SPECIAL REPORT: Protecting Consumers, Tracking Business Cash Flows, Cutting Costs for Digital Microfinance

During a session entitled “Digital Credit Beyond Consumer Finance” at European Microfinance Week 2020, Michael Rothe, the co-founder of UK-based Flow, argued that there are both good and bad players in digital lending. He said that “most development finance institutions think digital credit is dangerous” and that “because providers are not being differentiated, Flow is being lumped in with” consumer finance. In fact, Flow is a fintech that lends to businesses only. During the COVID-19 pandemic, some Flow customers – many of whom operate shops that offer mobile-money services as a sideline – had to close down due to government restrictions on travel and trade. However, those that remained open saw an uptick in transactions. This is partially because governments encouraged the use of mobile money in an effort to minimize virus transmission. While other lenders stopped operating during the early days of the pandemic, Flow continued to lend, resulting in brand loyalty that Mr Rothe describes as very high. The ratio of the firm’s portfolio at risk peaked at 50 percent this year, but it has since cooled down to 8 percent.

Anup Singh of MSC, which is also known as MicroSave Consulting and has offices in 10 countries in Africa and Eurasia, stated that the “digital divide” is growing among women versus men, rural versus urban dwellers and older versus younger people. This is partially due to lower rates of digital literacy among women in cities as well as men and women in rural areas. Referring to greater expansion of financial inclusion, Mr Singh said, “digital credit could do what [traditional] microcredit didn’t do, but is it?”. He added that “interest rates are still very, very high” for digital loans despite the “idea that over time, there would be a better profile of the client, lowering costs. But we haven’t seen this yet.” Mr Singh also expressed concern about multiple borrowing. “We are seeing 62 percent of borrowers have more than one digital loan.” This is exacerbated in some cases by problem gambling. Online gaming has been luring in low-income people with minimum bets as small as the equivalent of USD 0.10. Regarding unscrupulous lenders, Mr Rothe argued that “rather than try to change the villains, better to work with the good providers.”

Ben Wallingford of MFR, which is based in Italy and was formerly known as MicroFinanza Rating, argued that digital financial services have the potential for more outreach, but, “This can only be realized if services are delivered in a responsible manner.” One practice he suggested financial services providers abandon is advertising that the customer must “use it or lose it,” implying that forgoing a loan now is forgoing the option of a loan in the future.

As did Mr Singh, Mr Wallingford expressed concern about proprietary credit scoring algorithms. He argued that scoring processes should be documented and tested in a manner that shows they lead to repayment rather than over-indebtedness. He also expressed concern about terms of service being opaque, including when they are sent as URLs via SMS to users without internet access. Mr Wallingford also argued that practices relating to relatively sensitive information, such as location data, should be addressed in a way that is more specific and visible – “not buried” in pages of legalese.

Mr Rothe pointed out that Flow does not make credit decisions on personal data in part because, “Business data has way more predictive power than personal data.” Flow has many mobile-money agents as customers because their financial activity is so well documented. When a lender has data showing a borrower used her last loan to grow her business, it is easy to decide to lend to her again. Flow has seen many businesses grow since the pandemic began, and Flow itself has grown. After two years of operation, it has built a loan book of USD 250,000. The firm has not done this by trying to convince people to borrow responsibly. Instead, it looks for opportunities where the data are already rich. For example, data from ride-hailing apps can make it much safer to lend for a motorbike. Since the pandemic began, many restaurants are selling meals via apps for the first time. This automation of data are a major opportunity for digital lenders to small businesses. As robust financial data can ease lending, Mr Singh argued that psychometric data also has significant potential to improve access to finance for micro- and small businesses.

Mr Wallingford discussed the idea of combining low-touch and high-touch models. For example, while issuing a nano-loan will not cover the cost of an in-person meeting, a site visit may compliment a digital application for a larger loan. For lower risk loans, a phone call to follow up on a digital application may be sufficient.

Mr Wallingford also discussed the effects of the pandemic on digital lenders versus microlenders in general. While demand has been down for all lenders and all have become more conservative with their outflows, the changes have been milder among digital lenders. Mr Singh said that before the pandemic, loans of up to USD 70 were almost always approved, but that this is no longer the case.

This feature is part of a sponsored series on European Microfinance Week 2020, which took place online from November 18 through November 20. The event is held annually by e-MFP. MicroCapital has been engaged to promote and report on the conference each year since 2012.

Additional Resources

European Microfinance Platform (e-MFP) information on European Microfinance Week 2020
http://www.e-mfp.eu/european-microfinance-week-2020

MicroCapital coverage of European Microfinance Week, including the European Microfinance Award
https://www.microcapital.org/category/european-microfinance-week/