All Digital Credit Is Not. (Consumer v. SME Lending)

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1 All Digital Credit Is Not Equal (Consumer v. SME Lending) 1 1

2 Digital Credit High Potential To Financially Include % Correlation Correlation Between Origination FICO and Rating Grade Assigned by Lending Club Year of Origination Credit Card and Debt Consolidation All Loans 2 2

3 1. Digital Consumer Credit 3 3

Education Working capital 37 39 Typically repayable in a month Personal attire or travel 51

4 Kenya: Most Loans Used for Consumption Purposes Most Cited Digital Loan Uses (N, more than one response allowed) Ag inputs Pay debts ~5 million users Average loan size ~$35 Education Working capital Typically repayable in a month Personal attire or travel 51 % ARP Interest % Emergency 65 Ordinary HH needs 192 Source: FinAccess 2016/Julie Zollman 4 4

5 Median Loan Value (US$) N. Active Loans Fin Access Digital Credit. Displacing The Informal $2,500 $2, (All income groups, active loans), US$ $2, $1, $1,000 $500 $ $6 $15 $15 $20 $50 $50 $50 $70 $ $ $ $800 $1, Source: FinAccess 2016/Julie Zollman Digital credit is increasingly substituting shop credit, loans from family and friends and shopkeeper/ moneylender loans. Digital credit provides privacy. 5 5

6 If Paid 52% of Loans Are Fully Repaid With 3 Weeks 120% Repayments Made By Digital Credit Borrowers Percent Cumulative % 100% 80% 60% 40% 36% 20% 0% 1 week 2 weeks 3 weeks days 1-2 months 2-3 months 3-6 months 6+ months When Repayment Made Source: MicrosSave analysis of TransUnion data 6 6

7 3 Digital Credit Borrowers Persona Repayer Juggler Defaulter 7 7

8 >10% of the Adult Population Now Negatively Listed Negatively Listed Digital Loan Borrowers, by Outstanding Balances as of March 2017 >Ksh 5,000 ($50) 220,000 Ksh 1,000-5,000 ($10- $50) Ksh 200-1,000 ($2-$10) <Ksh 200 ($2) 275, , , ,000 borrowers negatively listed with balances under KSh1,000 ($10) 1.45 million borrowers negatively listed with balances under KSh5,000 ($50) Note: figure includes some double counting of borrowers who had outstanding delinquent loans with amounts that fall into multiple categories Source: MicrosSave analysis of TransUnion data 8 8

9 A Third of 1 st Time Borrowers Don t Repay Proportion of Digital Borrowers Negatively Listed with the CRB by Loans Taken (July 2016-March 2017) 35% 32% 30% 25% 20% 16% 15% 12% 10% 5% 9% 6% 5% 4% 4% 5% 5% 0% # of digital loans borrower has taken Source: MicrosSave analysis of TransUnion data 9 9

Customer Responsive Product by Jumo/Airtel Uganda Product Features Target Segment Customers Agents Loan Amount Loan Term Service Fees Up to (~$150) 1, 2, 3 and 4 weeks 8%-18% Up to (~$300) 1 month 5%

10 Customer Responsive Product by Jumo/Airtel Uganda Product Features Target Segment Customers Agents Loan Amount Loan Term Service Fees Up to (~$150) 1, 2, 3 and 4 weeks 8%-18% Up to (~$300) 1 month 5% - 6% Score Cards High for top-up, P2P-sending, cash-in, utility payments, push and pull (to bank account) Low for P2P-receiving and cash-out Salient Features Customers can choose their loan term based on the need 10% on outstanding penalties for delinquent borrowers High reported repayment rates (93/95%) basis tight initial targeting 10 10

11 Customer Responsive Product by Jumo/Airtel Uganda Offered in partnership with Jumo South Africa Linked purely to transactions on mobile money and GSM Launched in March 2017 Creation of risk profiles for all eligible customer (low/ medium/ high) Targeted marketing to eligible customers Communicating top five critical T&C Service fees vary based on loan term and risk profile Not yet linked with any CRB for reporting purposes 11 11

12 Enhancing the Digital Footprint Is Key Payments Remittances Sales Records Transaction History Agricultural Inputs & Data Credit History Personal & Collateral Details Mobile Data Sets 12 12

13 2. Digitising SME Credit 13 13

14 Resolving Constraints to Enhance Access to Finance for MSMEs The Potential mn. Over 80% mn. $ tn. MSMEs globally MSMEs are informal businesses MSMEs globally lack access to finance Financing gap for MSMEs What Digital Can Do Use alternative data to assess risk Use cost-effective digital channels to reach MSMEs Enhance returns through low cost digitally-enabled operations End-user customisable products Efficient processes with a turn around of 3-24 hours 14 14

How Can Digital Technology Enhance MSME Credit?

Augmented Products and Services Portfolio Monitoring Disbursement and Repayment Credit Approval

on-boarding Simpler processes and faster access Better assessment of credit risks -> Higher loan

15 How Can Digital Technology Enhance MSME Credit? Areas Digitised Benefits Marketing and Customer Acquisition KYC & Loan Origination Credit Assessments Augmented Products and Services Portfolio Monitoring Disbursement and Repayment Credit Approval Business Development Services Ability to service un/underserved MSME segments Easier/quicker on-boarding Simpler processes and faster access Better assessment of credit risks -> Higher loan amounts at a lower prices Easier repayment options Focussed portfolio monitoring Augmented & customized products and services Improved financial and business management capacities 15 15

16 How Can Digital Technology Enhance MSME Credit? Aspects Opportunities Benefits Opportunities Aspects Marketing and Customer Acquisition Social network based customer acquisition Lead generation and targeted marketing using IVR/SMS Geo-tagging Segmentation, targeting and positioning Easier on-boarding procedure, focus on unserved and underserved segments of MSMEs Work flow management systems Smart contracts Credit Approval Simpler processes and faster access Loan Origination e-kyc and identification technology Fraud detection Screening processes Automated AML/CFT checks Remote loan origination Better and appropriate assessment of credit risks resulting in higher loan amounts at a lower prices Mobile banking Internet banking Digital and crypto currencies Disbursement and Repayment Credit Assessments Automation of KYC compliance Automated KYC verification and sharing Customer due diligence Credit scoring use of traditional and alternative scoring frameworks Enhanced products and services customised to meet MSMEs financial needs Simpler processes and faster access Easier access to fund and repayment Automated business risk assessment and management Automated compliance Risk reporting, dashboard and breach monitors Portfolio Monitoring Focussed portfolio monitoring Product and Services Digital credit Merchant cash advances Invoice discounting Receivables financing Reverse factoring Other MSME focussed products and services Reduced price of loans Improved financial and business management capacities Virtual e-learning courses Virtual networking opportunities Inventory management services Payment acceptance services Business Development Services 16 16

17 Lending to Merchants Against Card Sales Model Design Eligibility of the MSE Past one year s bank statement KYC Income Tax Records Accepting card based payments Repayment Details Repayments deducted based on daily sales made on cards No penal charges for prepayment 57% do not have credit history 26% women entrepreneurs 17 17

18 Lending to Merchants Against Card Sales Impact of activity Financed over $120 million for SMEs in 2016 alone 50% Merchants have improved credit score 59% Merchants witnessed growth in business 51% Merchants experienced an increase in staff 27.5% Merchants now get formal funds due to improved profile 18 18

data Credit history generated for MSEs Positive

19 Lending to Merchants Against Card Sales Benefits of the model Customer repayments, and collections managed remotely Loan decisions automated and leverage nontraditional digital data Credit history generated for MSEs Positive and reliable change in credit rating for client MSEs 19 19

Riding India Stack - Lending Against Digital Footprints Project A: Merchants Project

Stack Layers Presence Less and Cash Less Technology Technology Key Cost Component

Comparison across Projects (In USD) Project A 1.94 Project B 0.

20 Riding India Stack - Lending Against Digital Footprints Project A: Merchants Project B: Remitters Partners Partners India Stack Layers Presence Less and Cash Less India Stack Layers Presence Less and Cash Less Technology Technology Key Cost Component Physical KYC (now largely eradicated) Key Cost Component Prepaid Card Indicative Cost Comparison across Projects (In USD) Project A 1.94 Project B 0.82 If all layers of the stack are activated 0.45 Making 5 Minute Inclusive Loans A Reality With India Stack 20 20

India: Developing Interconnected Digital Infrastructure G2P ($71 billion pa) LPG Kerosene Grains Fertiliser Scholarships Pensions Democratised Credit + Digital footprint Locker Unified Payment

21 India: Developing Interconnected Digital Infrastructure G2P ($71 billion pa) LPG Kerosene Grains Fertiliser Scholarships Pensions Democratised Credit + Digital footprint Locker Unified Payment Interface Merchant Transactions 20 million+ (largely informal) merchants Utilities Schools etc. Cash In/Out 650,000+ Agents Mobile Phones (mapped to accounts) Payments Banks and Small Finance Banks Aadhaar BHIM Pay PMJDY: 310 million bank accounts, RuPay cards (250 million), life & accident insurance and overdraft facility Aadhaar: Bio Metric Digital Identity 1 billion

22 Using The Digital Locker To Unlock Value For Farmers Inputs Information Processing/Marketing FSPs Fertiliser DBT Decision support ekyc / esign Kisan Paathshala (eschool for smallholders) Chemicals / Pesticides Offtake by Farmer/ Producers Organisations & Cooperatives Multiple and dynamic inputs for enhanced credit scoring and appraisal Seeds Hedging / Futures pricing Credit decisions based on multiple variables and constant data points related to farmer activities that influence yield, quality, market price, risk and other metrics Credit 22 22

23 Want Help with Digital Transformation? If you are worrying about these issues and want help with transforming your MFI Why not enroll in the IFC/MicroSave/Helix training course on Digital Transformation for Financial Institutions? Contact Anup Singh on Or sign-up for The Helix Institute s acclaimed online e-learning courses:

24 MicroSave is globally recognized as the local expert in financial inclusion 300+ Key partners and clients International FI consulting firm with 20+ years of experience 11 offices around the world Projects in ~50 developing countries Assisted development of digital G2P services used by 350 million+ people Our impact so far Implemented >75 DFS projects Developed 250+ FI products and channels now used by 50 million+ people >750 Publications Trained 6,500+ leading FI specialists globally 24 24

25 MicroSave partners with participants in financial services ecosystems to achieve sustainable performance improvements and unlock enduring value. Tewkesbury Lucknow Delhi Dhaka Dakar Hanoi Manila Kampala Hyderabad Nairobi Singapore Port Moresby Jakarta MicroSave Offices We strengthen the capacity of institutions to deliver market-led, scalable financial services: Guiding policy & facilitating partnerships to develop enabling eco-systems Comprehensive, customised strategic advice Actionable, on-site operational assistance and training 25 25

26 MicroSave partners with participants in financial services ecosystems to achieve sustainable performance improvements and unlock enduring value. India office, New Delhi S-10, Second Floor, Green Park Extension, New Delhi , India Tel : Fax : India office, Hyderabad /B/8, Second Floor, Shantinagar Colony, Masab Tank (Landmark: Opp. Lane of Mahavir Hospital) Hyderabad, Andhra Pradesh, India Tel : Fax : Uganda 3 rd Floor, Mirembe Business Centre, Lugogo Bypass Kampala, Uganda. Phone Mobile: United Kingdom The Folly, Watledge Close, Tewkesbury, Gloucestershire GL20 5RJ, UK Tel Mobile Philippines Unit 2408,The Trade and Financial Tower, 7 th Avenue Corner, 32 nd Street, Bonfacio Global City, Taguig City 1634, Metro Manila, Philippines. Tel: +(632) Indonesia ANZ Tower 23rd Floor, JI. Jend. Sudirman Kav. 33A, Jakarta Pusat 10210, Indonesia. Tel: /29 fax: PNG Corner of Musgrave Street and Champion Parade, Port Moresby, Papua New Guinea. TeleFax No.: / Singapore 3, Shenton Way, #10-05, Shenton House, Singapore (068805) Tel: Bangladesh 12/A, Level 8, R#104, Block #CEN(F) Gulshan 2 Dhaka Mobile: Senegal Sacré coeur 3 Villa N 9653, 4eme phase, 41 Dakar, Sénégal Téléphone/Phone: MicroSave Corporate brochure Contact us at Info@MicroSave.net Digital Financial Services brochure 26 26

Is Digital Credit A Silver Bullet?

DFS Observatory Webinar Is Digital Credit A Silver Bullet? Presenter: Graham A.N. Wright, MicroSave November 22 2017 1-2pm GMT/UTC www.dfsobservatory.com 1 1 Is Digital Credit A Silver Bullet? (Evidence