Why Nigerian Neobanks Are Struggling to Turn a Profit

FAPOHUNDA GRACE

Nigeria's digital banking market has grown rapidly. Apps such as Kuda, OPay and PalmPay have made it easier for people to open accounts, transfer money, pay bills and access financial services without visiting a traditional bank branch.

Their growth is visible in customer numbers and transaction volumes. But behind the convenience is a difficult business question: how much money does a digital bank actually make from each customer?

For neobanks, attracting users is only one part of the business. They must also generate enough revenue from those users to cover the cost of processing transactions, maintaining technology, providing customer support, managing fraud, meeting regulatory requirements and acquiring new customers.

This is where the economics become challenging.

Although some Nigerian digital financial companies have made progress towards profitability, others continue to face losses or pressure to reduce operating costs. The problem is not simply a lack of customers. It is the challenge of converting customer activity into sustainable earnings.

1. Millions of Users Do Not Automatically Mean More Profit

Neobanks often attract customers with features such as free transfers, low fees, quick account opening, cashback and other incentives.

These offers help them compete with established banks and encourage people to try their platforms. However, acquiring a customer does not mean that the customer immediately becomes profitable.

A user may register, receive money and occasionally make transfers without keeping a meaningful balance or purchasing other paid services.

The company still has to maintain the account, secure the platform, provide customer support and process transactions.

This creates a difference between registered users and commercially valuable customers.

For example, a digital bank with five million registered users may have a much smaller number of customers who transact regularly, maintain deposits or use revenue-generating products.

The more important measures include monthly active users, customer retention, average revenue per user and the cost of serving each customer.

2. Customer Acquisition Is Expensive

Competition in Nigeria's fintech market makes customer acquisition a major expense.

Digital banks spend money on advertising, referral bonuses, promotions, partnerships and other campaigns to attract users.

They may also offer incentives to encourage customers to move their primary banking activity to the platform.

The challenge is recovering that spending.

Consider a simplified example:

A neobank spends ₦3,000 to acquire a customer through advertising and referral incentives. That customer generates ₦500 in monthly revenue before service costs.

Even if the customer remains active, it takes six months to recover the initial acquisition cost, assuming revenue stays constant and ignoring other operating expenses.

If the customer stops using the app after two months, the bank may never recover what it spent to acquire them.

This is why customer acquisition cost (CAC) matters.

A sustainable business needs the lifetime value of a customer (LTV) to exceed the cost of acquiring and serving that customer.

If acquisition costs keep rising while customer revenue remains low, growth can increase the company's losses rather than reduce them.

3. Free Transfers and Low Fees Put Pressure on Revenue

One of the biggest attractions of Nigerian neobanks is the promise of convenient and affordable banking.

Some platforms have built their customer base around free or discounted transfers and low-cost services.

However, payments are not free for the company to operate.

Depending on the transaction and payment channel, a provider may incur costs related to interbank transfers, switching, settlement, infrastructure, fraud monitoring and customer support.

When customers make frequent transactions but pay little or nothing for them, the company must find another way to cover those costs.

Traditional banks and digital financial institutions can earn revenue from several activities, including transaction fees, commissions, lending, investment income and other financial products.

For a neobank that relies heavily on free transfers, the challenge is building additional revenue streams without making its services unattractive.

The economics become especially difficult when competitors offer similar services at comparable or lower prices.

4. Small Revenue Per Customer Can Be Difficult to Scale

Another challenge is average revenue per user (ARPU).

ARPU measures how much revenue a company generates from an average user over a particular period.

A neobank may have millions of customers, but if each customer generates very little revenue, the company needs a large and consistently active customer base to cover its costs.

For example, imagine a digital bank with one million active customers generating an average of ₦500 in monthly revenue each.

That produces ₦500 million in monthly revenue before operating expenses.

The company must still pay for technology, staff, compliance, payment infrastructure, fraud prevention, marketing and other costs.

The lesson is that a large user base can create impressive revenue figures without guaranteeing a positive bottom line.

Neobanks need to increase the value generated by each customer, not just the number of people downloading their apps.

5. Lending Can Generate Revenue, but It Introduces Credit Risk

Many digital banks are expanding beyond payments into overdrafts, personal loans and business credit.

Lending offers a potential source of interest income and can improve customer revenue.

However, it also introduces a different set of risks.

When a customer fails to repay a loan, the lender may lose part or all of the amount advanced. It must also spend money on credit assessment, collections, risk management and regulatory compliance.

A lending product can therefore generate significant interest income while still producing losses if defaults are high or the cost of funding and collections is too expensive.

The Nigerian market presents additional challenges because customers and small businesses operate under changing economic conditions, including inflation and pressure on disposable income.

This makes credit assessment particularly important.

A neobank cannot simply increase lending volume and assume that profitability will follow. It must lend to customers who can repay, price risk appropriately and manage defaults.

6. Technology, Fraud Prevention and Compliance Are Continuous Expenses

Digital-only banking reduces the need for a large branch network, but it does not eliminate the cost of running a financial institution.

Neobanks must invest in:

Technology infrastructure: Servers, cloud services, app maintenance, cybersecurity and payment systems.
Fraud prevention: Transaction monitoring, identity verification and systems for detecting suspicious activity.
Customer support: Staff and systems to resolve failed transfers, account restrictions, disputes and complaints.
Regulatory compliance: Know-your-customer checks, anti-money-laundering controls, reporting and regulatory requirements.
Business continuity: Backup systems, security testing and infrastructure that keeps services available.

These costs do not disappear when transaction volumes are low.

In fact, maintaining secure and reliable financial infrastructure can require significant investment even before a neobank reaches the scale needed to spread those costs across a large customer base.

For companies operating in a regulated sector, cutting these expenses too aggressively can create operational and compliance risks.

7. Naira Volatility Makes Financial Performance Harder to Manage

Currency volatility adds another layer of difficulty, particularly for fintech companies that raise foreign investment or report consolidated financial results in dollars.

A company may generate more revenue in naira but report lower revenue in dollars if the naira weakens against the US dollar.

This can affect investor assessments, financial reporting and the cost of technology or services priced in foreign currencies.

Kuda's reported 2024 financial performance illustrates this issue.

BusinessDay reported that Kuda's Nigerian subsidiary nearly doubled its revenue in naira terms to ₦21.2 billion, while group revenue declined 15% in dollar terms to $18.34 million.

The company also reported a loss of approximately $5.83 million for 2024, compared with $35.11 million in 2023.

This shows why local revenue growth does not always translate into stronger dollar-denominated financial results.

8. The Kuda and OPay Examples Show Different Paths

The financial performance of Nigerian digital financial companies demonstrates that profitability is not a universal outcome.

Kuda: Narrowing losses

Kuda's reported 2024 financials showed a significant reduction in losses, supported by lower operating expenses and restructuring.

BusinessDay reported that its group loss fell from $35.11 million in 2023 to $5.83 million in 2024. Its other operating expenses also declined substantially.

The figures suggest that controlling costs can improve a neobank's financial position, even when revenue growth alone does not resolve its profitability challenges.

OPay: A reported return to profit

OPay provides a contrasting example.

According to Nairametrics, OPay reported revenue of approximately $536.25 million and a net profit of $72.47 million for FY2025, reversing a reported $50.98 million loss in FY2024.

Its reported growth was supported by increased transaction volumes, user activity and lending.

The comparison matters because OPay operates across a broader financial services model, including payments, savings and credit. Its results should not be treated as proof that every app-based bank can achieve the same outcome.

Together, the examples show that profitability depends on the combination of revenue sources, operating costs, customer activity and risk management.

9. What a Sustainable Neobank Business Model Needs

For Nigerian neobanks to build sustainable businesses, they need more than customer growth.

Several factors are particularly important:

Higher customer lifetime value: Customers should use multiple useful financial products over time, rather than only opening accounts for free transfers.

Diversified revenue: Income from payments, lending, business banking, commissions and other services can reduce dependence on a single source.

Lower customer acquisition costs: Referral campaigns and marketing should attract customers who remain active and generate sustainable revenue.

Responsible lending: Credit products need reliable risk assessment and collection systems to prevent defaults from wiping out interest income.

Operational efficiency: Technology, staff and customer support costs must grow more slowly than the revenue they help generate.

Trust and reliability: Customers are more likely to keep their money and conduct regular transactions on platforms that resolve problems quickly and protect their accounts.

Conclusion

Nigerian neobanks are not struggling simply because they lack customers. Their bigger challenge is making the economics of digital banking work.

Free transfers, low customer spending, expensive acquisition campaigns, fraud prevention, technology investment, regulatory compliance and credit losses can all put pressure on margins.

The experience of Kuda and OPay also shows that the sector is not moving in one direction. Some companies are reducing losses, while others have reported profitability.

Ultimately, the strongest digital banking businesses will need to prove that they can turn customer activity into consistent revenue while controlling the cost and risk of serving those customers.

DIGITAL BANKING

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