Introduction
There is an increasing demand for fintech credit products in Nigeria for obvious reasons. The traditional financial institutions have failed the community of young entrepreneurs with their stringent conditions and slow procedure for access to funding. The money lender’s business leveraging the use of technology has fostered a leap in our national drive towards financial inclusion.
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How Can a Money Lender Leverage the Use of Financial Technology for its Credit Services?
Currently, there is hardly any sector, or aspect of product delivery or service operations, that does not require or has not got better with the use of technology. Financial technology (“Fintech”) can be used by Money Lenders (digital money lending) to better manage their financial operations and processes through the use of specialized software and algorithms that are both computer and smartphone friendly.
Happily, in Nigeria, a company can be registered with the Corporate Affairs Commission (“CAC”) having business objects of money lending and technology services, especially where the founders or key personnel are tech savvy and understand the process of set up, programming and integration of their business models with a digital platform. This means that a company can provide both credit services as well as other services relating to development and maintenance of software technologies. The only special requirement for incorporation of such hybrid company is to ensure that the issued share capital is not less than N20,000,000.
A money lender company (without any IT backgrounds or team members) may also have a collaboration arrangement or partnership agreement with IT firms in order to achieve its business operations using the IT firm’s Applications Programming Interface (“API”), a generic interconnectivity interface that allows the money lender to reach and service more credit customers digitally than what traditional lending business would have achieved in real time. An API is to a money lender in the micro credit industry what a waiter or waitress is to a customer and the kitchen in a food restaurant (i.e. a connector).
The increasing adoption of APIs by the fintech entrepreneurs has resulted in the explosion of several mobile apps, services and online business models. In the context of digital money lending, APIs can be adopted as parts of the business architectural components to foster data access and interoperability amongst the relevant parties to a money lending transaction, including the lender, borrower, the banks, the National Collateral Registry (“NCR”), licensed credit bureau in Nigeria and other third-party providers such as a debt recovery firm.
Below are some of the following are the areas in which fintech APIs can be relevant to money lending business:
1. Collection of payments from multiple customers using credit and debit cards, bank transfers, e-wallets and cash regardless of their locations.
2. Disbursement of funds and payments to partners, vendors and customers in accordance with their preferences. It is instructive to note that section 14 of the Money Lender Law of Lagos State, for example, provides that every money lender must maintain a current account with a licensed bank and that disbursement of loans shall be made by a bank cheque. However, it is not unusual for a money lender to now effect disbursement of loans to borrowers using any of the modern technology-enabled means.
3. Creation of e-wallet functionality for customer to receive, store and send out funds digitally. Please not that this feature may be resisted by the CBN as the apex bank insists that only licensed Mobile Money Operator (a company with N2 Billion share capital and licensed by CBN) can hold customer’s funds by way of e-wallets. Notwithstanding, the feature is achievable through the right partnership arrangements.
4. Issuance of debit cards.
What ways can Fintech change the game in the lending industry?
The following are ways in which fintech can help boost the money lending business:
1. One-Minute Loan: In order to play in the ever-competitive lending market, there is no gainsaying that fintech lenders need to speed up the application and funding process faster than what is obtainable right now. With the right software applications, the process of getting loans can be fast tracked and completed in less than one (1) minute and the borrower will receive a requested loan in his or her bank account even in shorter timeframe than it takes to withdraw money from the ATM. In traditional lending system, it may take the customers up to 24 hours or more to get loan approved subject to other rigorous condition.
2. Peer-to-Peer Lending Without Customer’s Deposit History: Unlike conventional lending system which conditions its credit appraisal models upon the deposit and cashflow levels of a customer to determine his or her suitability for loan advancement, the fintech lending system should not require a customer’s deposit history and must adopt innovative strategies, such as the peer-to-peer lending model. With the right technology, a fintech lender can find potential borrowers, assess their risks, calculate a fixed interest rate for a period (let us say: 5 years) and match them with people who want to invest in other people for profit. Please note that this model may be resisted by the Securities and Exchange Commission (“SEC”) for being similar to a crowdfunding intermediary platform. For more information about crowdfunding intermediary license, please click here.
3. Mobile Lending Apps and Self-Service Models: Nowadays, consumers expect a user friendly product as well as a service that is fast and cost-effective. If loan applications cannot be made, processed and completed within one minute by young customers (especially the digital natives) on their mobile phones, then the lending company’s business model needs a rethink. At the moment, telecommunication companies allow their subscribers to borrow call credits even at zero balance. A fintech lending company can enter into a partnership with a telecommunication company to enable mobile network users to lend money by simply dialing an assigned code of a money lending company and receive funds on their bank accounts without stress. This quick loan process may require some pre-registration process in which the customer’s profile will have been created with the fintech lending company in order for such registered customers to be able to take advantage of the 1-minute loan process. Upon creating a profile, every registered customer should be able to dial an assigned code on their registered mobile phone number and receive loan/credit alerts within a minute.
4. Low and Competitive Interest Charges: Because fintech lending depends heavily on technology, there is low cost in terms of rent for business office, personnel and utilities. A fintech lender would save more money in terms of operational costs than the conventional financial institutions licensed by the CBN. Consequently, a fintech lender should be able to offer low interest rates on loans to customers which the traditional lenders cannot offer.
5. Partnership with Third Parties to Obtain Alternative Credit Data: The use of data and analytics in credit risk assessment is key to succeeding in fintech lending business. A fintech lender can collaborate with relevant credit bureau and other third parties to access alternative credit data of their customers particularly on customer’s salaries, rent, utilities, etc. or customers’ social media profiles in order to make a better decision with regard to customers’ creditworthiness and ensure better loan performance.
6. Offer of Perks and incentives: In order to overtake conventional financial institutions licensed by CBN, fintech lenders can offer their customers what the other traditional institutions do not offer. For example, a lower interest rate, longer moratorium and opportunity for customers to pay back their debts without penalties will put a fintech lender ahead of its traditional competitors.
7. Having the support of a fintech lawyer: To succeed as a fintech lender requires not just great technology but also the support of experienced legal team with hands on experience in advising and supporting fintech businesses. It is important for a money lenders’ lawyers to have good understanding of the critical laws and regulations applicable to the money lending business, particularly online lending, loan-based crowdfunding, peer-to-peer lending or marketplace lending as well as other associated policy issues such as debt recovery, registration of collateral, etc.
8. Freedom of Operation and Low Compliance Costs: Fintech lenders do not have many physical offices or branches to pay for which means they would enjoy cost advantages over the traditional financial institutions. Also, because most Fintech lenders are not traditional financial institutions that are licensed by the CBN, they tend to operate freely with low compliance costs as they do not have to hold as much capital and liquidity as the banks are required to do.
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