In recent years, digital credit has emerged as a new product offering at the digital finance frontier, drawing attention from all players across the digital financial services ecosystem. Defined alongside the three key attributes of instant, automated, and remote, this digital finance product provides borrowers quick and ready access to short-term loans, and enables financial service providers to reach the mass market at scale.
Several deployments – most notably M-Shwari in Kenya – have gone to market already, and many more are expected to surface in the months and years to come. Recognizing this fast-evolving global trend, CGAP has released a new brief to understand this new product offering and its inner workings.
Drawing from the example of 10 existing digital credit deployments, the brief identifies four common features that characterize the emerging offering of digital credit, namely:
• Loan eligibility is enabled by existing digital access: Digital payments and communication channels form critical railways for digital credit delivery. While previous financial account ownership and credit history are not required, a precondition for many digital credit deployments is an existing subscription to mobile phone and mobile money services. (The deployments analyzed in the brief are tied to mobile phone ownership, but deployments building on customers’ access to the internet exist as well.)
• Loan decisions are automated and leverage nontraditional digital data: In the absence of credit bureau data and a formal financial history of many potential borrowers, alternative digital data sources, such as voice, airtime, mobile money usage, and at times even social media and utility payment data, are used to inform initial credit decisions. These variables are assembled into computerized decision trees and substitute manual decision-making processes.
• Loans are smaller, shorter-term, and often costlier than traditional consumer loan products: The financial dynamics of digital credit are fundamentally different from traditional consumer lending or microfinance loan products, in that the loan sizes are generally small and loan terms are short. Annualized interest rates are very high, but stand in relation to elevated loan loss risks and higher ratios of costs to each loan due to smaller loan sizes.
• Customer relations, repayments, and collections processes are managed remotely: In-person interactions between borrowers and lenders are limited in digital credit delivery, as most transactions occur via digital channels. The digital nature of lending addresses geographic access barriers of traditional credit products, and increases the potential reach to underserved and unserved customers.
Digital credit can benefit borrowers and providers in several ways: An alternative to informal lending sources. It can help meet emergency liquidity needs of poor households and provide a first step into formal financial services. For providers, it can be a value-added service used to retain existing customers, attract new (previously unbanked) customers, and diversify revenue streams.
While some have welcomed this innovative product offering and its promise to advance financial inclusion, others remain skeptical and caution against new risks arising to the customer. With the proliferation of digital credit deployments sure to continue, we look forward to watching this trend evolve over time.
Credit: Byoung-Hwa Hwang