Right now, mobile money providers are in a unique position. The need for their services is great and growing, but so is the competition. Mobile money is not a new phenomenon; more than 250 mobile money services are now available in nearly 90 countries. In more than 15 countries, there are more mobile money accounts than bank accounts. Providers that wish to get ahead must offer something more than just a digital wallet.
Mobile money providers must ask themselves these questions: how do they distinguish themselves from their competition? How can they make their business more profitable, gain new customers and retain current customers?
The answer is mobile lending: fully automated loans that a customer can apply for, receive instant approval for and access through his or her mobile money account within minutes.
In this piece, we will examine the benefits of mobile lending, the challenges in setting up such an offering and how to undertake such a process.
GAINING A COMPETITIVE EDGE through mobile lending
Mobile money providers must move beyond a basic mobile money offering to grow the accounts of current customers and attract new ones. The mobile lending market is just starting to heat up; there are only about 37 companies offering it around the world, and a full third of these services launched in 2014.
When mobile money providers are looking to distinguish themselves, mobile lending offers a real option for doing so. While there might be several mobile money providers in a given country, mobile lending provides a given operator with the ability to woo new customers and even convert those who might currently be using a different mobile money system.
The ways that a mobile lending offering builds a competitive edge for mobile money providers are laid out below: creating value for and enabling growth of current accounts, increasing profitability when done properly, and providing a unique opportunity to engage potential customers.
ACCESS TO CREDIT PROVIDES COMPELLING VALUE FOR CUSTOMERS
Since many mobile money customers are currently unbanked, the only source of credit for these individuals is in many cases predatory loans that come with exorbitant interest rates and can be hard to get, even with expensive terms and conditions. Rural customers often have no access to credit at all, despite real need for it due to household needs, variable incomes or other factors.
Whether a customer needs a loan to buy a new product such as a home appliance, pay school fees or take a payday loan, whether they are looking for a duration of one month or six, mobile money providers are already trusted financial services providers and are therefore a logical place to look for that credit. For people who are already using the their mobile wallet to pay bills or transfer funds to family members, the ability to take a loan from that same mobile money operator is a factor that can incentivize them to use a given mobile money provider over others.
As they take more than one loan through their mobile device and grow their credit profile, customers will also find themselves able to take loans with more favorable terms—borrowing more money for a longer duration and at a lower cost. For a customer, a mobile loan offering is a product that he or she is likely to use over and over again as it becomes easier and costs become lower. The customer’s experience is one of long-term value.
PROFITABILITY AND RETENTION
Mobile money providers are in a particularly beneficial position in the market of mobile lenders. Unlike traditional sources of credit such as banks or microfinance institutions, they are already accumulating customer data on all mobile money transactions, and have some basic customer data from when mobile money accounts were first opened. Used properly, those data can form the backbone of a credit score and subsequent credit risk assessment.
Since KYC checks on customers are usually completed when the customer opens a mobile money account, creditworthiness can be evaluated and loans can be made as soon as a system is in place, without waiting months to try to gather data or determine a loan strategy.
As customers become accustomed to taking loans on their phones, they often do so repeatedly, using loans to cover regular or unexpected drops in income, or increases in expenses. Each successive loan for the same customer requires less processing and less risk—providing a mobile money provider with a low-cost, high-profit product.
The mobile money provider’s mobile lending is truly self-perpetuating. As customers take and repay loans, the mobile money provider also gathers information on the customer’s repayment patterns and can use that data to customize future offerings, adjust interest rates or incentivize customers to maintain a regular pattern of borrowing. This enables the mobile money provider to engage and build relationships with customers that are data-based and since all communication is zero or low-touch, the cost of doing business in mobile lending remains low.
THE CHALLENGe of effective credit risk management in mobile lending
Any new lending offer is complicated and carries credit risk which needs to be assessed, quantified and mitigated. That is particularly true for a fully automated loan system such as mobile lending. How can a mobile money provider determine who will repay loans, and ensure that they do so, without having the credit risk controls that a traditional bank had implemented such as a verified salary or records of deposits and withdrawls? How can they determine what rates to offer, or how much to lend to customers? How can a mobile money provider manage portfolio-level credit risk concentrations? The risks are particularly acute since many, if not most, mobile money customers are those traditionally viewed as unbanked—they do not have large sums to use as collateral and generally lack the type of steady and predictable income that can be used to secure loans and mitigate credit risk.
Unlike traditional banks, mobile money providers do not have years to optimize an internal credit risk control system, test different credit automation algorithms or build lending models themselves—the market is hot now. In any given region, the company that is first to market has a tremendous advantage over the competitors in terms of acquiring and retaining customers, but in doing so it must ensure adequate credit risk controls, for individual loans as well as at the credit portfolio level.
BEST PRACTICES: THE HOW-TO OF MOBILE LENDING
Mobile money providers need a cost-effective solution that will enable them to get a mobile lending product to market quickly, using lending algorithms that work and provide adequate credit risk controls, and that will only get stronger with time. They need technology that will easily integrate with their current operating systems, not a system that will require months to integrate.
Obviously all mobile lending is fully automated from the start; there are no manual checks for an offering provided via a mobile wallet. Any solution for mobile lending must enable this, ensuring that all checks are performed automatically and that loans can be approved instantly.
Mobile money providers also need the ability to grow their lending portfolio quickly, whilst providing adequate portfolio-level control over credit risk. When first entering the mobile lending market, they may decide to lend more conservatively, requiring a deposit in a mobile wallet equal to a certain percentage of a loan, or making small, short-term loans. As data are collected on customers and their repayment practices, however, any mobile lending solution must be responsive to those changes—allowing for the mobile money provider to be more aggressive with lending once a statistically validated model is in place, which allows the credit portfolio to grow while ensuring the right balance between credit risk and profitability.
Most importantly, any mobile lending system that a mobile money provider will use needs to be fully customized to the unique requirements and credit risk characteristics of its target market and customer base; the needs of a rural, East African customer will be different than those of an urban dweller in West Africa, and both technology and people’s needs are evolving quickly today, requiring a mobile lending solution that can change as fast as customers’ needs do.
SUMMARY
Mobile lending holds tremendous promise for mobile money providers throughout the developing world. While mobile money is becoming widespread in many developing countries, mobile lending is just starting to grow. Mobile money providers have the opportunity to be the market leader in many places, providing real value to customers in the form of readily available credit. In return, they create loyal customers who borrow and repay loans regularly, providing a mobile money provider with a product which is cost-effective to operate and profitable in both short- and long-terms.
In order to succeed with mobile lending, however, mobile money providers must find and implement a solution which they can start using fast, which provides the necessary credit automation coupled with adequate credit risk controls, which will work with their current system but be dynamic and able to change, and which will be fully customizable to meet the needs of their particular customers.
ABOUT PARETIX
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.
