If you are a digital challenger bank, in Africa, and you have no plan to charge the typical banking fees, from customers, what is your future? Also, if your balance sheet remains small, do you not think that traditional banks can match your no-fee model with a service, and by doing that freeze your growth? Across the globe, most digital challenger banks (N26, Revolut, Monzo) are loss-making companies despite having millions of customers.
Yet, I have written on innovation hangover which makes it hard for mature/traditional companies to match the agility of startups. Another element is the cost model where a startup could technically capture value, in markets where mature firms may struggle, due to the positioning at the edges of a smiling curve. That positioning connects to cost efficiency due to the absence of legacy systems and structures in startups when compared with traditional competitors.
For example, a digital bank in Nigeria could have one office (the app/website) to serve all states in Nigeria while a commercial bank has physical branches across the nation. Those branches are cost centers, bringing inefficiencies to the allocation and utilization of factors of production.
So, on that construct, digital challenger banks have opportunities as they can through their playbooks redesign the markets by stimulating new needs in the customers. In other words, customers who bank free could be conditioned to pay for non-banking services, through the platforms, and in that process, the new banks could capture value. How? Become an operating system in the financial lives of the users: “But for the new banks, becoming central to users’ lives is the key to accessing the wealth of data needed to nudge them toward the right products, and making money in the process.” Those products include lending, wire transfer, remittance, and others.
“The important place in people’s financial lives is where the data is,” said Starling Bank CEO Anne Boden.
Partner firms plug into the apps, creating a “marketplace” of services ranging from loans and investments to insurance and energy, and paying the banks a fee whenever a customer signs up to their offering.
The banks will rely on this for income to varying degrees.
In Nigeria, that would not be that easy as you need massive scale to create value for your partners. But there is a consolation that the model could work when you examine how companies innovate and the incentives around them.
In this piece, I explain why startups win, despite the efforts of older companies who challenge them in new areas they are pioneering. The older companies can come with money, experience and technology, but most times, they are solving problems, with the wrong incentives. Consequently, they adjust the problems to accommodate their incentives and in the process, solve an entirely different problem, resulting to loss. You read it from me: African and specifically Nigerian startups, you can win and do not be bothered by the big companies. Your incentives are different and those are inherent advantages for you.
Simply, provided the challenger banks keep their incentives right, they can capture value even when the traditional competitors wake up from an innovation dilemma in the sector. While not a digital bank, Paystack demonstrated upon its acquisition, that value could come in many ways, when its market cap was put ahead of a combined market cap of Wema, Unity and FCMB in the Nigerian Stock Exchange.
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