There has been a noticeable increase in Nigerian-operated money lending mobile apps in the past few months and with these also is the big question, why? Regardless of the risks associated with this business model for both operators and customers, it is interesting to explore the dynamics that make such a system possible in the first place considering the volatility and risk-ridden economy such as Nigeria’s.
But there are enabling conditions for this development. Below are 7 key reasons for what we are witnessing today:
- Automated KYC: Financial service companies are now able to deploy new software engines for automated Know Your Customer (KYC) experiences. This easily makes it possible for these businesses to scale. Automated KYC provides clients with a frictionless experience by eliminating the frequent back-and-forths between customer and bank when new information is required. With an automated process, customers are given an easy and fast accreditation or identification experience that results in quicker account opening. Businesses like veriff.com and a few others offer these services. This is not entirely new but the technology has been more improved lately allowing clients to even verify Bank Identification Numbers (BVNs).
- Consolidated Access to Bank Accounts: Technology gives scale. Secure and reliable open banking infrastructure like mono.co now allows clients to access financial data and payments to build or support financial products. This solution helps loan apps to manage identities. You do not need to submit hard copies of your bank statement and wait for 24 hours for it to be reviewed before you can get a loan. This third-party service makes it possible for the app to look into your bank account in an instant then make a decision based on the inflow and outflow across all your bank accounts, all in seconds. The loan app then performs risk assessment and borrower qualification verification using cash flow data on the accounts for up to 12 months. This kind of technology is able to even study what you spend your money on and advise the app to either give you a loan or not based on what your spending pattern is.
- Laws: On the debt recovery side, with the new CBN Global Standing Instructions (GSI) policy, banks now have the power to recover their debts regardless of the user’s bank. This means if you owe bank ‘A’ and keep your money in bank ‘B’, the GSI law allows Bank ‘A’ to recover their debts from bank ‘B’ without your consent. These kinds of laws help to improve credit assurance and help loaning banks mitigate their risks.
- Technology and Scale: Generally, technology has given scale and efficiency to new fin-tech businesses thus reducing barriers of entry and reducing the general cost of the business. This means, with the right technology, a 2 to 5-man team can float a financial institution that provides micro credits to hundreds of thousands of clients across the country. This was practically impossible months back. For Instance, LC Credit, a Loan App has over 1 million downloads on Play Store just within a few months of launching on the store meanwhile Keystone bank mobile app that has been on the store for a longer time has only 100,000 downloads.
- The Emergence of Regulatory Technologies (Regtech): There are now platforms for automated general compliance. Automated Anti Money Laundering (AML) and Combating the Financing of Terrorism (CFT) technologies allows fin-techs to seamlessly sync with regulators to check customers on their platforms. Regtech is still new but fledging.
- Automated Credit Rating Registry: There are a few private sector initiatives providing automated credit rating today. With this, a loan app can access a report of a person’s credit activities across all sectors of the economy seeing a history of loans the person has taken; be it cash loans, auto loans, or other forms of post-paid services. This, like many of these services, is still very young but very promising.
- Availability of funds: This is the last but not the least on the list. Local and global funding are increasingly accessible today. Investors can get as low as 17-25%/Annum credit facility and give out the same at 3-5%/month (which is between 36-60% per annum). Global funds can come as low as 2-5%. Currency risk exists so investors hedge these funds by reinvesting a fraction of the fund in a tested foreign economy to mitigate the risk brough by devaluation and inflation in the country.
These developments can be directly connected to new policies of the Central Bank of Nigeria (CBN) which include new license categorizations that are attempts by the government to deepen financial inclusion and regulate the emerging fin-tech sector in the country. The emergence of new technologies plays a crucial role in this development thus allowing microfinance banks to have access to bigger markets at a reduced cost.
After the novelty of this emerging market has passed, many loan apps will fade off the landscape, but we are just at the dawn of a new credit system that will shape the way we live and do business for many years to come. Let us know what you think about this.