It was just Just More than a year ago McKinsey described Africa’s fintech scene as an “investment hotbed.” Fast forward to present day, startups on the continent face many of the same problems as fintechs in more mature markets like the UK and US: valuations are falling, growth is flagging, revenue targets aren’t being met, and those investors, well… , searching for comfort in another hotbed. But if we look closely, we find that there are some glimmers of hope amidst the greater challenges.
TymeBank, the South African digital bank owned by African billionaire Patrice Motsepe’s African Rainbow Capital, recently… Announce It became profitable for the first time in December 2023.
To be clear, the celebrations may be as short-lived as the bank’s continued earnings: TymeBank did not disclose revenue or other financial data, and in fact only confirmed earnings for that month alone — not the entire year. This situation highlights the problem facing many fintech companies in Africa: despite the enormous growth potential, sustainable profitability for many of these companies remains elusive.
However, the new bank is now strategically using the profit moment to attract more investors. TymeBank has conducted two massive funding rounds over the past two years, the latest of which appears to value the startup at $965 million, according to a January report from Bloomberg. This report quoted CEO Koenraad Juncker, who said 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 Tyme Group and in collaboration with sister company GoTyme based in the Philippines – has 8.5 million users in South Africa. But although it’s still gaining users — 150,000 users per month as of January 2024 — that number appears to be slowing down: In 2023, TymeBank said its acquisition rate was 200,000 users each month.
TymeBank claims to be the first digital bank to break even not just in South Africa but on the entire continent. This may not be entirely accurate. In the past, Nigerian fintechs Carbon and FairMoney have been profitable over their entire fiscal years, no less.
Carbon publicly disclosed its financials in 2018 and 2019, reporting profits of more than $700,000 cumulatively. After a two-year hiatus, Carbon resumed financial disclosures, revealing net income of 201 million naira ($478,500) for the fiscal year ending June 30, 2022. Likewise, FairMoney recorded after-tax profits of more than 1.6 billion naira ($3.9 million) for 2020 .Fiscal year ending December 31, 2021. Both have been conspicuously silent of late.
What makes a neobank profitable?
As we wrote last January, deposit-driven digital bank Koda is among the fintech companies looking to turn a profit. Kuda is basing its own transformation on expanding its overdraft range and introducing more micro-lending products. For many fintechs like Koda, the message was clear: neobanks couldn’t make profits from consumer deposits alone, so offering lending products was crucial.
This is not entirely new, and in fact reflects much of the development of neobanks elsewhere. In the UK, Starling Bank has made profits through a two-pronged strategy of building strong deposit and lending portfolios supported by a high interest rate environment.
Neobanks in Africa have taken different paths to get to the same place. FairMoney and Carbon started out as online lenders offering instant loans and bill payments before offering accounts and cards. TymeBank, similar to Kuda, initially focused on offering bank accounts and savings products with low to low fees before delving into credit services.
In 2022, TymeBank acquired Retail Capital as its merchant banking arm to complement MoreTyme, its buy now, pay later product for consumers. This acquisition alone has provided over R10 billion (about $507 million) of working capital to SMEs, and this activity has contributed to TymeBank’s 30% year-on-year growth in its lending portfolio. Meanwhile, FairMoney, lacking large deposits, has turned to Nigerian capital markets, launching a 10 billion naira ($23 million) special bond program to support loan book growth and short-term liquidity needs. Carbon, which raised $5 million in debt in 2019, reports that its deposits make up more than 40% of its loan book.
These examples highlight the importance of stable balance sheets and strong lending offerings for neobanks to achieve profitability. However, it is important to note that African neobanks are still predominantly loss-making entities. For example, TymeBank’s recent profitability announcement came on the heels of financial statements for the year ending June 30, 2023, which revealed accumulated losses of R6.6 billion ($351 million) to that point.
Interestingly, Carbon, which raised the least funding of all these funds — $15 million compared to $90 million from FairMoney and Kuda and $250 million from TymeBank — has been in a shorter period of time than any of these funds (it has been profitable In three out of five years). It’s the smallest as a company, though, with more than 3 million users compared to FairMoney’s 6 million, Kuda’s 7 million, and TymeBank’s 8.5 million.
Bad loans are weighing on new banks
One of the most significant issues that affected the performance of neobanks in Africa was the impact of bad debts.
In the financial year ending June 30, 2022, TymeBank reported a net loss of R976 million ($57.5 million). However, by the end of fiscal 2023, its losses had fallen by 20.7% to R858 million ($45.6 million). The December 2023 results were primarily driven by significant growth in net interest income and fee and commission income, which rose 109% and 360%, respectively, to $28.2 million and $18 million from fiscal 2022. This strong performance contributed to TymeBank’s earnings. Revenue, which rose 62% to $48.5 million in fiscal 2023.
However, TymeBank’s revenue growth has not come without a cost. TymeBank’s credit impairment charges, which represent loans that customers have been unable to repay or are considered bad loans, have seen a significant increase. These fees, which were a modest $65,000 in 2022, skyrocketed by 20,000% to $13 million in 2023, impacting the new bank’s net revenue, which stabilized at $35.5 million. Meanwhile, fintech operating expenses, which cover staffing, depreciation and other operating costs, increased 9% to $81 million.
As for FairMoney, despite turning a profit in 2021 with a net income of 1.6 billion naira ($3.9 million), the Tiger Global-backed fintech company faced challenges in 2022, ending the year with losses of 3.73 billion naira ($8.3 million). .
These fluctuations were affected by a 67% increase in operating expenses, from $18.6 million in 2021 to $31 million in 2022. Although FairMoney’s core revenues saw significant growth, reaching $123 million, an 82% increase year-over-year 2021, but the impact of impairment and borrowings, which rose 138% to $101 million, reduced its net revenue for the year to about $22 million.
Comparing its fiscal 2022 net revenue to the $400 million to $500 million valuation after securing a bridge round last year, FairMoney’s revenue multiple ranges from 18 to 22 times. On the other hand, TymeBank’s FY2023 revenue multiple 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.
While growth in these valuations is an ongoing process, the immediate focus of these new banks should be on addressing the challenges of weak credit. In 2022, FairMoney’s net impairment accounted for 82% of net interest income, compared to TymeBank’s 47% in 2023; For the latter, a 200-fold increase from the previous year should be a concern. The increase in credit loss expenses reflects growth in the lending portfolios of both the new banks, however, TymeBank and FairMoney need to strengthen their credit quality amid ongoing economic headwinds and adjust their models to consider higher loss expectations from their customers across South Africa and Nigeria.
Meanwhile, in FY2023, Carbon faced issues of weak credit and depreciation of the Nigerian currency (the naira has depreciated by 49% year-to-date), and thus was unable to maintain its profitability that year. Conversely, in profitable fiscal 2022, the Lendable-backed fintech reduced credit impairment by 67% compared to the previous year, and recorded nearly $6 million in net revenue. FairMoney did not return a request for comment if it reaches profitability in 2023.
We’ll update when we learn more.