It was alone just over a year ago that McKinsey described Africa’s fintech landscape as a “hotbed for investment”. Fast forward to today, and startups on the continent are facing many of the same problems plaguing fintechs in more mature markets like the UK and US: valuations are falling, growth is stalling, revenue targets are being missed and those investors , therefore, looking for rest in another home. But look a little closer, and there are some glimmers of hope amid the greatest challenges.
TymeBank, the South African digital bank majority owned by African billionaire Patrice Motsepe’s African Rainbow Capital, recently was announced became profitable for the first time in December 2023.
To be clear, the celebrations may be as short-lived as the bank’s earnings run: TymeBank didn’t disclose revenue or other financials, and in fact only confirmed earnings for this month — not the full year. The situation highlights the problem facing many fintech companies in Africa: despite huge potential for growth, sustainable profit remains elusive for many of these businesses.
However, neobank is now strategically using the profit moment to gain more traction from investors. TymeBank has had a few big funding rounds over the past two years, and the latest of them apparently valued the startup at $965 million, according to a January report from Bloomberg. That report quoted CEO Coenraad Jonker as saying the startup was looking to raise another $100 million, valuing the company at over $1 billion.
The startup — which operates as an independent entity under parent company Tyme Group and together with Philippines-based sister company GoTyme — has 8.5 million users in South Africa. But while it’s still gaining users — 150,000 users per month as of January 2024 — that number appears to be slowing: In 2023, TymeBank said its acquisition rate was 200,000 users each month.
TymeBank claims to be the first digital bank to break ground not just in South Africa but across the continent. This may not be completely accurate. In the past, Nigerian fintechs Carbon and FairMoney have claimed profitability for entire financial years, no less.
Carbon publicly disclosed financials in 2018 and 2019, reporting earnings that cumulatively exceeded $700,000. After a two-year hiatus, Carbon has resumed financial disclosures, disclosing a net income of N201 million ($478,500) for the financial year ending June 30, 2022. Similarly, FairMoney posted a profit after tax of over N1.6 billion ($3.9 million) for the fiscal year ending December 31, 2021. However, both of these have been noticeably quiet in recent years.
What makes a neobank profitable?
As we wrote recently, digital deposit bank Kuda is among the fintechs chasing profits. Kuda is basing its own shift on scaling up overdrafts and introducing more micro-lending products. The message was clear for many fintechs like Kuda: neobanks have not been able to make a profit from consumer deposits alone, so introducing loan products is critical.
This is not entirely new and, in fact, mirrors much of the growth of neobanking elsewhere. In the UK, Starling Bank became profitable through a two-pronged strategy of building strong deposit and loan portfolios with the help of a high interest rate environment.
Africa’s neobanks have taken different paths to get to the same place. FairMoney and Carbon started as online lenders offering instant loans and bill payments before providing accounts and cards. TymeBank, similar to Kuda, initially focused on providing bank accounts and savings products with zero to low fees before moving into credit services.
In 2022, TymeBank acquired Retail Capital as its business banking arm to complement MoreTyme, its 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 businesses, and this activity helped TymeBank grow its loan portfolio by 30% year-on-year. Meanwhile, FairMoney, short of significant deposits, turned to Nigeria’s capital markets, launching a N10 billion ($23 million) private paper program to support loan portfolio growth and short-term liquidity needs. Carbon, having raised $5 million in debt in 2019, notes that its deposits make up more than 40% of its loan portfolio.
These examples highlight the importance of solid balance sheets and a strong lending proposition for new banks to achieve profitability. However, it is important to note that African neobanks are still predominantly loss-making entities. TymeBank’s recent earnings announcement, for example, followed financials for the year ending June 30, 2023, revealing accumulated losses of R6.6 billion ($351 million) up to that point.
Interestingly, Carbon, which raises the least funding of them all – $15 million compared to FairMoney and Kuda’s $90 million and TymeBank’s $250 million + – was the lowest of them all (it made a profit in three of five years). However, it is the smallest as a business, with over 3 million users compared to FairMoney’s 6 million, Kuda’s 7 million and TymeBank’s 8.5 million.
Bad loans weigh on new banks
One of the most significant issues that has affected the performance of neobanks in Africa has been the impact of bad debt.
In the financial year ending June 30, 2022, TymeBank reported a net loss of R976 million ($57.5 million). However, by the close of fiscal 2023, its losses had narrowed by 20.7% to R858 million ($45.6 million). The December 2023 result was driven primarily by significant growth in net interest and fee income, which increased 109% and 360%, respectively, to $28.2 million and $18 million from fiscal 2022. This the strong performance contributed to TymeBank’s top-line revenue, which rose 62% to $48.5 million in fiscal 2023.
However, TymeBank’s revenue growth did not come without a cost. TymeBank’s credit impairment charge, which represents loans that customers could not repay or considered bad loans, saw a significant increase. This fee, which was a modest $65,000 in 2022, rose dramatically by 20,000% to $13 million in 2023, impacting neobank’s net income of $35.5 million. At the same time, fintech operating expenses, which cover personnel, 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, closing the year with losses of N3.73 billion ($8.3 million).
The difficulty was affected by a 67% increase in operating expenses, from $18.6 million in 2021 to $31 million in 2022. And although FairMoney’s top line revenue saw a significant increase, reaching $123 million, an 82% increase from 2021, the impact of the impairment Loans, which rose 138% to $101 million, reduced its net income for the year to about $22 million.
Comparing fiscal 2022 net income to the $400-500 million valuation it commanded after securing a bridge round last year, FairMoney’s earnings range varies from 18 to 22 times. On the other hand, TymeBank’s fiscal 2023 revenue multiple was 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.
While growth in these valuations is an ongoing process, an immediate focus for these new banks should be to address credit impairment challenges. In 2022, FairMoney’s net impairment accounted for 82% of net interest income, compared to TymeBank’s 47% in 2023. For the latter, a 200x year-over-year increase should be a concern. The increase in credit loss expenses reflects growth in the loan portfolios of both new banks, however, TymeBank and FairMoney need to strengthen their credit quality amid ongoing economic headwinds such as currency devaluations and lower purchasing power and adjust their models to take into account higher loss expectations from their customers. South Africa and Nigeria.
Meanwhile, in the 2023 financial year, Carbon faced credit impairment issues and a devaluation of the Nigerian currency (the Naira depreciated by 49% year-to-date) and thus was unable to maintain its profitability that year. By contrast, in a profitable fiscal year 2022, the debt-backed financial system had reduced credit impairment by 67% compared to the previous year and reported about $6 million in net income. On the other hand, FairMoney said it has reached profitability for the 2023 financial year.
It was updated to include new information about FairMoney’s profitability status in 2023. The fintech also claimed that 2022 was the only loss-making year since its first year of full control in 2018.
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