From Access, To Quality, Purpose then Literacy There is no doubt that digital mobile lending is one of the most transformational innovations – greatly enhancing financial inclusion among the base of the pyramid and giving dignity to a class of borrowers that are otherwise shunned by traditional lending models.
Credit is now a transactional utility to a mass market in Kenya largely because of the developments in mobile payments with an efficient money distribution infrastructure – mobile money, but also the prevalence of mobile technology and availability of data online and real time. Getting a loan within seconds directly applied and disbursed to your phone is already a reality.
As more fintech ventures and the banking incumbents join in this new model of lending, many questions, concerns and strong opinions have risen along customer education, protection and indebtedness; far from the noble intended ambition for financial access and inclusion and the great technology right at the heart of it.
This demonstrates a pivotal point of maturity in this new model of lending.
A recent research study by CreditInfo revealed that 98 per cent of these loans have been offered by Banks with over 12 million contracts to over three million customers. It is at this point then to take time to ‘climb a tree’ and see the forest for the trees.
Two product come to mind - Payday Loans and Credit Cards.From acceptance and performance perspective, the most innovative financial services of our time has to be the credit card. It stemmed from as early as the 1900s when American Express was a delivery company issuing money orders and travelers cheques while departments stores issued credit using charge plates, the predecessors of credit cards.
Credit cards managed to converge two core functions of financial services: offering credit, and making a payment for goods or services.
Credit cards have been successful in developed markets but not without its lessons. An elaborate acceptance infrastructure and payment gateways had to be established by both the schemes and the banks. As the internet and online technology became prevalent in the US market, so did Payday loans.
These are short term online loans to customers whose repayments were taken out through direct debit and deduction from the customers Bank account. Their nature was to renew the loan every period that the loan is not paid in full (roll over fees).
The significant difference between the two is that with credit cards, there is knowledge of what the credit was for from purchases done for goods and services.
This offers a view to how credit was used, hence the purpose of credit, while payday loans cannot and seem to procrastinate the credit behaviour of a customer. These two models of lending can offer much guidance to how digital mobile lending should and can evolve.It is not enough that technology has made lending simple and accessible.
Real impact will be achieved by how people use loans; purpose lending.
Not only is today’s technology able to achieve this but can even further support customers into financial literacy, education and personal development in managing and planning their finances.
A recent study by FSD Kenya sighted the major reasons by customers for accessing digital credit as being for ‘meeting day to day ordinary household needs’ and ‘business purposes’, while only 31 per cent of digital borrowers have every tried mobile betting. 47 per cent have repaid a loan later while only 12 per cent have defaulted. 46 per cent of the respondents also save digitally sighting reasons being for school fees and emergencies. Imagine not having enough balance on your mobile money wallet and instead of the transaction failing and being denied goods or service when paying a bill or till, your able to access a loan at the point of transacting and it is paid directly to the provider instantly.
Take the example borrowing for school fees, health cover, utilities, insurance premiums or purchase of household items and many day-to-day bills. Purpose lending could see digital mobile lending platforms segment their facilities to meet specific needs of consumers and possibly even develop new behavior that evolves into demand for new products such as insurance and investments. A commitment to pay will be established with the customer as the loan achieves what matters most to them.And in this era of big data, analytics and artificial intelligence, such a focused service allows you to ‘see’ where the loan proceeds are consumed hence providing strong insights into the behavior of digital mobile loan borrower and powerful information in calculating the credit worthiness and risk assessment for affordable pricing.
This model would discourage fraud as well as offer further improve risk assessment to extend the service to businesses and SMEs. Embracing purpose lending is set to open a new chapter of opportunities – and brings in a new level of competition. The ultimate beneficiary of mobile-based purpose lending is the consumers: avails users a wide array of boutique products, offers convenience at the comfort of your phone, and is likely to drive down cost of service as lenders price different products rather than blanket cash loans.
Edward Ndichu, managing director, Opera for Africa.