UD #02: Banks are shook and they should be

Flutterwave, Airtel Money, and Kuda Bank raise major rounds, while MTN flexes its muscles

I’m taking a break from the series I started last edition exploring three funds that have done the most to deploy technology-enabled business models across emerging markets. Today’s newsletter explores recent African fintech funding news. The series will continue in the next edition.

Valar Morghulis.

The amount of capital flowing into an ecosystem tends to get most of the headlines. I’ve argued, that just as important is the source of the capital. As an ecosystem matures, you want three sources of capital to emerge:

  1. Local angel investors that understand the nature of tech investing and venture returns. These are angels that are able to de-risk start-up creation and give founders guidance based on their actual experience. Alex Danco writes with enviable clarity about good angels in this article.

  2. Dedicated pools of capital focused on just that market and able to take multiple significant bets. These are funds like TLcom, Partech Africa, Cathay Africinvest, Sawari Ventures, and Novastar. With their current funds, these firms have committed to deploying >$500M into Seed-Series B deals in Africa over a 5-10 year period. If they are able to back companies that achieve scale, the multiplier effect on this effect will be immense.

  3. Global funds with impressive track records and experience in multiple markets. Funds that act as a bellwether for the growth of markets they enter and are able to attract even more capital. When SoftBank announced its $5B fund focused on Latin America, it did two things: a.) made it clear that the best companies in LATAM, with the most impressive traction, will have access to the capital they need to scale. b.) it put the ecosystem on the map and attracted other investors. Another example is Y-Combinator, which has invested ~$5M into the African ecosystem over the past ~5 years. This capital has had a very different signaling effect to $5M deployed by [insert local VC] over the same period.

This lens, of the source of capital, was what I used to look at two recent fundraising announcements from the Nigerian tech ecosystem - Flutterwave & Kuda Bank.

A lot of the focus on Flutterwave's round was around the amount raised and the valuation - both of which are notable. An underappreciated fact was who the company raised money from. The round was co-led by Tiger Global with participation from a host of funds including Insight and DST. Tiger Global is an investor in Checkout (Europe & Middle East), dlocal (LATAM), and Razorpay (India). DST and Insight are also investors in Checkout. [Flutterwave, dlocal, and Checkout also happen to be led by Endeavor Entrepreneurs and portfolio companies of Endeavor Catalyst].

Raising money from this profile of investors puts Flutterwave in the same peer group as these companies. Moving forward, it will raise capital at similar multiples, attract talent from a similar pool, and sign a similar calibre of clientele. The challenge here, and it is quite a challenge, is that it has to continue growing at a similar rate as these companies.

Kuda Bank's round was led by Valar Ventures, whose portfolio also includes promising neobanks across other markets such as N26, Neo, Wise (previously known as Transferwise), and Albo. Similar to Flutterwave, but perhaps to a lesser degree, this puts Kuda Bank in the same peer group as these other neobanks. This is crucial to Kuda Bank's strategy. More than any other company tackling the same problem space in Nigeria, Kuda Bank has chosen to execute on the global challenger bank playbook which involves raising a lot of capital to aggressively grow customer/deposit base by extensive marketing and offering free services before eventually monetising that base presumably through offering loans and investment products.

Africa's Hidden Unicorns.

The first generation of digital financial service products in Africa generated two groups of winners. The first group was the regional and local payment processors. DPO got acquired for $288M, Interswitch was valued in 2019 at $1B, Fawry is currently valued at over $2B. The other group was the mobile money operators. Half of the world’s 300M mobile money users are in Africa. A lot of the value in that space is 'hidden' inside of telcos but the telcos are increasingly considering spinning these business lines in search of the attractive valuation multiples that financial services revenue attracts compared to telephony revenue. Airtel Money raised $300M from TPG Global and Mastercard at a $2.6B valuation. In Q3 2020, Airtel Money generated $110M ($440M annualised). MTN has also made noises about spinning off its mobile money operations. Based on its 2021 projected revenues of $1B and using a generous 60 % discount to the valuation multiple of comparable companies, JP Morgan arrived at a $3.9B valuation for MTN’s fintech business. Applying the same multiple to Safaricom’s $770M of revenue from Mpesa in 2020 will give you a valuation of $3B.

This exercise is useful because it shows you how much value was created by the first generation of digital financial services operators. Together, MTN, Airtel, and Safaricom are generating ~$2B in financial services revenue and those business lines have a combined market value of ~$10B. Even more remarkable, these products predated the widespread availability of smartphones and were built primarily to work on feature phones. In the next decade, a few trends will shape the evolution of digital financial services on the continent: 1.) increasing smartphone penetration and adoption 2.) the emergence and growth of cryptocurrency 3.) the commoditisation of agent networks.

If you haven't read it, I highly recommend Wiza Jalakasi's piece titled The Fight for Mobile Money 2.0. In it, he lays out the various approaches taken by companies like Chipper Cash, Barter (by Flutterwave), Kuda Bank, Piggyvest, Carbon, Buycoins, Bitsika, and Eversend to shape the next generation of financial services on the continent. We are still very early in the evolution of these products but it is not unreasonable to expect this generation of digital financial services to create significantly more value than the first generation and for a lot of that value to emerge outside of telcos.

The enemy of my enemy is my friend.

Last week, I tweeted that I hadn’t spent cash in months. This weekend, I received a text message from MTN telling me that I may have to resort to buying physical airtime recharge cards?!

It turns out that MTN and the banks were having a stand-off. MTN decided to slash in half the amount it pays banks for selling its airtime on their platforms and so the banks decided to remove MTN from their platforms. The Central Bank of Nigeria ultimately intervened and MTN took the pricing back up. This comes a few weeks after the CBN had intervened in another squabble between banks and telcos over who pays for USSD transactions and how much they pay. TechCabal has the tea on both arguments here and here.

What’s interesting is that throughout the weekend, I received notifications from every fintech product on my phone that I could still purchase airtime on their platform. According to TechCabal, MTN has now shifted to Flutterwave to provide infrastructure for its USSD services. Banks are under pressure from both fintech players and telcos, which are happy to team up against the banks. The one thing that remains in the banks favour is that the CBN sees protecting traditional banks (versus the banking sector as a whole) as one of its core mandates.


My good friends at Rally Cap are a month away from launching Rally Cap Asia with a focus on Bangladesh, Pakistan, and Indonesia; to learn more, you can check out this deck or reach out to hayden@rallycapventures.com.

Rally Cap is building a global ETF of early-stage emerging market fintech, and they’re excited their portfolio has expanded to include:

  1. Asia

    1. Brick

    2. Elphinstone

  2. Africa

    1. Mono

    2. Pngme

    3. Termii

    4. Stitch

    5. Sudo

    6. RiseVest

    7. Kaoun

    8. Stealth (Egypt)

  3. LatAm

    1. Belvo

    2. Minka

    3. Divibank

    4. Cubo Pago

  4. Other

    1. Sydecar

    2. SimpliFi