The widespread social restrictions introduced by governments to combat the spread of coronavirus over the last year has limited economic growth in many respects, particularly amongst businesses. But it has also increased demand for micro-lending amongst both consumers and small firms in emerging markets looking for the short term, low-interest loans to tide them over in rapidly changing circumstances.
As the pandemic recovery gathers pace, Allied Market Research predicts that the global microfinance market will expand at a compound annual growth rate (CAGR) of almost 13% to reach US$344bn by 2027, up from US$134bn in 2019. The fastest source of growth (14% CAGR) is likely to come from providers outside the traditional banking sector, including emerging digital lenders and mobile network operators (MNOs) offering app-based services.
Telcos have considerable reach into remote towns and villages in emerging markets where physical banks and ATMs are rarely present. And large numbers of people that own mobile handsets and smartphones do not even hold credit/debit cards or even have access to bank accounts.
In its report Digital credit scoring for farmers: Opportunities for agritech companies in Myanmar, the GSMA also highlighted how MNOs could help promote digital and financial inclusion in developing countries by assessing farmers’ credit risk in rural economies.
Africa hotbed of telco microloan activity
MNOs have been particularly active in launching microloan services in Africa recently. MicroLoan has been offering services in Zambia in partnership with African telco MTN since 2017. In 2019, there were more than 50 mobile lenders offering loans ranging from US$10 to US$400 according to news reports, led by Safaricom-owned M-Pesa.[i]
Orange Bank, the finance unit of French telco Orange (formerly France Telecom), has pledged to roll out micro-credit services across Africa and the Middle East – including Mali, Burkina Faso and Senegal – starting in 2020, in parallel with its successful Orange Money payments app. The telco launched its Lajor product in Sierra Leone late last year, a joint venture with Empire Solution that offers Orange subscribers access to loans of up to around US$20 without requiring guarantors or collateral securities.
Reports suggest that both MTN and Telkom are preparing to offer microloans in South Africa to help consumers and businesses cope with the economic disruption caused by the coronavirus pandemic.[ii] Elsewhere Vodacom is moving to expand its lending, insurance and payment businesses currently available only in South Africa to other markets.
China leads microloans in Asia
China already has an established micro-lending industry which has rapidly grown on the back of its massive mobile phone subscriber base and favourable legislation over the past decade. Reports suggest microlending surpassed its Alipay payment app as Alibaba-owned Ant Group’s most significant source of revenue in the first half of 2020.
That success is partially due to the less stringent regulatory environment covering online microloans (OMs). This situation could change depending on the progress of tighter regulation proposed by the People’s Bank of China (PBOC) and the China Banking and Insurance Regulatory Commission (CBIRC) in November last year.
But while the new regulation could slow down the pace of future growth in 2021 and beyond, it is unlikely to stall momentum entirely. A survey conducted by Tsinghua University Research Institute indicates that 66% of OM users in China are under the age of 39, and their habits will be hard to change.[i]
Elsewhere in Asia, Malaysian telco Axiata Digital, the national telco Axiata Group’s financial services arm, operates a micro-lending platform dubbed Aspirasi which is estimated to have issued almost US$12m in microloans to 9,000 merchants across the country in 2019. As the coronavirus led to economic restrictions in 2020, the telco also put together a support program for Malaysia’s small business that used Axiata Digital’s Aspirasi Assist platform to provide immediate micro-financing to qualified firms through a quick 3-minute online process.[ii]
Turkcell too, is preparing the launch of new consumer micro-lending solutions in anticipation of changes to the regulation concerning the provision of financial credit in Turkey. An investor presentation prepared in May last year suggests the telco is building a “Super App” which combines an electronic wallet (eWallet), payments, transfers and direct carrier billing (DCB) into a single Paycell app for example.
DOCOMO platform handles financial profiling for telcos
Microlenders have long used artificial intelligence (AI) and big data capabilities to build algorithms that analyse customer behaviour to determine the risk of defaulting on the loan. Alongside its rival Tencent, Alibaba was estimated to have accounted for 90% of smartphone-based payments in China in 2019. Both companies commonly process the vast information gathered from the mobile payments they handle to make automated lending decisions in almost real-time.[i]
DOCOMO Digital endeavours to build a platform that lets MNOs create their subscribers’ risk profiles using the same techniques. This form of ML-led microlending drives higher conversions because users have the freedom to purchase digital content without having to worry if they can pay for it, with a fast, smooth customer transaction handled entirely using SMS messages.
The seamless customer experience means MNOs can increase their average revenue per user (ARPU) and create stickier relationships with their customers while overall carrier billing transaction volumes expand.
While MNOs have the customer base and reach that established financial institutions can only dream of, they rarely have the expertise to set up the necessary profiling and billing processes needed to establish a successful micro-lending service. Our experience of dealing with telecommunications markets and regulatory frameworks in multiple geographies around the world enables us to support our carrier partners with such initiatives.
[i] Microlending goes digital, bringing debt stress to the masses, Bloomberg, 30th August 2019
[ii] Pandemic spurs Africa’s mobile telcos to ramp up banking bid, Reuters, 29th September 2020
[iii] China’s leverage caps on microlenders bring Ant’s regulatory risk to forefront, S&P Global, 17th September 2020
[iv] The Rise of Consumer Finance in China to Bolster Consumption, FitchRatings, 28th January 2021
[v] Operationally Resilient in Face of Pandemic Pressures, Axiata, 27th August 2020
[vi] China’s mobile banks offer 1-second loan decisions in farmland, NikkeiAsia, 9th August 2019