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The Emerging Landscape of Digital Credit

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Alternative lending options have grown rapidly over the past 10 years. This deck offers an overview of digital credit and key takeaways from contexts around the world.

Published in: Economy & Finance
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The Emerging Landscape of Digital Credit

  1. 1. The Emerging Landscape of Digital Credit Maria Fernandez Vidal 100010110 1110 01 111 00 001 1111110001010111010101111111000101011101010100001010101 11110010010110100100111101010010 001011000000011110000001011 00000101110100010111011 101010101111010101 0100010000 01011 111 Presented at CGAP’s learning event: Customer value & Customer risks: Emerging issues in Digital Credit & Data Privacy, February 2017, Paris
  2. 2. 2 • In last 10 years: ‒ 800+ new alternative lending companies ‒ USD 9.5 B+ invested • Fast growth: >50% of total investment made in 2015 • 7 “unicorns” (SoFi, CreditKarma, Klarna, Avant, Prosper, Funding Circle, Kabbage) • Several IPOs (e.g. Lending Club, OnDeck) Alternative lending options have grown rapidly in developed markets over the past 10 years Source: Tracxn, “Alternative Lending Report”, Dec 2015
  3. 3. Payment account $ Data pool 0110101 1101010 0100111 0010011 Balance Sheet Access points • Diverse players • Deep data pools, multiple sources of information • Internet connectivity and smartphones universally available • Payments infrastructure (switches, ACH) that disaggregate the value chain and enable innovation Credit bureau, Social media, Internet Banks, Prepaid issuers, retailers, MNOs Internet, Smartphone apps, ATMs, ACH Numerous sources Developed markets Sub Saharan Africa MNOs BANKS Fin Co’s. In developing markets, especially in SSA, MNOs play a dominant role due to the lack of alternative channels to reach customers • In SSA, MNOs concentrate the key aspects needed to reach customers with a credit offering – except the balance sheet, but that can be a “commodity” accessed through a partnership or a lending license • In many Asian countries banks have a higher penetration in the low income segment Payment account $ Data pool 0110101 1101010 0100111 0010011 Balance Sheet Access points 3
  4. 4. What do we mean when we refer to digital credit? Defining attributes of digital credit Instant Automated Remote 1 2 3 • Loans are approved instantly, often within seconds • Individual decisions are undertaken without a one-by-one human review • Borrowers can receive funds and repay remotely without visiting a B&M location Additional characteristics of the space we are focusing on Collateral-free Direct to individuals Developing markets Targeting the Unbanked 4 5 6 7 • Collateral restricts access and generally requires an in person interaction • Loans for businesses and P2P have specific characteristics • We focus on Africa, Asia and Latin America • Products that do not require a prior bank account can reach the unbanked 4
  5. 5. Example: M-Shwari loan . . . 8 SEC Turn around time on account activation 6 SEC Turn around time on transaction processing Kenya (2012)Country/Launch Providers Deposit into mobile account Instant Automated Remote Collateral-free Direct to individuals Developing market No bank account 5
  6. 6. Though still concentrated in Kenya, Digital Credit is a growing trend across emerging markets Philippines DRC, Ghana, Malawi, Niger, Rwanda, Tanzania, Uganda, Zimbabwe Kenya Mexico Pakistan Indi a • Currently 22 live deployments globally*: ‒ 18 deployments in SSA ‒ 5 offer Credit & Savings ‒ 6 have >1 M users • Most: ‒ 2-4 weeks average tenor ‒ USD $10-$50 average loan amount ‒ Interest rate 6 – 10% for duration of loan • Estimated 24M+ subscribers ‒ About 15-25% active borrowers • For example, M-Shwari in Kenya: ‒ 13.5 M customers ‒ NPL = 1.7 % Note: These deployments strictly follow our definition of digital credit. If expanding the definition, e.g. not fully automated, P2P and SME lending etc., the number of deployments increases to 50+. As of January 2017 6
  7. 7. Successful deployments can scale up rapidly, as illustrated on the example of M-Shwari in Kenya and M-Pawa in Tanzania 2012 2013 2014 2015 M-Shwari Customers (Million) Includes savings and loan customers Nov 2012: M-Shwari Launch 2.9 9.0 12.5 M-Pawa Customers (Millions) May 2014 0.2 0.4 0.7 1.3 2.0 3.6 4.1 June 2014 Sept 2014 Jan 2015 June 2015 Dec 2015 March 2016 7
  8. 8. And have can lead to significant growth for the players involved Deposit Accounts (Million) Loans (Million) 2011 2012 2013 2014 2015 0.04 1.06 5.65 9.35 12.93 0.01 0.89 0.90 1.85 2.69 Source: Central Bank of Kenya Nov 2012: M-Shwari Launch Kenya 8
  9. 9. Digital credit deployments typically offer small, short-term loans, but there is some variation on the loan terms, amount, and pricing structure LOAN TERM: 4 weeks 1, 2, 3, or 4 weeks 16 weeks4 weeks Note: Data as of Dec 2015 USD $30 USD $10 USD $50USD $125TYPICAL LOAN AMOUNT: INTEREST/FEE: 7.5% monthly 0.5% a day 1.5% weekly None 10% initiation fee One time application fee of $2 if approved ADDITIONAL FEES: 5% handling Transaction fees for moving funds to/from wallet Kenya (2012) Tanzania (2014) Zimbabwe (2014) Philippines (2015)COUNTRY 9
  10. 10. Digital credit is primarily being used for day to day needs and emergencies Reasons for taking loans by selected institution type (%) Kenya, FinAccess 2016 34.2 6.7 14.5 10.7 18.9 5.9 3.2 40.9 8.1 10.5 11.8 46.2 5.2 1.8 6.8 5.8 15.2 3.6 45.9 10.5 36.5 21.5 17.1 8.2 11.5 40.1 34.1 51.5 37 36 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% House/Land Emergency Education Agriculture Business Day to day needs Banks Mobile banks Microfinance SACCOs Informal providers
  11. 11. There are unique aspects of the digital credit product that make it different from traditional products like microfinance Digital Credit Microfinance Type of loan Need being addressed Requirements Short term Short term liquidity need due to irregular income No collateral or formal proof of income generally required Medium term Financing for an asset to be used in a productive activity A business plan or functioning business and collateral are generally required Target Anyone that has a short term need for cash MSME owner, farmer, self- employed Breakeven loan size $10-$50 $300-$600 Breakeven interest rate ? 15%-40% Example: 11
  12. 12. This business model requires higher annualized interest rates to breakeven when compared to longer term loans Term 1 month Amount $20 Cost of capital 0.5% per month (6%) Operational cost per loan 10c Simplified example: Assumptions: Breakeven interest rate 12.2% per month (299%) Breakeven interest rate 6.3% per month (109%) Breakeven interest rate 18.8% per month (692%) 12 Default rate 10% Default rate 5% Default rate 15% Scenario A Scenario B Scenario C Note: Simplified example for illustration purposes only, should not be understood as an accurate description of the cost of a digital credit product.
  13. 13. NBFI + MNO NBFI scores, underwrites, and lends on own balance sheet MNO provides data, wallet and agents TIMIZA Jumo+ Airtel TANZANIA There are different types of partnerships in the market, depending on the role each player takes in the value chain Balance sheet Data pool Payment account Credit scoring Product Example: Bank / FI Mobile Network Operator Tech Firm/NBFI BANK + MNO + Tech Firm Tech Firm provides scoring service Bank underwrites and lends MNO provides data, wallet and agents Libiki UBA + Tiaxa + Airtel DRC BANK+ MNO MNO provides data, wallet and agents Bank scores, underwrites and lends MSHWARI Safaricom+ CBA KENYA BRANCH KENYA Tech Firm scores, underwrites, and lends on own balance sheet Uses MNO wallet and agents for cash-in and cash-out Tech Firm + MNO TELCO- LED MODEL TECH-FIRM LED MODEL Access points Tech Firm reaches customers, scores, and lends on own sheet Uses Internet footprint INTERNET MARKETPLACE KUBO* FINANCIERO MEXICO Internet / Banks *Requires previous bank account ownership 13 Smartphones or internet as the Access Point
  14. 14. • Smartphone penetration: The availability of a direct digital channel through smartphones or online enables the tech-led models to use apps as access points • Digital footprint: The availability of digital data on potential borrowers enables better scoring of applicants and helps manage the default rate • KYC requirements: In person KYC requirements limit the expansion of tech-led models and new entrants, that don’t have a physical channel they can leverage • Interest rate caps: Regulation on interest rates that considers digital short term loans in the same light as annual or multiannual loans can make the business model for small liquidity loans unsustainable, as interest is only charged for short periods of time and on small amounts • Lending license requirements: Simplified processes to get lending licenses can enable new players to enter the market without requiring a partnership with a bank, increasing the competition There are several factors that affect the business model and impact the growth and evolution of the market 14
  15. 15. • Digital Credit does not seem to be a passing fad, it is growing and becoming more mainstream, offering banks and other formal FIs a role in developing the digital ecosystem • Digital Credit offers a source of revenue for providers and a clear value proposition for customers, and therefore it has the potential to be a gateway product that strengthens the digital ecosystem by bringing in more users and providers to the space • It is leading to a new kind of credit market, where Telcos, banks, MFIs and Fintechs are participating, for a product that did not exist before but can fill an important need for low income customers • This new market poses new challenges for customers, providers and regulators, as it follows a different business model, it evolves at a fast pace and it attracts a more diverse group of players Key takeaways 15
  16. 16. Advancing financial inclusion to improve the lives of the poor www.cgap.org 16

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