In emerging markets, individuals and businesses have pivoted into the digital age because, simply put, they’ve had to.
The pandemic has upended traditional economics and economies, changing the commerce system, and even disrupting the way more sophisticated financial service products — like loans — find their way to borrower’s hands.
For the loan business, the challenge is how to underwrite risk for individuals and businesses that may not have credit files in nations where scoring databases are non-existent.
It’s an area in which Nigerian FinTech FairMoney operates. FairMoney Chief Product Officer Rohan Khara told Karen Webster that there are layers and rules that govern a successful entry into a developing market, especially one focused on providing smaller loans done digitally.
The way forward is lit by a combination of mobile devices, banking done digitally (through FairMoney’s Loan app), and credit extended with the aid of advanced technologies.
FairMoney operates as a lending platform that provides a range of financial services to roughly 1 million underbanked people in Nigeria and India — and it is targeting 5 million users by the end of 2022.
As Khara told Webster, for firms like FairMoney, and for FinTechs in general: “The bedrock hypothesis in any emerging market in order to push the envelope into the next orbit is that you have to take a lot of risks. Succeeding with that risk involves being in the right place at the right time.”
Access to cheap and immediate capital is critical, he said, and allows nascent companies to make inroads into offering new products and services. He recounted his pre-FairMoney stint with Gojek in Indonesia, and in markets such as India, where FinTechs began forming and moved to scale offerings from payment to lending to a slew of banking services — all done by mobile app.
No surprise: Data is the oil, as they say, that keeps innovation humming and powers new offerings.
The Layers Of Disruption
Along the way, he said, for FinTechs targeting new ways to bring lending to broader populations and foster financial inclusion, “disruptions in markets happen in layers.”
The first layer, he said, has subsets that include digital identity footprints based on know your customer (KYC) and authentication. The next subset is tied to making sure that “robust underwriting” is underway.
There are a bunch of tools in place to make sure that underwriting is indeed running full steam. He pointed to companies like Mono and Opera (operating in Nigeria) that, with users’ explicit consent, help create bank accounts, and with data, gain insight about individuals’ ability and willingness to repay loans. There’s also the “strata” tied to overall consumer demand, which helps FinTechs understand how their products and services are being received.
On top of that “disruption layer” lies the cosmetic or presentation layer, which lays out the value proposition to end users, and which Khara cautioned must be user friendly enough to make it intuitive for would-be borrowers to navigate the lending process online.
Making all those layers work seamlessly and in concert with one another is no easy feat. And as Khara relayed to Webster, the key rule of bringing digital financial services to emerging markets is there are no rules.
“You absolutely cannot apply the same cookie cutter approach from one emerging market to the others,” he said.
He offered a case in point: One of the most important factors underpinning FairMoney’s ability to underwrite a user is for the individual or business to disclose monthly salaries or income (or, for a merchant, cash flow).
Those inputs are needed to understand a user’s ability to repay. In one market — Indonesia, for example — users are open to sharing that data. In Nigeria, the opposite is true — and so the “atomic data points” vary from country to country.
Nigerians, said Khara, “worry if their phone gets lost or stolen and falls in undesirable hands, there could be undesirable consequences.”
In that case, FairMoney relies on what Khara termed “a potent cocktail of underwriting algorithms” and, where applicable (FairMoney focuses on unbanked and underbanked populations too) users’ consent to access bank accounts, which in turn give insight into borrowers’ liquidity levels.
Asked about scaling the business, Khara contended that “if a lending business did not have proper risk management and ‘guardrails,’ then how would the loan be different than the modern-day cash back?” Unlike other payment models, where once money flows from sender to receive the transaction end, the lending process is marked by an extended relationship where every interaction creates data.
“We have a dedicated risk team, which day in and day out looks at all the different data points, the type of loans, and which informs how the products are structured,” Khara said. “So that’s the core essence of a lending company to balance risk and at the same time innovate on behalf of the user.”
Drilling down into FairMoney’s own metrics, he noted that nonperforming loans (NPLs) are about 10 percent (with more defaults in Nigeria than in India). The firm facilitated $93 million of loans in Nigeria last year, up more than 120 percent over the previous year despite the pandemic. In Nigeria, about 70 percent of FairMoney’s portfolio is from small- to medium-sized businesses (SMBs); the remainder comes from individuals. Loan duration can be as short as a month and as long as a year, and the upper limit is about $1,000.
“A good chunk of our users borrow money from us to make more money for themselves, to support themselves or their family — even their friends as well — and once they’ve paid the loans back, whole cycle repeats.”
Looking ahead, “this year we plan to disburse $300 million across Nigeria and India,” he told Webster.
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