Instant credit vendors challenge banks

Instant credit vendors have been on the increase in Nigeria

By JULIUS ALAGBE

 The rising trend of instant credits vendors is posing a big threat to the consumer lending business of deposit money banks (DMBs), some analysts have said.

While several consumers who spoke with BusinessHallmark attest to the benefits they are enjoying from the instant credits vendors in terms of the availability, speed and convenience of transactions, industry experts, who define the development as access to credit breakthrough, are expressing their concern that the explosive growth in the numbers of these peer lenders, otherwise called instant credit vendors, could reduce the volume and amount of transactions being presently enjoyed by commercial banks even as operators of the instant credit schemes intensify their drive for enhanced market share.

This indication is coming to the surface given that consumers are increasingly buying into the products being offered by peer lenders who are delivering more and more of their non-collateralised instant loans disbursement to customers on a large scale. At the moment then, an expanding chunk of some of the 75% of adult Nigerians that were previously crowded out from accessing credit through the traditional banks are now in a literal honeymoon season as they are being serviced by instant credits vendors of choice.

Indeed, the streets are marvelled at the reality of the activities of these vendors. BH intelligence gathered that, only a few years back, very few would have thought that the day would come when ordinary Nigerians can be trusted with money without the hitherto very strict hurdle of collateral deposits that players in the financial system fall back on in case of default.

“It is like a dream situation that Nigerians would for any reason now have access to credit without deep examination in an environment where trust is generally lacking. But here we are, without physical presence, your hands on the typing pad of a mobile phone or related devices, and people are receiving credit alerts into their accounts,” a perplexed analyst reacted.

Essentially being packaged as a service to further deepen market penetration, some of the more nimble of these instant credit disruptors such as Paylater, AellaCredit and Fairmoney, BH checks reveal, are working in tandem with investment backup venture capitalists or private equity institutions and are daily seeking to attract more and more customers into their net. By this however, they are effectively reducing the size of the personal lending market that had hitherto almost been exclusively available to traditional commercial banking institutions such as banks.

Underscoring the challenges being faced by the traditional players on the personal lending turf is the fact that the risk management orientation at the commercial banks now broadly stands in contradistinction to the working model through which the operators of the instant credits services dispense much needed funds to interested customers without what would – in the eye of traditional lenders –  be called proper credit appraisal.

While this now expanding loans culture stands in sharp contrast to what the established lenders do, BH checks reveal that the traditional banks may have however been forced to gradually begin to adjust their operational templates towards now making short term loans available to employees that meet stated criteria. And as at today, the evidence is that almost all banks now seem to be involved in this as corroborated by BH market intelligence.

Meanwhile, BH can also reveal that the business models of some tech-driven vendors differ from that of the instant credit vendors. But then it is not uncommon for customers to mistake some of these financial technology service firms with instant credit vendors. BH investigation shows that payment gateways like CowriesPay, Flutterwave, KongaPay are some of the technology service firms that are often mistaken as instant credit vendors.

Wema Bank’s response

Some Nigerian banks approached to formally respond to the new infusion of instant credit vendors in the economy generally welcomed them.

WEMA Bank Plc in its reaction to a BH questionaire on the subject said that it actually sees the credit vendors as an interesting opportunity for collaboration/partnership. The bank would also not rule out working on even closer terms with the instant credit vendors in future.

“WEMA Bank is currently focused on going digital in its processes and as such we are more concerned about creating synergy in the finance ecosystem as we continue to successfully drive innovation,” the formal response from the orgainsation outlined.

FCMB also open to cooperation

In his own view, Louis Ibe, the Head of Media Relations at FCMB, while making the point that he ‘would need specific data (statistics) from the appropriate office to really show you how well FCMB Plc is doing on loans and other forms of credit,’ noted that there was generally enough space for several players to thrive in the broader Nigerian loans market.

“Speaking for myself, the berthing of other alternative credit facilitators in the space can only but challenge core financial institutions and make them become more creative in their operations and credit service offerings.

“Like the saying goes, the sky is very wide for all birds to fly without colliding. There are too many people, organisations, sectors, etc that need credit and the number of financial institutions in Nigeria today, including Bank of Industry (BOI), Development Bank of Nigeria (DBN), the Central Bank of Nigeria (CBN), would not be able to satisfy all the needs.”

Continuing, Ibe requested that holistic attention should be paid to the overall need for more and more credit by players of all types within the larger Nigerian economy.

“If the alternative credit providers grant instant micro credit to a few people in addition to what the Banks are doing, that would be helpful as we have an uncountable number of SMEs across sectors in dire need of support. There are women-owned businesses, emerging markets, agriculture and other agro-allied businesses, and the manufacturing, corporate and multinational businesses that are heavily dependent on credits from banks. There are many in Energy, Oil and Gas, Aviation, Telecommunications just to mention a few, running after Banks on a daily basis for support”.

“The entrance of these alternative instant credit granting platforms is positively contributing to the CBN’s financial inclusion initiative and ultimately the Apex Bank’s PSV2020, the internationalization of our payment system and its cashless approach. So it’s a good thing they have come in, and should not be a serious headache to the Banks. It is a plus to the nation’s economy. It engages many more people in the populace to become more positively productive. Small businesses need small capital sums for take-off and it’s all good for Nigeria,” Ibe concluded.

And to ensure their seamless integration into this unfolding space, DMBs say they are now spending very heavily to ensure they adjust to consumer lending changes and thereby sidestepping competition from the apps and digital platforms that are presently quiet steeped in the business.

These adjustments notwithstanding, BH market research however reveals that some banks are not adequately reacting to the trend. Many of the operators are confusing their legacy or base banking infrastructure as innovative reaction to the threat of alternative lenders that have now a captured significant share of the personal lending market. And this analysts say, is not satisfactory.

Pegs of the business

It would be recalled that in 2014, the CBN Bankers’ Committee in collaboration with DMBs had launched  a centralized biometric identification system or Bank Verification Number (BVN) for the banking industry.

Thus, the biometric resources provided a critical security pillar for peer lending and led to an increased number of online peer lenders that are using apps, internet facilities and mobile phones to disburse instant credit. The development has also forced some DMBs to rethink their personal loans strategies and their associated stance on consumer lending, albeit slowly. The magnitude of transactions across digital platforms and devices has also  grown beyond the hitherto negligible amounts that were the vogue in the past and this explains the new wave of modified instant credits from DMBs.

Within this climate, the competition for consumers’ loans business which started since 2014 is on the ascendancy. And the rivalry in instant credits services between established DMBs and instant credits vendors engaging in short term credits is getting tougher already. Some banks are already adjusting their products profiles to facilitate the introduction of more financial products that aid short term credits for customers.

It would be recalled that some years back, accessing credits was an exclusive prerequisite of certain sets of people, and more often, individuals with deep pockets and corporate entities with high-profile physical assets. However, statistics show that within this period, less than 85% of savings and deposits communities with legitimate demand to raise capital were however excluded from getting loans from banks due to the stringent requirements that were inn force.

Instant credits vendors’ lax requirements for collaterals have therefore automatically lifted the seeming ban that had been put in the way of  Nigerians in their quest for getting short term credit service needs satisfied in the immediate past.

At the moment, about 50 internet, apps and mobile enabled platforms are already jostling for market share in the financial technologies services industry. P2B are the vendors that are making the case for a credit economy, against the hitherto dominant cash-based stance for transactions and dealing.

An analyst who spoke under condition of anonymity said; “It is funny how transactions are conducted in Nigeria. How are people meeting their daily needs when employers – private and public sector – pay salaries every 30-day? Those short term credits offerings mean a lot to some people. Higher interest rate is really secondary as competition could make that correction in no time”.

Jide Famodun, Chief Operating Officer at LSintelligence said; “What we are having now is vertical and horizontal competition in the financial service sector. Many peer-to-peer online or mobile platform lenders are competing against themselves as well as against banks. The future of the millennials would be financed in credit. There are proposals for education credits and these are in the pipeline”.

According to him; “the emergence of instant credits operators has changed the narrative to a greater extent. The trend will not be reversed in the short to long term; instead banks would be forced to conform fully to the new credits service model. There is a shift in Nigeria from a cash to a credit-based economy; albeit marginal but things would hold up and fall into balance in the medium term”.

BusinessHallmark research discovered that financial technologies innovation has shifted the credits model; and access to loans processes have changed from the exclusive prerequisite formats of traditional banking functions. In a recent survey, it was revealed that more than 75% of the Nigerians youths are accessing credits, a situation that industry observers described as a new normal among millennials.

Timothy Anisere, one of the users of the P2P platforms said; “Few years ago, loans, irrespective of tenure, was exclusive to certain class of individuals with standard collateral or businesses with strong cash flow and brand goodwill. Today, at a tap on the mobile keypads, many instants credits providers are willing to do business with 190 million faceless Nigerians”.

Folakemi Adedokun, an insurance broker in Lagos who spoke with BusinessHallmark said that she didn’t know short term credit was possible until the kind of Rosabon financial services, Zedvance, Credit Direct among others came onboard with innovative credits services.

Meanwhile, some analysts who spoke with BusinessHallmark harp on the threat for banks that are yet to position themselves for the ongoing disruption. They are of the view that the deployment of finance services on the back of technology-based tools remains a big threat for less agile, non-innovative laggard banks in the economy.

The new credit models and approaches have become non-collateralised, without obvious need for sureties as is often required by banks. Market intelligence revealed that there are various initiatives that have been implemented that are supporting credit services.

Some vendors that are using entirely mobile lending platforms to provide short term loans as a way to covering unexpected expenses as requested by customers are riding on cost advantage compared with banks with significant operating expenses as a proportion of income.

On products by products analysis, Business Hallmark survey indicates that banks responses have been weak. Some banks have in the recent time developed a light version of consumers lending. Unlike what is obtainable from instant credit vendors, banks continue to largely hang onto their collateralised loans frameworks. But this time, short term credits are tied to having salary accounts to benefit.

As an example, banks like FCMB Plc have adjusted their business portfolio to provide low end consumers credit service to individuals in the same manner as non-banking credit provider counterparts”. United Bank for Africa now has a personal overdrafts scheme for executives. On its part, GTB will as well load your Naira MasterCard if you are in paid employment.

“So, the game is on already. If intensified, Nigeria may be moving to becoming the first credit-driven economy in sub-Saharan Africa”, he added.

FCMB Plc joined the consumers’ credits service league with the establishment of a subsidiary Credit Direct Limited. In a similar move, many Micro Finance Banks (MFBs) are also addressing the issue of credits with some quick cash loan services.

In their views, analysts who spoke with BusinessHallmark Research said that banks are not really designed for unstructured business on the back of poor personal databank. They are of the opinion that for banks to engage successfully in providing credit for all, their ability to track background information is important. Personal loan is not DMBs forte as they consider it as too risky to undertake. Taking exception to that, analysts at a forum disagree and claimed that BVN answers to the need for background information. The data is available; banks just have to discover how to use it.

“Banks don’t have to cover the whole market. Significant numbers of people in the country are active phone users. Thus, data in the banking sector, and telcos database of internet users is just about okay. About 60 percent of Nigerians that uses smartphones connect to the internet. Both mobile phone and BVN combine to mitigate risk of identity”, the analysts said.

They also made reference to 9mobile’s “kwikcash” lending using USSD code to provide loans to mobile users. At an average rate of 15% interest on a thousand naira in just 14 days, individuals using 9mobile, Glo mobile and Airtel are accessing short term loans easily with Kwikcash’s USSD code.

Like telecommunications operators, banks have similar information at their disposal about banking individuals. Willingness to engage the retail end of the market with access to credit is primary. Onefi limited, the operator of Paylater instant credits is a mobile enable platform, and the first loans is for 30-days at 15%.

Many downsides but customers don’t care

Many banks players may however still be oblivious of the real scope of the steadily increasing miracles that the instant credits vendors are performing as well as the magnitude of deals that have been successfully initiated and completed on the back of increase in mobile adoption by people. Leading the pack of users of instant credits services are persons between the ages 18 and 50, while some outliers from upper age brackets are just about 18% according to BH online consumers’ survey.

Instant credits vendors’ rates are well above average lending rate in the banking sector. However, customers don’t really care because their immediate needs supersede whatever rates the operators are offering. The fact that these vendors are opening up access to credits by leveraging technologies and widespread mobile adoption is a welcome development, perhaps a transit phase into a full-fledged credit economy, Ogochukwu Ndubuisi, Head of Market Research, LSintelligence said.

BH market research discovered that rates vary between 5 to 30% per month compared with banks’ lending rate at 25% on the average. Customers who spoke with BH are of the view that sometimes; the mere availability of the cash loans is the fillip that makes them to live to see another day and cycle, a situation experientially expressed emphatically by more than 75% of the users.

Paylater, one of the leading peer lending platforms offers rates from 5% to 15% per month on loans below N100, 000. A new customer often starts with lower amounts and based on credit reports from Credit Bureau, there is a graduating scale in rates and amount that can be assessed.  This is unlike some others who can be said to be in the habit of literally exploiting their customers in terms of rates and tenor.

Platform

Most of the active instant credit vendors are riding on widespread mobile adoption; they are delivering services on apps basically. Few of them, like Kwikmoney use Unstructured Supplementary Service Data (USSD) code, just as many deposits money banks that are involved also do

Banks’ responses need to improve

Overall, analysts surmise that banks’ preparedness for what some see as impending blowout in the financial service sector on account of this looming revolution in lending services is weak and that even the reactions of some corporate communication representatives of DMBs to BH inquiries reflect the relative ignorance in the DMBs world about the upcoming tsunami. But then, some industry experts think that DMBs will likely acquire performing platforms when the stage is set. But for that to even become a serious proposition, the DMBs would need to improve their overall knowledge about how the sector is running.

The leading peer lenders differ, even in character

A downside of the peer lending scheme however is that it presently comes across as an all-comers field with almost no codified rules and systems.

BH research revealed that many of the peer lenders have no corporate identity as such. Also, some are seemingly exploitative in nature, and charging as much as 30% interest on a monthly take. After successful deals, some of the platforms increase the amounts that paying customers can access at a lower rate. The range is from 5% to 15% at the lower side while some charge as much as 15% for 14 days with automatic tenor extension if customers default but with surcharge that raises rates up to more than 30% – Kwikmoney is a typical example in this regard. But it not the only one in this world where ‘many things just go.’