What Telcos can learn from Digital Lenders?
On Tuesday 28th July, Safaricom (the largest mobile provider in Eastern and Central Africa), launched a new service offering consumers the opportunity to buy a 4G-enabled smartphone for as little as 600 KSH (6 USD) per month for nine months, with an initial deposit of 1,000 KSH (10 USD). This is a high-impact initiative for the country, where the average monthly disposable income is just 8,500 KSH (85 USD) according to a 2019 report from the Kenyan National Bureau of Statistics. Though 91% of the population now have access to mobile phones (their own or through others), most of the devices are simple 2G handsets that do not provide helpful utilities that many smartphone owners are used to, such as: social networks, music streaming platforms, and other services including mobile banking apps, which are used by only 25% of adults (FinAccess report 2019). It is a pity, as this could otherwise become a primary channel for accessing banking services. In Kenya, there are only five bank branches per 100,000 people (World bank’s data), and many individuals are excluded from formal banking simply because of remoteness. The proliferation of smartphones can stimulate the usage of digital financial services, which is a critical step in improving financial inclusion and quality of life – it has been shown that mobile money has been linked to a reduction in poverty (Jack and Suri 2017).
Device financing can help to overcome the smartphone affordability barrier; customers can buy a new handset or upgrade their existing one, without paying a lump sum which is often higher than their monthly income. This makes smartphones, even advanced ones, affordable for a wider array of people. Besides having a positive social impact, smartphone upgrades provide an attractive business opportunity, which has already been recognized by market leaders such as Safaricom. In 2019, Kenya’s smartphone sales grew by 10%, according to Counterpoint Research’s Market Pulse. This growth was mostly driven by upgrades from feature phones to smartphones. Upgrading customers to 4G models is good for telco businesses, since it results in the growth of data consumption and an increased usage of other products and services. So, companies are often willing to waive interest on their loans in favor of future gains.
Device financing is a great offer, but lenders must be conscious of its challenges. Although this product differs from traditional loans in that customers don’t get cash and funds are transferred directly at point-of-sale, lenders must still ensure that loans are repaid on time. To achieve this, they must employ state-of-the-art credit risk management methods which are used in the financial industry, such as decision strategies, credit scoring and limit management. One of the advantages that telcos have over traditional lenders (such as banks and MFIs) is the possession of rich phone usage data, such as calls, SMS, GPS and other key info. Some telco companies also have access to mobile wallet transactions (e.g. M-PESA). This unique proprietary data is a great source of information on their customers’ financial behaviour and can significantly improve credit assessments, especially of thin-file customers.
To fully utilize this advantage, telcos must learn advanced analytics and modeling techniques. They should also gain “risk manager’s acumen” – an understanding of borrowers’ behaviors; typical fraud schemes; collection methods, and more. This is not an easy task; this expertise requires time to build up, which involves significant trial-and-error. Sometimes, when time is short and expectations are high, it is easier to go to external consultants who have already crossed this path many times. It can help to avoid some costly mistakes. Also, to allow for the automation of decision processes, lenders need tools which are flexible enough to accommodate frequent changes of policies and credit product terms. Such decision support software must be capable of dealing with high volumes of applications and ensuring fast response times, even in peak hours. Fortunately, such tried-and-tested solutions are already available on the market, and telcos do not need to spend huge amounts of time on in-house development. Some solutions are even available as SaaS, which is another benefit for proponents of Lean IT.
Creditinfo Group provides a full range of consulting and analytical services, including the development of scoring models, the design of credit decision strategies, and limit management. The company also offers decision support solutions and portfolio-monitoring tools that are used by lenders all over the world in their daily operations. Creditinfo’s experts work closely with our client’s teams to transfer knowledge and provide long-term support in digital transformation.
Global Consultant, Creditinfo Group