian challenger bank, Kuda provides a digital-only savings account. Users can save and spend their money by requesting a debit card through the app. Kuda also offers free withdrawals at ATMs across Nigeria and customers receive 25 free transfers to other banks every month. Kuda receives its microfinance banking license from the Central Bank of Nigeria.
Bank Zero
Bank Zero is a mobile-driven digital mutual bank in South Africa that focuses on the savings market for individuals and businesses. This bank doesn’t charge monthly bank account fees and features patented credit cards. Bank Zero is partnered with Mastercard to develop security and provide its users with other features.
Discovery Bank
Discovery Bank is the world’s first behavioral bank. Based in South Africa, the bank uses a behavioral model to reward its customers for lifestyle choices. Engaging in the artificial intelligence-powered Vitality Money tool, customers’ behaviors such as managing their money well, eating healthily, and staying fit get them rewards from the bank that can be monetized, earned, or spent at Discovery’s partners.
Bettr Finance
Also based in South Africa, Bettr Finance offers low-cost accounts and an app powered by a debit card. The bank uses a WhatsApp-based sign-up list for convenience and targets younger consumers (aged 16-35). Bettr finance is not a fully licensed bank and relies on a sponsor bank.
About CIT Vericash
CIT VERICASH is a division of CIT GLOBAL, an international leading provider of innovative eCommerce and mCommerce software solutions and services with solid expertise spanning 25 years, since its establishment in Toronto, Canada in 1993. By applying CIT Global’s dedicated centers of excellence and its specialized leading products, in cooperation with its strategic partners, the company has delivered innovative and award-winning solutions to its clients in more than 48 countries, serving leading brands from North America, Europe, Asia Pacific, the Middle East, and Africa.