Based on a foundation of airtime and person-to-person money transfers, an emerging second generation of Mobile Finance and Commerce (MFC) propositions is transforming Africa. The number of second-generation MFS products and services available to customers is growing rapidly. Their range and variety is widening, with the result that a broader section of previously excluded consumers have access to financial services. The infrastructure of mobile money has jumpstarted a new wave of mobile technology-enabled services including in the area of alternative lending. Mondato Insight spoke to several alternative-lending vendors and providers to discover how this new wave of services was shaping up against more traditional lenders, and what they can learn from each other.
The use of digital data for financial service is not new. Until recently, however, vast numbers of consumers in emerging economies lacked a digital footprint, the information from which could be used for their benefit, a phenomenon that limited their access to finance (an issue discussed previously in Mondato Insightshere and here). The humble mobile phone has fundamentally changed this dynamic, opening up access to more traditional financial services and products, and acting as a catalyst in the creation of new ones.
Obviously, the more functions a mobile phone can perform, the more and varied data it can collect, meaning that smartphones offer the richest treasure trove of information. Nonetheless, feature phones, which predominate in developing countries, also provide data points and information that can help financial service providers make informed decisions relating to the credit worthiness of applicants and tailor their product offering. For the poor in developing counties, practically all of whom use prepaid airtime credits, purchasing airtime may account for more than 10% of their monthly income. Analyzing the top-up patterns and usage of such customers can provide valuable insights about their financial situation.
There already exist today a wide number of lending products across many markets, such as M-Shwari, M-Pawa, Lenddo, AMP Credit Technologies, and Tiaxa’s Online Balance Advance. Benefits for the clients can include streamlined application processes, reduced documentary burdens, and potentially access to new services, as previously noted. According to a recent focus note from CGAP, there are three reasons for banks and other providers to offer such services. The first is the most obvious: this new information opens up novel avenues to new customer segments, as more and more previously excluded individuals qualify to use the service. More broadly, however, more data points mean the lender or financial institution is better equipped to manage risk, as they will have a deeper understanding of their clients’ risk profile. And finally, the abovementioned two reasons converge to allow a deepening of the lender-borrower relationship, with new opportunities for cross- and up-selling.
The opportunity is huge: by some estimates there is US$100 billion in unmet credit demand in Africa alone. The companies that are engaged in mobile-related lending come from a variety of sectorial backgrounds, and their solutions tend to reflect this, whether it is microfinance, telecoms, mobile money or banking.
Services can largely be grouped on the basis of a mix of their target market and business model:
|· Technology vendor
|· Partnership loan provider
It should be noted, however, that operating as both a service provider and a technology vendor is not uncommon. In the course of providing the service, the company can create case studies, which could later be used to facilitate additional sales of the technology. As an example, while both Lenddo and AMP started life keeping the loans on the balance sheet, they have since shifted to towards being a technology vendor, which is more scalable. Thus, banks, MNOs and other service providers have the option to partner with a company that can either provide the loans, or simply use their technology for credit scoring.
Where an individual company sits within the broader ecosystem will depend, obviously, on its own unique circumstances. So, for example, AMP is a technology vendor using traditional data to provide loans to underbanked SMEs. afb is a loan provider to unbanked individuals and SMEs. Lenddo is both loan provider and technology vendor using mixed credit scoring model to provide loans to individuals. Taixa sells to MNOs, while AMP only to banks.
Credit Scoring Models
|Mobile money data
Each company has their own proprietary model, mainly based on pre-paid mobile usage but also often a mixture of several of the above categories. For example, Casey Gheen, Director of Finance & Corporate Development at Lenddo recently explained that they “currently use data from six different social networks as well as mobile data via our SDK on Android and iOS… We also develop custom models which combine this social data with our clients’ data such as telco records, mobile wallet data and banking data.” InVenture, winner of the Mondato Award for MFC Innovation in Africa 2015, claims to use over 10,000 data points to make loan decisions in less than one minute. This process is facilitated by allowing greater personalization of loan amounts, from nano-loans (which, according to afb, in their business model can be profitable down to a loan size of 30 cents) through microloans and then growing to more traditionally-sized lines of credit worth thousands of dollars that may be available to SMEs from players such as AMP.
Barriers to entry
While data is now becoming available that didn’t previously exist, creating capacity to make use of it is a significant challenge. Data banks and the data scientists who analyze their contents and create the appropriate algorithms are expensive, and can act as a major barrier to entry in some markets. “Building a sophisticated data analytics capability is both expensive and time-consuming”, the CEO of AMP, Thomas de Luca, observed in a recent interview. “It requires specialist skills and knowledge that is not always readily available – particularly in certain markets.” New entrants also face the obvious, but not insignificant barrier, that they may have very little data on clients, compared to more established players. The continual accumulation of more and more data, and the concurrent refinement of algorithms and business models create structural advantages for those players who had first access to the data.
Not entirely surprisingly, banks have been slow to make use of alternative lending. They have tried and tested models of risk profiling that do not lend themselves well to nano- and micro-loans. New products can be confusing and because of the new technology that is involved, buyers do not always understand the product or the bases upon which decisions about their money will be made. “Banks should not feel they are outsourcing their most important decision to a black box” noted Jessica Carta, COO of First Access. “That is why we tailor our solution to each customer.” Clear communication from vendors is necessary to ensure that banks understand both what the new system and score is telling them, and how to intergrade the new product with their extant systems. If a bank does, however, decide to offer alternative lending to reach new customers or make current ones more profitable, they then have to discover which model works best for them, often on the basis of the following factors:
- Target market
- Sophistication of current risk assessment method
- Sophistication of current technology /core banking
- Need for and feasibility of integration
- Incorporation of third party system operations
- Risk allocation and loan operation
Only then can the appropriate vendor be selected.
Access to credit is an important part of the financial inclusion matrix, both in its own right and as an onramp to accessing the goods and services Base of the Pyramid consumers want to avail of: lamps, solar panels, smartphones, and agricultural loans, to name but a few. Vendors are working hard to expand their offerings, and it is unlikely to be long before we may see increased loan sizes and the introduction of other services such as insurance and utility or overdraft protection. There are many different models already available on the market, and any company considering implementing an alternative lending service needs to understand the specificities of their target customers and business model, and to align them closely with the most appropriate vendor/partner. Nevertheless, the alternative lending space is one that merits close observation as we move towards MFC 2.0, as it may help chart a useful guideline for the development of other services.
©Mondato 2015. Mondato is a boutique management consultancy specializing in strategic, commercial and operational support for the Mobile Finance and Commerce (MFC) industry. With an unparalleled team of dedicated MFC professionals and a global network of industry contacts, Mondato has the depth of experience to provide high-impact, hands-on support for clients across the MFC ecosystem, including service providers, banks, telcos, technology firms, merchants and investors. Our weekly newsletters are the go-to source of news and analysis in the MFC industry.
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Image courtesy of Got Credit.