In most Sub-Saharan Africa lending to retail customers has not seen the growth rates witnessed in other regions in the world. The main reasons for this lack of credit offers on the supply side are related to high operational costs and to the general lack of credit history for large segments of the population. The traditional credit underwriting processes and data sources cannot help to change this situation.
Providing credit to self employed and micro businesses in emerging markets is difficult. Usually these kinds of businesses cannot provide the required documentations needed by lenders to correctly evaluate the lending risk. One solution to overcome this lack of information is to form lending groups. The peer pressure and the shared liability in such groups leads to better loan performances also in difficult market conditions. This lending model is successfully being applied worldwide.
Over the last few years, governments, NGOs and to a lower extent, the private sector, have all invested huge efforts and capital to help the unbanked population in emerging markets access the formal financial system. The common belief is that financial inclusion will enable governments to remit funds to their citizens in a safer manner, thereby reducing corruption and fraud. In addition to financial inclusion, the migration to digital payments will also enable individuals and businesses to transact in a manner that is both cheaper and safer, thereby promoting entrepreneurship and growth.
Most banks have already integrated a mobile banking offering into their services. Allowing for fund transfer or cash withdrawals without human interaction is not new.
The next step for banks is mobile lending: allowing customers to apply for, receive and access loaned funds instantly and automatically, using only their mobile device. This kind of offering has many benefits, including cutting loan origination costs, lowering risk, reducing loan turnaround times, enabling more customized product offerings and allowing your bank to gain a competitive advantage.
The next evolution in credit is the Collaborative Lending model, in which an existing financial institution partners with a non-financial partner, whereby the non-financial partner provides customer data and the financial institution funds the credit using its know-how, regulatory framework and lending license.
For mobile lending to succeed it must offer:
1) A “wow” factor for customers,
2) Service that is immediate and accessible,
3) Loan products that meet an immediate need, and
4) Reduced loan origination and servicing costs for banks.
Who and where will be the next big success story in lending technology? Nigeria is the next hot spot for mobile lending—despite the failure of mobile money in the country, and even, perhaps, because of it.
There are three main factors at play: 1) governmental initiatives to improve access to financial services and broadband internet, 2) the rate of growth in both of those fields independent of the government, and 3) the fact that only around 30 percent of people currently have access to retail credit. Taken together, these factors will result in a population using cell phones to access financial services for the first time.
Among the most exciting results of this revolution will be accessible, mobile loans for consumers. A strong desire for credit provides opportunity for a bank to emerge as the leader of Nigerian mobile lending—offering a service no one else can match to a customer base no other bank has tapped.
Online lenders face a unique challenge. In addition to building an online lending operation that competes with established lenders such as banks and microfinance institutions, these online lenders also need to build an entire credit-related set of analytics tools completely from scratch, relating to credit scoring, credit pricing, credit fraud and portfolio-level analytics.
Paretix is a solution which is ideally positioned to assist bringing these online lenders to market quickly using a combination of an agile cloud-based environment, know-how related to industry best-practices and a platform which helps expedite the process of defining, deploying and enhancing these credit-related analytics.
In recent years, alternative lenders have emerged and are now extending credit to unserved or under served market segments such as SMEs, the unbanked or "thin file" borrowers, competing with traditional lenders such as banks, credit unions and microfinance institutions. These alternative lenders utilize state-of-the-art lending platforms coupled with advanced algorithms to extend credit at a lower cost (to the lender) and with very fast turnaround times. This blog post describes the practical steps that traditional financial institutions should take to effectively compete with these alternative lenders.