When Branch was launched in Nigeria in 2017, it was a single product business with a money lending license to provide loans to individuals. Loans start from 1,000 (~ $ 2) and gradually increase to 500,000 (~ $ 1,200) as the borrower repays.
Four years, 40 billion yen (~ $ 97 million) and three million loans later, the business is changing.
The company, which also operates in Kenya, Tanzania and India, acquired a Nigerian microfinance banking license this year. In doing so, Branch joined the growing number of Nigerian fintechs that are becoming digital banks after a few years in the nursery of lending applications. Carbon and Fairmoney also fall into this category.
Branch mobile application (available only for Android) now includes a wallet that offers users unlimited money transfers and commission-free bill payments, in addition to instant loans (it’s pretty instant; I’ve tried it more than once between April and now) which are guarantees- free.
But the Branch function that attracts attention is the “Invest” tab. By clicking on the button, users are prompted to “Earn 20% per year by investing with Branch”.
For example, a user who keeps 1 million yen in this product for an entire year receives a minimum of 200,000 yen. Returns are paid every Monday and if left in the branch wallet they are dialed for the next payment.
20% ?! How can they deliver this?
You are not alone in asking. This was the first question that Dayo Ademola, Managing Director of Branch Nigeria, faced. on CNBC in May. It was also the main curiosity during a Zoom call with reporters earlier this month.
According to a June 18, 2021 Central Bank of Nigeria Fact Sheet, Heritage Bank offers 13.88% on term deposits, the highest of all Nigerian deposit banks. But that’s an outlier; Access Bank’s 7.28% rate is roughly the average rate.
Zenith Bank’s 3.94%, although one of the lowest, is better than that offered by Stanbic IBTC, Standard Chartered and First Bank. So how can Branch, a startup, go so high in investing in retail?
Investing capital, low costs
To assure clients that their funds are safe, Ademola explained that the CBN Branch’s financial money license allows them to offer money management services and that they “only invest client funds in major securities and low risk securities “.
It does not specify what these titles are. Low risk securities could be government treasury bills. But since virtually all other banks make the same request and the yield of instruments like treasury bills are stifled by inflation, Branch’s extra margin must come from elsewhere.
So, on CNBC and on the call with reporters, Ademola offered two reasons why Branch can afford his promise: investor capital and a lean, profitable business operation.
“Our investors do have a long-term view of our business in Nigeria,” said Ademola.
By this, she underlines the fact that Branch, which is a company based in San Francisco, was funded, among others, by the International Finance Corporation (IFC) and Andreessen Horowitz (a16z), one of the largest capital investments -risk of Silicon Valley. companies and early investors on Facebook.
Both organizations participated in two major rounds of funding for the Directorate – one $ 170 Million Series C Round in April 2019 and a $ 70 million Series B a year earlier, drawn to Branch’s brand as a “$ 2 loan” service for emerging markets. $ 50 million of this increase 2018 was a credit facility from a business that focuses on alternative credit.
VISA is also an investor in Branch and has led their expansion in Nigeria. But beyond relying on capital from investors, Ademola said Branch is able to depend on its loan record to support other ambitions. “Our lending business is profitable here.”
This profitability, she explains, was possible due to the reduced cost of not having to operate physical bank branches across Nigeria.
“We operate on a lower cost structure than your typical commercial bank and are able to pass some of these savings on to our customers,” said Ademola.
Better than your bank?
Branch Nigeria’s pitch is therefore that it is “better than your bank”.
Digital banks tend to tease variations on this tagline – Kuda, for example, is the “Free bank”. But as Ademola said, no other Nigerian fintech startup offers a 20% annual return on investment products.
Carbon offers a number of options that offer between 9-11% revenue. There is no investment product on Fairmoney yet.
Because I borrowed easily from Branch, there is a call to adventure with their bold investment request. But it may be necessary to approach promises of high returns with caution.
“Fintechs do not have cheap deposit sources in the form of current and savings accounts (CASA), so they may try to attract customers with high yield deposit products, but maybe to high risk, “Adedayo Bakare, investment analyst, told me.
While a 20% return is an attractive reward, it also signals the high-risk nature of the models fintechs must adopt to beat banks. “Higher risk is also the reason they charge borrowers high rates on loans. Because it is not backed by guarantees, ”adds Bakare.
In fact, Branch microloans charge an interest of 20%. A loan of 2,000 2 (~ $ 5) for one month, for example, will be repaid with 2,400 – an interest rate of 20%. In contrast, Guaranty Trust Bank is able to lend to its customers at a monthly rate of 1.5%.
And what about investor capital as a pillar? Bakare is skeptical: “If you look at the funding structure of banks, investor capital is not even up to 30% of funding in many cases. ”
Reach all smartphones
The branch does not have audited accounts in the public domain showing their non-performing loan ratio (NPL) and capital adequacy ratio (CAR).
The two figures would give a clearer picture of the performance of their three million loans. Based on its profitability and investor capital, it would appear that both indicators are healthy.
It will then be interesting to see the reaction of clients to the newly launched investment offer. Nigerians have fallen for Ponzi schemes at an alarming rate, suggesting that legitimate platforms offering high returns may find an audience.
Ademola, who became Branch’s managing director for Nigeria in March, believes in being the country’s go-to platform, expanding financial access wherever a smartphone receives an internet signal.