Despite flashes of profit, most African neobanks are in the red | Tech Crunch

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This is the only one Just over a year ago McKinsey described Africa's financial technology landscape as a “hotbed for investment”. Fast forward to today and startups on the continent are facing many of the same problems that plague fintechs in more mature markets like the UK and US: valuations are falling, growth is flagging, revenue targets are being missed and those investors are just fine. , looking for relaxation in another hotbed. But look a little closer and there are some glimmers of hope amid the big challenges.

South African digital bank TymeBank, majority owned by African billionaire Patrice Motsepe's African Rainbow Capital, recently announced that it has become profitable for the first time in December 2023.

To be clear, the celebrations may be short-lived, along with the bank's profit: TymeBank doesn't disclose revenue or other financials, and it actually only confirmed profits for that month — not the full year. The situation underscores the problem facing many fintech companies in Africa: despite huge growth potential, sustainable profitability remains elusive for many of these businesses.

However, Neobank is now strategically using the profit momentum to gain more traction with investors. TymeBank has had two mega funding rounds in the past two years, and the last of these valued the startup at $965 million, according to a January report from Bloomberg. The report quoted CEO Koenrad Jonker as saying that the startup is looking to raise another $100 million, valuing the company at more than $1 billion.

The startup — which operates as an independent entity under parent company Time Group and with sister company GoTime in the Philippines — has 8.5 million users in South Africa. In 2023, TymeBank said its acquisition rate will be 200,000 users per month – despite gaining 150,000 users per month by January 2024.

Timebank claims to be the first digital bank not only in South Africa but the entire continent. It may not be completely accurate. In the past, Nigerian fintechs have claimed profitability for carbon and fairmoney for all financial years, no less.

Carbon publicly disclosed financials in 2018 and 2019, reporting cumulative profits of more than $700,000. Carbon has resumed financial statements after a two-year hiatus, revealing a net income of N201 million ($478,500) for the fiscal year ending June 30, 2022. Fiscal year ending December 31, 2021. But both have been noticeably quieter of late.

What makes Neobank profitable?

As we wrote this January, the deposit-led digital bank is also one of the fintechs chasing profits. Kuda has its own spin on scaling back its overdraft and introducing more micro-loan products. For many fintechs like Kuda, the message is clear: neobanks cannot make a profit on consumer deposits alone, so introducing loan products is critical.

This is not entirely new and, in fact, reflects much of the neobank development elsewhere. In the UK, Starling Bank has become profitable through a two-pronged strategy of building strong deposit and portfolios helped by the high-interest rate environment.

Neobanks in Africa have taken different paths to reach the same destination. FairMoney and Carbon started as online lenders offering instant loans and bill payments before offering accounts and cards. Timebank, like Kuda, focused on distributing zero-to-low-fee bank accounts and savings products before venturing into credit services.

In 2022, TimeBank acquired Retail Capital as its business banking arm to complement MoreTime, a buy-now, pay-later product for consumers. This acquisition alone provided more than R10 billion (~$507 million) in working capital to small and medium-sized enterprises, and that activity contributed to 30% year-on-year growth in Timebank's loan portfolio. Meanwhile, Fairmoney, lacking significant deposits, has turned to Nigeria's capital markets, launching a private note program worth N10 billion ($23 million) to support the growth of its loan book and short-term liquidity needs. Carbon, which raised $5 million in debt in 2019, said its deposits make up more than 40% of its loan book.

These examples highlight the importance of stable balance sheets and a strong lending proposition for neobanks to achieve profitability. However, it is important to note that African neobanks are still predominantly loss-making institutions. TymeBank's recent statement of profitability, for example, followed the financials for the year ending June 30, 2023, revealing losses of R6.6 billion ($351 million) to date.

Interestingly, Carbon, which has raised the least amount of funding of all — $15 million compared to FairMoney and Cuda's $90 million+ and Timebank's $250 million+ — is at a lower level than any of them (beating profits over three to five years). It is the smallest in the business with just over 3 million users compared to Fairmoney's 6 million, Cuda's 7 million and Timebank's 8.5 million.

Bad debts are burdening neobanks

One of the key issues weighing on how neobanks have performed in Africa is the impact of bad debts.

For the financial year ended June 30, 2022, TymeBank reported a net loss of R976 million ($57.5 million). However, by the end of the 2023 financial year, its losses had fallen by 20.7% to R858 million ($45.6 million). Its December 2023 result saw significant growth primarily in net interest income and fees and commissions income, which rose 109% and 360%, respectively, to $28.2 million and $18 million from fiscal 2022. This strong performance contributed to TymeBank's top line. Revenue, up 62% to $48.5 million in fiscal 2023.

However, TymeBank's revenue growth has not come without a cost. TymeBank's credit impairment charge, which refers to loans customers consider to be non-repayable or bad debts, has seen a significant increase. This charge, which was $65,000 in 2022, rose 20,000% to $13 million in 2023, impacting Neobank's net earnings, which reached $35.5 million. At the same time, fintech operating expenses, including staffing, depreciation and other operating expenses, rose 9% to $81 million.

As for FairMoney, despite turning a profit in 2021 with net income of N1.6 billion ($3.9 million), the Tiger Global-backed fintech faced challenges in 2022, ending the year with losses of N3.73 billion ($8.3 million).

The impact was a 67% increase in operating expenses, from $18.6 million in 2021 to $31 million in 2022. And while FairMoney's top-line revenues saw significant growth, reaching $123 million, an 82% increase from 2021, the impairment impacted loans, which rose 138% to $101 million, reducing its net income by about $22 million for the year.

Comparing FY2022 net returns to the $400-500 million valuation it commanded after securing a bridge round last year, FairMoney's returns range from 18-22x multiples. On the other hand, TymeBank's revenue in fiscal 2023 is 27 times its current valuation of $965 million. Like Kuda's 25x revenue multiple in 2022, these multiples are considered expensive in the current fintech market.

Although growth into these valuations is an ongoing process, the immediate focus for these neobanks should be to address credit impairment challenges. In 2022, FairMoney's net impairment accounted for 82% of its net interest income, compared to TymeBank's 47% in 2023; Second, the 200x increase over the previous year is alarming. The increase in credit loss expense reflects growth in both neobanks' lending portfolios, however, TimeBank and FairMoney need to strengthen their credit quality amid the ongoing financial turmoil and adjust their models to anticipate higher losses from their customers across South Africa and Nigeria.

Meanwhile, in the 2023 fiscal year, credit impairment issues and devaluation of Nigeria's currency (the naira has depreciated 49% year-on-year) and it is unable to maintain its profitability in that year. In contrast, in the profitable fiscal year 2022, the loanable-backed fintech reduced credit impairment by 67% compared to the previous year and reported about $6 million in net income. FairMoney did not return a request for comment if it reaches profitability in 2023.

We will update as and when we learn more.

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