With more than one million customers in its first month, the KCB M-Pesa partnership is a clear sign that mobile lending is the future of banking. Banks that do not adjust to this new paradigm risk falling behind and losing market share.
What are the implications of this deal for other banks in Kenya, Africa, and around the world? In this piece, we’ll explore:
1) Details of the New KCB M-Pesa Account
2) What Does This Mean for Banks?
3) How to Move Forward
Details of the new KCB M-Pesa Account
KCB M-Pesa is a new account offered to anyone who has been a Safaricom/M-Pesa customer for at least six months, and who is not listed in any credit reference bureaus—approximately 20 million people across Kenya, or nearly half of Kenya’s population.
Eligible customers can apply for loans between KES 50 and KES one million (USD 0.5-10,000) from their mobile phones, and receive instant approval, with easy access to the funds through an M-Pesa account. The borrower chooses a repayment period between one and six months, and the interest is between 2-4% monthly. All services take place via mobile phone with no visits to a bank, and customers also have the option to open one of two interest-bearing savings accounts on their cell phones.
While M-Shwari, Safaricom’s partnership with CBA, has offered loans via mobile phone for more than two years, those loans carried a high interest rate of 7.5% monthly, and had to be repaid within 30 days. The service also was not very widely used. As of one year ago, CGAP reported that only 30% of M-Shwari customers had ever used their accounts to take a loan. The KCB-M-Pesa deal is a massive expansion of mobile lending—with flexible loan amounts, interest rates and repayment terms on a scale that will compete directly with the offerings of banks.
Within a month of its launch, KCB-M-Pesa now has more than one million customers—more than 30,000 new customers per day, with an average loan size of KES 3,000 (USD 30).
Implications for Banks
The clearest lesson from the success of the KCB M-Pesa account is that offering loans through a mobile phone is no longer a “nice-to-have” option, but rather a “must-have” in today’s competitive environment. From the tremendous success of KCB M-Pesa’s product, it's clear that mobile lending is a very attractive feature, and if banks want to remain competitive, they must offer this service.
Banks without mobile lending options will find themselves unable to attract new customers, and even potentially alienating current customers who want to apply for and receive loans the same way they do everything else—on their cell phones.
Today’s banks need to determine how to move forward with mobile lending, focusing on two components: strategy and capacity, both of which are essential for success.
Choosing a Mobile Lending Strategy
A mobile lending strategy for a bank involves determining its goals, including target market and how it wishes to distinguish itself—its competitive edge. Since KCB M-Pesa loans are general products offered to all customers, there is certainly room in the market for more specialized types of accounts or credit products. A bank could choose to focus on a specific geographic area, or to offer products aimed at certain sectors of the population, such as teachers, people in rural areas, minority language speakers or others.
Alternatively, a decision could be made to focus on certain existing credit products already offered by the bank, or to create new loan types, and to build around those.
Certain credit products, such as check-off loans, are well-suited to a focus on a specific population—for instance, a partnership with a large employer could mean that their employees are eligible for particular loan products through a mobile phone with the employer as a guarantor. An offer like that would draw customers towards the bank, positioning the bank as a leader in a particular arena. While the bank may not know initially which products it needs in order to achieve its goals, the goals should shape the products the bank wishes to offer.
In addition to determining its goals, as well as what type of credit portfolio it will aim to build through a mobile offering, the bank must build internal capacity to execute the strategy.
Building Capacity to Lend via Mobile Phone
In order to move forward with a mobile lending strategy that will succeed, banks must ensure that they have the capacity to carry out mobile lending. Capacity will need to be organizational, technological and regulatory.
Given its very nature, there is usually no need to build up bank branches in order to facilitate a move into mobile lending.
Organizationally, it is crucial that the bank’s senior management and risk management teams are engaged and on board with mobile lending. For many banks, the introduction of mobile lending is the first time a customer can receive a loan without any manual intervention by a bank employee; the process is fully automated. Consequently, credit risk management of mobile lending is especially critical. A particularly strong credit automation algorithm must be used to approve the loan and generate a loan offer. An ideal credit automation algorithm will evolve with time, becoming stronger as more customer data is gathered and minimizing defaults while maximizing profitability.
Technology is also an essential component for success in mobile lending. A key element of mobile lending is its real-time availability - a customer requests a loan and has it approved within seconds, with funds available in the account.
The bank's systems therefore need to support a fully integrated and automated, real-time lending process. This requires integration of mobile customers’ actions with the bank’s systems, real-time, automated algorithm-driven lending decisions and the ability to seamlessly set-up the loan and disburse the funds. The system must dovetail seamlessly with the rest of the bank’s operations. All pieces will need to work together, instantly.
If the technological capacity is lacking, or the system requires manual intervention from the bank before loans are approved, the customer will become frustrated, there will be errors in the system, and what is achieved will be the opposite of what was intended.
Finally, mobile lending may require regulatory approval; in order to move forward, most banks will be required to undergo approval by their local bank regulator to ensure that the mobile lending process meets customer protection requirements. For example, banks may be required to specify what information needs to be disclosed when a person is presented with a loan offer through a mobile phone. The regulations should be known from the start, and the mobile lending process built to comply with these rules.
While in Kenya, CBA and KCB were the first to partner with M-Pesa, all banks will move in the direction of mobile lending soon. Banks that do not adapt will see serious losses as customers move towards mobile credit products. Banks which are able to adapt quickly have the opportunity to lead, acquiring customers fast and gaining a reputation for leadership.
Mobile lending is a complicated process to initiate, requiring a carefully planned strategy and necessitating capacity on a variety of different levels, but banks who do not undertake such a process at this time do so at their own risk.
Pareto Pulse offers banks/MFIs, mobile money providers and online lenders a single solution to implement mobile lending. With big data predictive analytics and models that improve over time, a mobile-first automated lending platform, the ability to monitor and adjust your credit strategy and more, Pareto Pulse is the cost-effective solution to all questions about mobile lending. Our team has experience on three continents, with more than 15 banks as customers, and with success in building customized digital lending portfolios from the ground up. Mobile lending can help you reach out to millions of unbanked/underbanked people, make your portfolio more profitable and help propel you into the future. For more information or to set up a custom demonstration of our solution, please contact us.