The $1.30 Customer: Affinity Africa

Thanks for making the trek all the way out here.

That's right, that's true.

I did not tell you about it, though, full disclosure. You're a journalist, you did your research.

Not directly. The entire fund was 160 billion. I had a small allocation that was investing in financial services.

Bank. That's true.

Well, I'm from Ghana, for those of you who don't know, so it wasn't a random decision. My parents were still based in Ghana. I moved to the UK when I was 12. I worked in financial services, like you pointed out, investing in financial institutions. But before deciding to get that experience, what I actually wanted to do was try to understand and explore how financial services can have a positive impact for socioeconomic development. Initially the idea was actually starting a fund that would invest in Africa, as a way of creating companies and jobs, dignified jobs. And then this morphed, after I quit my job and moved back to Ghana, into the idea of actually starting a bank, because I felt like the impact multiplier of starting a bank is a lot higher. Instead of giving cheques out to two or three companies a year, at the moment we're actually deploying over 1,500 loans a month. So the impact multiplier was much higher, that was the reasoning behind it.

I guess I like a challenge. My whole life has been about looking through things, whether it was physics, or working in the field of sports and trying to do the impossible, things that needed a lot of endurance. Banking is difficult. Being in a regulated space is very difficult, as I'm sure you know as well. And so I thought to myself, the reason this has not been solved for the African continent is because it's difficult, and that's a terrible excuse. So I decided to go after it. But I can understand why a lot of people have tried in the past and have failed at it.

There's a fourth level, where there's more than one expletive, and that's where I probably sit.

Sure. So I'll start off with one statement, and that's that the challenges of setting up a bank, it's not harder in Africa than it is elsewhere in the world. It's very, very difficult setting up a bank here in the UK as well, right? Until the financial crisis hit, and was it Metro Bank? I think that was the first challenger bank that popped up here. I think no banking licences had been issued for like over a hundred years, or something. You have to do the research and quote me on that.

I think that was right. So I think the first thing is that it's not an Africa-specific challenge, starting a bank, it is a global challenge, because it's a very highly regulated space, and the hurdles are really high. Because if you want to fundraise, you have to have a proof of concept; to have a proof of concept when you're a bank, you have to get a licence; to get a licence, you need funding, which you need to fundraise. So it's sort of a chicken-and-egg situation. So the first thing I wanted to say is that it wasn't an African-specific problem on the regulatory side, but that's obviously a hurdle.

No, we're highly regulated, and we have approvals from the regulator to do what we do. So we can't, when it comes to KYC, "know your customer," these things are very important. So there are a couple of things. Number one, you need to understand the context of how customers behave in that segment of the market, and design for it, especially your risk frameworks. So we managed to convince the regulator that what we're doing is lower risk, and as a result, most of our customers are not going to do money laundering, because, maybe I can show you a photo of what our customers look like, but it's a typical profile of an informal worker. The second thing, as well, is we're a digital bank, so we use technology to solve a lot of this problem. And that's very important, understanding customer behaviour. For example, when you make a ton of transactions on one of the neobank apps that you're on, I don't know if you have an account with, like, a Monzo, sometimes you get blocked if you're trying to make a payment, and something weird has happened, and they need you to verify your ID, so you sit there and take a selfie. I don't know if it's happened to you, but it's certainly happened to me before.

And the reason that happens is because they know Ian. They know how much Ian earns. If something looks unusual in Ian's behaviour, it has nothing to do with other people's behaviour, because he has, let's say, too many inflows this month, because you've done a great job at all the contracting gigs you're getting, or a really large outflow, "Holy smoke, somebody might have stolen your card", they block your account to protect you, and then ask you to clear KYC again. So you can use that same behaviour to try to mitigate any risk when it comes to our banking customers. But you have to understand the behaviour of that customer. Because if you take a look at a salaried individual, they earn a salary every month and then they have outgoings every month, rent or mortgage, travel, their groceries or whatever. For the informal segment of the market, it's different. You flip it around. So we get lots of inflows, not just one outflow and one inflow. On average, between 20 and 25% of our customer base deposits with us each month. That's not because they earn a salary every four days, right? It's because they run small stores, and the inflows they get from those stores actually come through. So you need to understand the behaviour, and you can use tech to adjust and profile risk on the basis of that.

Very important.

So the opportunity is twofold. It's a commercial opportunity, because we're all kind of private-sector workers and we have investors, and we need to generate a return for them. The second is a social opportunity. Both matter to me. For some of my investors, the former matters more than the latter, and for some, the latter matters more than the former, social enterprise, for-profit. And so we're happy that we can tick both of those boxes. The reason I think it's important to focus on the social side of things is because, well, let me start with the commercial side. Banking is one of the most profitable sectors in the world, and the African continent is the only continent in the world where penetration is so low. Penetration is at 40%. That's nuts, that's absolutely crazy. If you're a digital bank here in the UK, you're trying to convince Ian to switch from HSBC to Monzo, basically. Whereas if you're a digital bank in Ghana, we can grow the pie, because we're actually going after a segment of the market that has been excluded. And it makes commercial sense to do so, because banking is a very profitable sector. The other thing I wanted to say is, we focus on inclusion because we also think it makes commercial sense, because we're growing the pie. We're not coming in and piling in with all the other big banks in Africa that have banked, basically, the top of the pyramid. We've decided that financial inclusion is one of our identities, and it matters to us not just from an inclusion and social point of view, but also from a commercial point of view, because we're going after 80%, pretty much, of the population in Ghana.

The last thing I wanted to say, which is very important, is that people often talk about the penetration of bank accounts in Africa. The World Bank, the UN, McKinsey, tons of reports keep coming out about the opportunity. One thing that I learned recently, through our regulator, in a workshop we were at with them: if you take a look at private credit, so, loans, in OECD countries, divided by GDP, it's over 100%, which means in a country like the UK, there is more supply than demand for loans. Which is crazy, you've got over 100% penetration. If you take a look at the African continent, it's 27%, which means you can grow this by over threefold. And then, with a country like Ghana, which on the credit side does below the average of the African continent, it's as low as 8%. Which is crazy. It's nuts.

Sure, absolutely. So our customer acquisition cost is very low. I was actually on a call, was it yesterday, with a woman who founded a digital bank in the US and exited it, and she was bragging about how low her customer acquisition cost was, at $10, whereas with the average bank it's about $150, by the way. So it's relative.

It is very impressive, right? I had to do a bit of a mic-drop moment and say, for us, it's between $1.30 and $1.50. And it's not because we're doing anything unusual, it's because the fintech market on our continent is so nascent that we had to build everything from scratch. So typically, if you were to look at setting up a bank and opening an account for an individual, let's say you were going through an account-opening process flow with Monzo, you'd have to download the app, take a video selfie. They're probably using a partner for that. There are some big partners in Europe that partner with banks to do video selfie, ID recognition, OCR scanning of your ID card. So there's video selfie, OCR scanning of your ID card; you enter your email address to get a verification, that's another partner they partner with; you get a one-time password on your SMS, for your code. So these are all suppliers and service providers you're paying for. You add that all up, plus marketing on top of that, and you've got whopping customer acquisition costs. In our part of the world, and in particular in Ghana, these partners do not exist. We reached out to the European ones and they were like, "We don't do ID verification in Ghana. I don't think our compliance team would even let us operate in Africa, it's too high-risk." So we actually had to build it ourselves. What that means is it took longer for us, and the tech is obviously a bit more complicated in terms of what we built, but it also means that we don't have those fees for every single one of those API calls when we do ID verification. And as a result, it actually gave us this benefit in the end, that reduced our customer acquisition costs.

It is correct to assume, it's relative, right? So, let's say, typically, if your customer acquisition cost of an Ian in the UK is $150, sorry, I'm putting you in a bucket.

Factors of Ian. So it's $150. If you walk into a Lloyd's here and they look at you and go, "Oh God, there's another Ian walking in, he's going to cost us $150 to open an account," and they ask you, "Great, you'd like to open an account, what's your salary?" they're thinking, "Okay, if your salary is 1,000 pounds, I really hope it's not, I hope it's more than that, and a typical Ian has outgoings of, I don't know, 900 pounds, it means at the end of the month he's going to give us 100 pounds." That 100 pounds, he's probably not going to borrow, either, because he's not creditworthy with his small, abysmal salary. So as a result, if we collect that 100 pounds and place it on loans elsewhere, and we're lending a mortgage at whatever, what's the mortgage now, like 3%, 3.5%, 4%? Let's make it easier, let's make it 5%. So it means that Ian generating revenue for us on his 100 pounds each month is five pounds, that's annualised. So five pounds divided by 12, so 60p. Is that right? Am I doing the maths right? Anyway, I don't actually know, but it's a very low amount of money. You're not generating that much revenue for them. So now they're thinking, "Okay, he costs us 100 pounds to open this account, he's generating a pound of revenue each month, which means he's going to pay back in 100 months. So, no, we cannot accept Ian as a customer, because he's only earning a salary of a thousand pounds." However, now, if Ian walks through the door and is still earning a thousand pounds, but his acquisition cost is basically a quid, a pound, which is what it is for us, then it makes you commercially viable to bank, because your payback for that acquisition cost is one month. And so that's what's happened with us. Our balances are not as high as high-net-worth individuals' or whatever, but because we've acquired these customers for such a low amount of money, it makes them basically commercially viable to bank.

It depends. It's roughly between 0.6 months, it's on my laptop over there, I can tell you what the number is, the range is between 0.6 months and about 4.2 months, roughly. So let's say between one and five months.

Yeah, that's very important. So, I remember when I worked for the hedge fund here in the UK, we'd spend all our time trawling through data and trying to extract information that would give us an edge over our competitors who are investing. And there was a lot of data to go through, so much of it that you could spend hours and hours creating these models and algorithms to try to figure out what to invest in next. Now imagine coming to our part of the world, where these customers, these individuals, as I said, the majority of the population are offline. There's no data on them. So the first step is: how do you collect data? So the way it works with us, and the reason we have such low default rates, and, I guess, success, is that we bank our customers. We give them the best products on the market from a banking, from an accounts point of view: we have no monthly fees, we have high interest rates across all accounts, we provide interest on accounts that's even better than the traditional banks in Ghana. And then we use their behaviour information, not just on the risk and KYC side we discussed earlier, but also on affordability. And as a result, we can quantify what the risk of default is for that individual, credit-score them, and extend a line of credit to them. So, roughly, it takes about three months to convert a customer to becoming a borrower, and then, once they start borrowing with us, we unlock a small amount of credit to them, and we grow it over time. As they de-risk even further, we reduce the interest rates, increase the size of loans, and also increase the tenure.

It's a very difficult comparison to make, so maybe I'll talk about it in the context of Ghana. So the non-performing loans in Ghana at the moment are relatively high. We've had a difficult few years, last year was a great year for Ghana, where our currency performed very well, inflation went from a whopping 68% to, I think it's less than the UK now, believe it or not, so we're outperforming the UK. And so there's a hangover, basically, of a very difficult credit cycle. So non-performing loans were at a peak of almost 30%; I think they've just dipped below 20% right now. Our default rate is less than 2%, despite that. And that's because we're going into a market where it's new, we're extending lines of credit to new borrowers, and also everything is digitally driven, so we have the insights, the information, the ability to adjust quite quickly in terms of how we disburse our loans.

So it was an intentional target. And it's funny, because I was working with the product team a few years back as we were designing our app and our outreach channels, and we designed a very swanky app, it's not the app we use right now; our app right now is quite muted, but it was a very swanky app. You swipe left and right; it kind of felt like a mashup between Snapchat and what is now TikTok. We presented it to our customers, and before even launching, it wasn't live, it was a dummy app, we just filmed them, and we asked them very basic things, like "Change your PIN, make a transfer, a payment, open a new savings account," et cetera, and they didn't know how to interact with it. And then we realised, basically, that their relationship with financial services and tech was very different to the one we understood. And we noticed that women in the informal sector were the most risk-averse. Even though they qualified for loans more than men did, even though they had more money than men do, they were just really, really risk-averse. And as a result, they didn't want to interact with it, they weren't first movers, they weren't early adopters. They were thinking the entire time, "If anything goes wrong, there's less food on my table for my family. I can't pay my kid's tuition. I cannot take any risk." So it was an intentional strategy that made both impact sense, but also, on top of that, commercial sense, to try to solve for that use case. Because we thought, if we solve for the use case of women in the informal sector, we solve for all the other use cases at the top of the pyramid, being men in the informal sector, who take the most amount of risk. The Ians of this world.

Of course. And maybe I'll tell you a story, I haven't actually thought about this in a while, but when I first moved to Ghana, like a decade ago, before the idea of actually starting Affinity happened, I did a bunch of not-quite-internships, but kind of consultancy gigs, with a bunch of financial institutions, like payday lenders, and actually not even just financial institutions: internet service providers, a tech platform, an incubator, an affordable housing fund. And one of them was actually a microfinance institution. And I remember, when I was following the loan officers, MFIs are very traditional institutions now, they've been in existence for decades, you have this sort of officer that walks around with a clipboard and a printed-out Excel spreadsheet, and they go, "Hey, Ian, do you want to deposit today?" and you're like, "Yeah, sure, here's a dollar," or "I'm going to pay my loan, here's $10 back." So you're doing high-volume, very low-value transactional business. And I walked around with these officers who were extending lines of credit to people, and most of them were first-time borrowers. And there was such a fear that someone had stuck their neck out to give me a loan, that their priority was always back-of-mind: "Pay back that loan, pay back that loan." So there was seldom any default on that first-time borrower, unless it was something grave, like illness, or any sort of macro shock, like COVID, obviously, where they lost their income. Not because it was out of malice that they'd want to default and abscond from their loan. But what changed is when they got desensitised to that loan. So the first loan was always okay, the second loan was always okay, the third loan. And usually, if they did pay back their third loan, in the future they would always be good borrowers. It's that third loan that always gives you the insight as to whether or not the personality matches the willingness to pay, not just their ability to pay.

I think bank branches are on the way back as well, now, right, here?

There are a lot of cities in the North, apparently, because of an ageing population, where people are panicking, so they're creating these hubs where, if you go in on a Monday it's a Lloyd's, if you go in on Tuesday it's an HSBC. I don't know if you've been following this, but anyway. So, on the question of our customer sophistication, I don't want to use the word "educated," because our customers are really, really good at running their business. But I think most of my friends don't even know what an APR is, or what a reducing balance is on a loan versus a flat interest rate. Or, I don't think my mom knows what inflation is, frankly, even when she went to university, it's just of that demographic. So there are two ways in which we educate on our products. The first is via the app, and the second is via the agents. I'll touch on the agents first. Before we launched our platform, our app, at the end of October 2024, we had an agency network, we had about 30 agents, and we had an app that was internally facing. So if I was an agent and you were one of our potential customers, I'd go up to you and go, "Hey, would you like an account?" You'd say yes, hopefully. I take a photo of you, I tag where you work, I fulfil KYC for you, you get a text message, and you can basically use the account. That agent was there to educate you on what Affinity was. So instead of trawling through the website, or looking at marketing on the Tube or on Instagram, that agent would sit there and actually sell Affinity to you, and say, "Look, there are no monthly fees, there's great interest on our products, there are high-interest-rate accounts, the barrier to entry is really low because the minimum deposit is minuscule, so with very little you can actually open a bank account, you can qualify for a loan. Are you interested? I can show you how to." So that was very important, we acquired, I would say, almost 30,000 customers just on that platform, after operating it for a couple of years before we launched the app.

I think word of mouth is probably the best thing, frankly. So, I gave that example about how many customers have been onboarded on the agency side who've now switched to the app, predominantly, most of them have. We're about to hit 130,000 customers on the app itself, that we launched 15 months ago, and the majority of that was true word of mouth. So, for example, I download the app, I fall in love with the product, I go home to my spouse, my kids, my mom, whoever it is, and say, "Have you used Affinity? It's great, let me show you how to do it. It's so great, you can pay your bills, you can make a transfer, you can create a savings product with a target and a goal, you don't get charged any penalties or fees, no monthly fees. It's a fantastic platform." So most of it has come through word of mouth, because we've actually created something that maybe customers in the Global North take for granted, but in the global majority is relatively new.

I actually wrote an article about this, by the way. I'll send it over to you.

I'll share it with you. So I'll tell you something that's even more shocking. It fluctuates, right, 1% is on the lower end; I think the maximum it's ever been is 3%. Even though we're a large proportion of the GDP of the globe, let alone the fact that we're the youngest continent when the rest of the world is shrinking. What's even more shocking is that the LPs behind most of these funds are actually not African, and I think that's a big part of the problem. And I think it is changing. A country like Ghana, for example, regulation has changed, allowing pension providers now, by law, to invest in VCs, which is fantastic, because we need to unlock our own capital. And it's important, because it's not just about growing that capital base to support initiatives and innovations; it's also very important because investors who are from the African continent really understand the problem that innovators like Affinity are trying to solve for. And as a result, the alignment of values and trust and patience is much higher than trying to go out to the US to convince a US VC to give you funding for a really large opportunity, but for a problem that is very specific, that cannot be solved the same way a digital bank in the US or the UK would.

I've been very, very lucky, because I've been, I would say, unlucky. And the reason I say that is because I've been at this for quite a long time, because getting a banking licence is not easy, we're the first licensed bank in Ghana in 15 years. And so, as a result, I've spoken to a lot of funders, and with experience, I've been able to understand those who understand what we're building versus those who don't. The second thing, I've been quite selective, and I would say we've turned away some capital in the past on the basis of a misalignment in terms of strategy. The third thing, which is very important, is that we're a balance-sheet-driven business. We lend.

And most VCs don't like that. Most VCs like payments platforms and companies, because that's highly scalable, acquisition is much easier, transaction volumes are very important. Whereas with us, it's different, we make the majority of our revenue off lending, which is why we provide most of our products on the account side for free. Now, the only ones that have the capacity to invest in lending businesses are those that have tons, and I'm talking about decades, of experience in investing. So, as a result, when you're having a conversation with those sorts of investors, they understand it pretty quickly, and they understand the difficulty when it comes to lending. They also understand the patience behind it, because you can't throw out a loan product on day one, if it defaults, then you're screwed. Whereas with us, as I mentioned, it takes at least 90 days to actually build a credit score for our customers, so there's a lag in revenue. And most of our investors, well, all of our investors, most investors that invest in balance-sheet-driven businesses, understand that and look for it when they do due diligence.

Also, they tend to have deeper pockets, by the way, so the funds tend to be quite large.

Plus all the African funds as well, which is very important.

Because your name is Ian.

No one's ever asked me that question.

I'm going to give you one answer as I think through a second one, so hopefully I can juggle both in my head.

I love it. So, let me talk about digital banking in the Global North. A Starling Bank, a Revolut, or a bank in the US, all those that have banking charters, and I'm assuming Revolut got their banking licence here now anyway, most of them started off by acquiring a ton of customers to begin with, doing some money on upselling with transaction volumes: "We'll give you very cheap rates if you use your card abroad, we'll try to upsell you a metal card by you paying us 10 pounds a month extra." And then now they're getting into the process of trying to figure out how to lend, because that's sort of the ultimate goal for a digital bank. So the difficulty there is that a lot of these institutions don't have lending experience. And that needs to come from those that have deep banking experience, which tends not to tie in, culture-wise, with a fintech or digital bank. A lot of them have tried and failed, because it's not a proven model yet. The second thing is that a lot of these neobanks, the majority of their customers are actually not their primary bank, which is very different. So I think one of the lessons that can be learned from the Global South, not just through Affinity, because I have peers I respect in Brazil and Nigeria and other countries too, is because we're growing the pie, we've actually built a full-fledged digital bank. And I would be as bold as to say we're the first continent in the world that has done that, where we're going after a customer base and we're actually not credit-led, we're actually full-banking-services-led, but from a revenue point of view, it's off balance sheet. And that's something that's very unique. It's quite fascinating, because I have a mentor of mine, I hope he doesn't mind me saying this, called Colin Walsh, and he's the founder of Varo Bank. I'm having dinner with him next week. And we're now talking about lending, and how we do it in a certain way at Affinity, and how countries like the US can learn from an Affinity. It all starts with building towards a customer base that isn't banked to begin with, so you're actually capturing them, and capturing the full pie with them.

I'm reading your notes, that's why.

I can't see it.

Yes, yes I did.

No, just one, that I've come out of. Full disclosure.

Yes, that's right.

I did finish it. Sorry.

Yeah, I did a postdoc for a couple of years, and then I left, basically, on the back of that, and moved into the private sector, because I just decided academia was not for me at the time. I'm back dabbling into it now, which is a lot of fun, but obviously the dynamics are very different. I think any founder out there would tell you that endurance is very important. It's even more important in our part of the world, because there's a lot less, as I'm sure you know, but the opportunity is a lot larger as well, because, like I've already mentioned, where in the world will you get one of the most profitable sectors that's so under-penetrated?

Solving this problem. And giving something back as well, that's very important to me.

So, we closed the fundraiser round a couple of years ago. Hopefully sometime later this year we'll go back into the market. We've had some really, really good traction over the last 15 months, as I mentioned, 130,000 customers now. We were doing about 200, 250 loans a month a year ago; we're over 1,500 now, which is great. So, firstly, we want to double down on the market in Ghana. And then, secondly, it's Affinity Africa, it's not Affinity Ghana, so we're beginning to think through what our international expansion looks like as well.

All domains registered, so no one can take them.

Just that I'm always open to conversations. So if anyone's listening to the podcast and anything resonates with them, whether you're a founder, a donor, an investor, or someone who's just curious about Africa, please feel free to reach out to me. Always happy to have conversations.

Thanks again.