Challenger banks — Bringing banking to your favourite device

4 min readJan 29, 2020


Challenger banks, aka Neo banks/digital banks, are small banks that seek to compete with larger and older banks by offering financial services in areas that the older banks have underserved. Typically, these neo banks provide digital/mobile-only banking services. Neobanks can either apply for a license to practice or partner with existing banks to offer their services.

There have been several categorizations of neo banks, however, the consensus is that they are cheaper, nimbler, tech-savvier and customer-oriented than the traditional banks.

Governments around the world are relaxing strict regulations to make it easier for new entrants in the financial services to thrive. Open banking regulations are an example of this.

Pioneers in the digital banking space including Chime and Monzo differentiated themselves and attracted a robust customer base by offering on-the-go banking services, while simultaneously reducing the relatively high bank charges, and in some cases, eradicating the charges. Challenger banks are able to earn money by charging fees on brokerage services like bills payment and the float earned from customers’ deposits, among others.

They are able to charge these lesser fees despite limited streams of income due to their significantly lower operational costs. Lowering their operational costs is possible because neobanks offer most of their services virtually, which reduces the need for physical branches and the cost of servicing those branches. For example, Kudabank, the first fully digital bank granted a license by the Central Bank of Nigeria, allows its customers to open a fully-functioning bank account online and cards are couriered to the user upon request.

The success of these pioneer digital banks has had a great influence on aspiring entrants into the digital banking space. These new entrants are adopting the bank-on-the-go with lesser charges strategy with great success.

A key enabler of success for neobanks is how they focus on niches rather than offering the whole bouquet of banking services. This enables them to build a differentiated brand quickly in a competitive market.

Notable among companies offering specialized financial services in Nigeria include:

  1. Payments and transfer: Opay, an app that has achieved notoriety by offering a bouquet of services including bike-hailing and food delivery, and offering massive discounts when users pay through their mobile wallet. The mobile wallet enables users to make payments using phone numbers as account numbers.
  2. Savings: Piggyvest, founded in 2016, accepts deposits from customers in the form of savings. The app is popular among the Nigerian working class who are attracted by its higher-than-banks interest rates.
  3. Lending: Carbon, formerly Paylater, offers loans to users with minimal documentation, no collateral, and the money arrives almost instantly.

The traditional banks are responding to the threat neobanks pose and protecting their place at the top of the food chain in several ways including:

- Leveraging on their existing customer base and scale to offer digital banking to their customers. JP Morgan’s Finn by Chase is a prominent example of these efforts. In Nigeria, the I-Invest app by Sterling Bank is fast gaining grounds as well.

- Establishing closer relationships with the group most likely to switch to neobanks; the millennials and Gen Z. Traditional banks are now reaching out to these market segments by building brand images that come off as youthful and forward-looking. It is not uncommon to see banks sponsoring events meant for youths and writing in a way that is relatable to the average young person.

While the competition is intense, the potential for partnerships is strong and more collaboration is expected to occur between digital banks and traditional banks.

Kaoshi is enabling success by partnering not only with traditional banks but also with new entrant digital super wallets like EziPay.

EziPay is a digital wallet in Ghana, and Francophone West Africa offering banking services to its users like bill payment and money transfer. It plans to offer loans in the near future. EziPay is also interested in providing financial services to the Africa diaspora. Kaoshi’s technology is leveraging Open Banking API to enable EziPay connect to the African diaspora and provide bespoke services that meet the needs of the Africa diaspora in their home countries — Bill Payments, ,merchandise financing, loans, insurance, investment, etc. Moreover, Kaoshi is licensing its technology (APIs) to EziPay to enable its users the opportunity to send money across borders, in a cheaper and more efficient manner. Kaoshi does this by providing a secure platform that enables direct peer-to-peer money exchange between EziPay wallet users and the diaspora.




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