Right now, every financial services company in Africa wants the same thing: to grow revenues, and reduce their risk. But with consumers across the continent struggling in the face of rising inflation and interest rates, they’re experiencing a growing wave of non-performing loans (NPLs), which is putting a brake on their growth ambitions.
At the same time, regulators and governments across the continent are challenging the financial services sector to drive greater financial inclusion. The sector is also grappling with challenges like how to deal with rising digital fraud without affecting the customer journey in the process.
One of the obvious ways for lenders to spread their risk is to look for new audiences and sources of business. The problem is that banks and lenders are all talking to the same market – which is largely consumers in the formal sector, who already have credit scores, and are probably already carrying several credit facilities.
And as anyone who does business in Africa knows, the bulk of the economy is informal. However, the informal sector is largely invisible to the credit market. The obvious pockets of growth are credit underserved consumers and SMMEs, those with minimal formal credit activity but who might want or need greater access or further formal products. The credit underserved markets are relatively unknown and unquantified, they represent elevated risk and higher cost of acquisition.
Our challenge as an industry is to give them a way to quantify that segment of the market, and to find a way to measure and predict their payment behaviour.
Currently, the way banks tend to score consumers is to take a snapshot of their behaviour at a point in time. The clear drawback of this is that it provides a limited view. What they should be able to do is to look at how a particular client has behaved over a period, and whether their payment patterns are declining or improving. That way, they can make a far more informed – and lower-risk – decision.
Imagine, for example, on a score range of A to E, you have two potential clients with a score of C. Great, you think. But you’re not getting the full picture. No two Cs are ever the same. The one may be improving, and the other declining. One may be spending their entire salary by the second of every month, while another pays their bills on time.
The answers to many of the current challenges lie in usable sources of data. Data-driven lending and decision-making is essential to the success of any modern financial institution. That’s where we’ve got to start looking at alternative sources of data to make better risk decisions. People are leaving clues to their behaviour all over. We just have to find, and use, that data.
Where is that alternative data? Much of it sits with mobile networks, as the majority of consumers have a mobile phone. More than that, though, credit invisible consumers are transacting all the time. They pay rent and municipal accounts. They buy insurance. They pay school fees.
Microlenders and SACCOs hold vast volumes of rich data on payment behaviours, from which anyone with analytics capabilities can extract insights. And as we’ve seen in other markets around the world, it’s even possible for banks and lenders to use alternative data on farmers’ yields to predict repayment behaviour.
The bottom line is that alternative data is the key to unlocking a lot of problems facing the financial sector right now. If we are able to access a bigger pool of consumer data, it will go a long way towards combating the plague of loan-stacking, and even allow institutions to work together to fight the rising tide of digital fraud. NPLs will reduce as a result of better risk management and predictions. New audiences will open up, and the sector can resume its desired growth trajectory.
Data is the future. But we must seize the opportunity now.