Instant Credit Vendors’ Activities Threaten DMBs’ Consumer Lending Business


    Instant Credit Vendors’ Activities Threaten DMBs’ Consumer Lending Business

    Increasing activities of instant credit vendors is a key threat to Nigerian banks consumers lending business, analysts polled by MarketForces Africa said but concluded that lenders with financial muscles would always weather the storm.

    Increasing access to short term credit is a breakthrough following the explosive growth of peer lenders or instant credit vendors in the aftermath of the biometric validity number in 2014.

    Now, the growing numbers, both in size and volume of transactions undertaken has reduced personal/consumer lending size opportunities available to Nigerian banks. Now, peer lenders are asking for more.

    Some operators sampled by MarketForces Africa have increased their focus from mere lending to creating wallets for their customers for their daily transactions – including payments, transfers and withdrawals.

    Though their charges on short term loans remain high, customers interviewed appears to be indifferent but the default rate is also high, thus neutralises high margin enjoys by operators.

    Some customers who spoke with MarketForces attest to the benefits they are enjoying in terms of speed and convenience.

    However, peer lenders have intensified efforts to delivering non-collateralised instant loans disbursement to customers on a larger scale. Some 75% of the adult Nigerians that were previously crowded out from accessing credit from traditional banks are now on honeymoon with instant credits vendors of choice.

    The street is marvel at the possibility of the activities of these vendors. MarketForces research gathered that no one would have thought Nigerians can be trusted with money without collateral to fall back on in case of default.

    Right now, it is happening and growing in size but not without risk.

    “It is like a dream that Nigerians would be for any reason access credit without deep examination in an environment where trust is lacking. But here we are, without physical presence, your hands-on typing pad on a mobile phone or related devices, people are receiving credit alerts into their accounts”

    To deepen market penetration, nimble disruptors like Paylater, now Carbon, AellaCredit, Fairmoney with investment backup Venture capitalists or private equity institutions now seek to attract more customers into their nets, thereby reducing the size of the personal lending market available to banks.

    However, as they grow, their target customers profiles appear to be changing, thereby encroaching on traditional banking core areas like depositing collection with style, and opening accounts for small and medium scale enterprises.

    Risk management orientation at the commercial banks remains stronger while vendors compete daily to attract customers from nook and crannies – to them: “it costs money to keep money”.

    This culture stands in sharp contrast to what instant credits services providers are doing. However, banks have adjusted to making short term loans available to employees that meet stated criteria. And all banks seem to be involved in this; MarketForces gathers.

    It is also noted that the business models of some of these tech-driven vendors differ, just as their various services. It is not uncommon for customers to mistake financial technologies service firms as instant credit vendors.

    MarketForces investigation shows that payment gateways like CowriesPay, Flutterwave, KongaPay etc are often mistaken as instant credit vendors.

    1. BVN- Catalyst

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

    MarketForces 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 an innovative reaction to the threat of alternative lenders that have captured a significant share of the personal lending market.

    Wema Bank Plc in its reaction to the question seeded out the threat says it actually see the credit vendors as an interesting opportunity for collaboration/partnership.“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”.

    Louis Ibe, Head of Media relations said; “I am not speaking for the Bank from where I am right now, because you 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.

    Speaking for myself, however, 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.

    “As 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 the Bank of Industry (BOI), Development Bank of Nigeria (DBN), the Central Bank of Nigeria (CBN), would not be able to satisfy all the needs”.

    According to Louis; “If the alternative credit providers grant instant micro-credit to a few people in addition to what the Banks are doing, we have an uncountable number of SMEs across sectors in dire need of support.

    There are women-owned businesses, emerging markets, agric and other agro-allied businesses, the manufacturing, corporate and multinational businesses 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 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 capitals for take-off and it’s all good for Nigeria”; Louis added.

    Thus, biometric resources provide a pillar for peer lending and led to an increasing number of online peer lenders that using both apps, internet facilities and mobile phones to disburse instant credits. The development has forced some DMBs to rethink strategy and stance on consumption lending, albeit slowly.

    The magnitude of transactions across digital platforms and devices has grown beyond negligible amounts; thus explain the new wave of modified instant credits from DMBs. 

    Thus, competition for consumers’ loans business which has started in 2014 is on the ascendancy. And the rivalry in the instant credits services between established DMBs and instant credits vendors engaging in short term credits is getting tough already. Some banks are already adjusting their stance and facilitate more financial products that aid short term credits for customers.

    It would be recalled that some years back, accessing credits was an exclusive prerequisite to a certain set of people, often deep pockets individuals and corporate entities with physical assets. However, statistics provide that less than 85% of savings and deposits communities in their quests to meet their needs were excluded from getting loans from banks due to stringent requirements.

    Instant credits vendors’ lax requirements for collaterals have lifted automatic banned for Nigerians in getting short term credit service needs. In their reactions, DMBs are spending heavily to ensure they adjust to consumer lending, thereby sidestep competition from the apps and digital platforms. 

    At the moment, about 50 internet, apps and mobile enable platforms are already jostling for market share in the financial technologies services industry. P2B is the vendor that is making case for the credit economy, against the cash base stance for transactions and dealing.

    Some diaspora that commented online 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”, they asked.

    “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, a Lagos-based business consultant said, “What we are having now is vertical and horizontal competition in the financial service sector”.

    He also noted that many peer-to-peer online or mobile platform lenders are competing against themselves as well as against banks. The future of the millennial would-be finance in credits. There are proposals for education credits are in the pipeline”.

    According to him; “the emergence of instant credits operators has changed the narratives to a very greater extent. The trend will not reverse 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 cash to credit base economy; albeit marginal but thing would hold up and fall into balance in the medium term”. 

    MarketForces research discovered that financial technologies innovation has shifted the credits model, and access to loans have changed from an exclusive prerequisite of traditional banking functions.

    In a recent survey carried out, more than 75% of the Nigerian youths that responded are accessing credits via instant credits platforms, a situation that industry’s observers described as a new normal among the millennials. 

    Timothy Anisere, one of the users of the P2P platforms said; “A few years ago, loans, irrespective of tenure, was exclusive to a 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”. 

    Meanwhile, some analysts who spoke with MarketForces harp on the threat for some banks that are yet to position for the upcoming disruption. They are of the view that the deployment of financial services on the back of technologies tool 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 the obvious need for surety as often required by banks. It was gathered that there are various initiatives that have been implemented that is supporting credits 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 compare with banks with significant operating expenses as a proportion of income. 

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

    On products by-products analysis, the MarketForces survey indicates that banks responses have been weak. Some banks have in recent times developed a light version of consumers lending.

    Unlike what is obtainable from instant credit vendors, banks stylish still hanging around collateralised loans. But this time, short term credits are tied to having salary accounts to benefit.

    As an example, banks like FCMB Plc have adjusted 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 overdraft for executives. GTB will as well load your Naira MasterCard if you are in pay employment.

    “So, the game is on already. If intensify, Nigeria may be moving to become a 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.

    However, some analysts said 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.

    A personal loan is not DMBs forte as they consider it too risky to undertake. Taking exception to that, analysts at the MarketForces Africa analysts 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, Telcos database of internet users is just about okay. About 60 per cent of Nigerians that uses smartphones connect to the internet.

    “Both mobile phone and BVN combine could mitigate the risk of identity theft”, the analysts said. 

    They also made reference to kwikmoney or Migo 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 Kwikmoney USSD code. 

    Like Telecommunication 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 loan is for 30-days at 15%. 

    Many downsides but customers don’t care

    Many banks chiefs are as confused as the miracle the instant credits vendors are performing, the magnitude of deals that have been successfully initiated and completed on the back of an increase in mobile adoption by people.

    Leading the pack of users of instant credits services are a person between the age of 18 and 50, while some outliers from upper age brackets are just about 18% according to MarketForces online consumers’ survey.

    Instant credits vendors’ rates are well above the average lending rates in the banking sector. However, customers don’t really care because their immediate needs supersede whatever rates that 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 full fledge credit economy, Ogochukwu Ndubuisi, Head of Market Research, LSintelligence said.

    MarketForces Africa however discovered that rates vary between 5 to 30% per month compare with banks lending rates. Customers who spoke with analysts are of the view that sometimes; the availability of the cash makes them live to see another day, a situation experientially expressed emphatically by more than 75% of the users.

    Paylater, one of the leading peer lending platforms offer rates from 5% to 15% per month on loans below N100, 000.

    A new customer often starts with a lower amount and base 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 exploit their customers in terms of rates and tenor.

    Instant Credit Vendors’ Activities Threaten DMBs’ Consumer Lending Business