We’ve read articles and blogs posts about M-Shwari, the innovative Safaricom-Commercial Bank of Africa product that allows mobile money users to remotely open bank accounts, earn interest on their savings and access credit instantly.
We’ve seen traditional financial institutions rushing to enter into strategic partnerships with mobile network operators, in an effort to replicate this success.
A few have managed, though perhaps not at the same level. The question is, what will happen to those institutions that have not found a willing telco partner?
Should they follow the path of Equity Bank in Kenya and get a telecoms licence? Are they to continue business as usual, competing for the existing banked clients while living with the fear that customers will eventually migrate to digital financial products?
In the banking business the ability to accurately assess the potential of a customer to repay a loan, disburse that loan in a timely manner and efficiently collect repayments, is what drives an institution’s profits.
Consequently, serving entirely new customers who have no financial history and are far from bank branches is a major challenge. There are various factors that lead to M-Shwari’s success: CBA’s risk and credit management expertise to create the scoring models, Safaricom’s provision of customer voice and mobile money transaction data to generate credit scores, and their mobile money agent network for cash-in and cash-out.
Traditional banking services cannot compete with the convenience of instant and easily accessible cash-in and cash-out points of the mobile money agents.
According to MTN Uganda and CBA, more than one million customers had signed up for MoKash, their mobile savings and credit product, less than three months from launch.
Mobile network operators have the data to support credit decision making for non-bank customers, as well as the infrastructure for loan distribution and repayment collection at scale.
In countries where mobile savings and credit products have been launched, there are only a few mobile network operators that have the bigger market share of customers.
These have partnered with a few specific financial institutions. For those institutions that have not formed partnerships with mobile network operators, becoming one may not be an option, but it is not the only option to grow their businesses.
M-Shwari-like products provide small value loans for short durations, most commonly one month. CGAP reported in 2015 that the average M-Shwari loan amount was $15, enough to cater for an emergency but not to grow a business.
These digital financial products don’t address the needs of customers for larger amounts repayable over long periods of time. There is room for traditional banks to use digital systems to increase their volumes by building scoring models that utilise the bank’s customer data to provide more accurate and consistent risk assessment of customers.
Most institutions in Uganda have credit officers who review all applications and decide whether to grant the customers loans. Digital systems can be developed that determine a customer’s probability of default and automate credit decisions.
With digital scoring models, financial institutions can make their internal processes more efficient by reducing the time it takes them to process loan applications, freeing up time for their staff to dedicate to other core business activities.
Faster loan processing should also result in better customer service, making institutions more competitive. This, coupled with agency banking, can help financial institutions grow their footprint for customer registration, cash-in and cash-out, increasing accessibility.
Additionally, connecting to mobile money operators would allow customers to transfer funds between their bank and mobile money accounts and would enable banks to use the mobile money agent network as distribution points.
Banks might not have airtime and mobile money customer data at their disposal but they do have customer loan repayment records, which, according to credit scoring experts, is even more predictive of probability of default than telco data.
Can this be used to accurately assess the creditworthiness of a financially excluded customer, and if so, how? Financial Sector Deepening Uganda is supporting financial institutions in several initiatives that, if successful, will enable traditional financial institutions to extend their current credit operations to people who were previously excluded.
Mobile savings and credit products have disrupted the financial services industry in Africa by enabling millions of poor people to gain access banking services, providing them with a digital financial footprint.
This disruption can further be leveraged by allowing other financial institutions access to positive loan repayment data of these customers, through credit reference bureaus, so that they too can use it to assess their creditworthiness. This would encourage competition within the industry, promoting better service provision to the end customer.
For financial service providers without mobile savings and credit products, the door to financially excluded customers is certainly not closed shut.
Renita Nabisubi is an innovative financial services specialist at FSD Uganda