The Emerging Landscape of Digital Credit

Maria Fernandez Vidal

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Presented at CGAP’s learning event: Customer value & Customer risks: Emerging issues in Digital Credit & Data Privacy, February 2017, Paris

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• 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

Payment account

$

Data pool

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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

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0010011

Balance Sheet

Access points

3

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

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

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

PakistanIndi

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 20176

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 0.40.7

1.3

2.0

3.64.1

June

2014

Sept

2014

Jan

2015

June

2015

Dec

2015

March

2016

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And have can lead to significant growth for the players involved

Deposit Accounts

(Million)

Loans

(Million)

2011 2012 2013 2014 2015

0.041.06

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

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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

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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

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:

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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 loan10c

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%)

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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.

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

• 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

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• 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

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Advancing financial inclusion to improve the lives of the poor www.cgap.org

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