The rise of digital lending – will Nigerian credit bureaus evolve?

In the past few years, Africa has witnessed a surge in the demand and supply of credit products, especially across retail. Notably, “digital lending” and “fintech” have become both buzzwords and actual technology revolutionizing banking services. In 2019, users can, through an app and without any physical confirmation, get loans via their smartphones in mere minutes. Decades ago this would have been considered impossible. But as technology evolved, data science and machine learning became applicable technologies at scale, and the path to previously unfathomable ease of transactions was suddenly opened. Digital companies could leverage technology to give users loans in real time, utilizing telephone data at exponential scales, something traditional banks continue to struggle to do.

As this sector evolves, a critical player seems absent from the innovation happening in this industry: Credit Bureaus(CRBs). The history of credit bureaus date back to the late 80’s in Nigeria and just like digital lending is burgeoning today, traditional lending prevailed and the problem of serial delinquent debtors taking advantage of the disconnected system became a menace. Debtors would take loans from one bank even after defaulting in another. Soon, creating a central system every bank could connect to and check a user’s credit history before giving out loans, became critical. Thus, Credit Bureaus were born and were indeed successful in abating serial bad debtors.

Evolution of Credit Bureaus
In today’s era of lightning quick transaction speeds powered by the internet and APIs, credit assessments can be done digitally without checking centralized credit score databases. The sheer volume of alternative data via smartphones has allowed retail lenders thrive irrespective of CRBs. So, what then, is the value proposition of a traditional credit bureau?

Ease of access to credit at retail levels for individuals and small and micro businesses is a critical pillar of the general health of an economy, and also an important index in how the World Bank measures a country’s Ease of Doing Business. This criteria makes sense because if an economy does not facilitate easy access to capital; a critical component in creation of businesses and their survival, doing business in said economy would most likely be challenging.

With the retail sector in focus, Credit Bureaus are a critical pillar to opening up the lending market to players who do not have alternative data credit scoring competencies but have financing capabilities. For Nigeria to tackle the access to credit enigma, it needs numerous players leveraging technologies. Asides from data science, access to a central credit system is a great lever towards democratising access to loans.

Credit Bureaus in the digital economy now again, need to play the same role they have always performed — create an environment where credit history of users is readily accessible. However, they need to adapt their decades old approach to creating such an environment to address the nuances of the modern era. Currently, the relevance of Nigeria’s Credit Bureaus is limited to the commercial banking population, but has so much potential to build relevance within the retail segment which arguably is the future of banking.

With over 60% population unbanked and underbanked in Nigeria, this is a new segment of customers who might take smaller loans through digital lenders, and most will be first time credit customers. If CRBs are not designing new solutions with these new customers in mind, their overall relevance to this segment will be non-existent in a few years.

Building for A New Base Of Customers
According to the CBN, the profile of customers credit bureaus have been historically mandated to check and report, before and after disbursing a loan are borrowers of amounts N1,000,000 and above (principal + interest). However, this poses a problem today as retail loans range from as low NGN 1,000 to amounts well below N1 million.

Therefore, a huge section of retail borrowers do not fall within the scope of existing credit bureaus, do not have sufficient data collected on their activity, and consequently, do not have their creditworthiness measured.With the exponential growth of retail lenders, Credit Bureaus must evolve to retain relevance and begin to serve a new segment of lenders. This means aggressively and proactively leading the charge on connecting to digital lenders, leveraging on their exponential growth. Without doing this, CRBs will struggle to maintain their relevance down the line, However, before embarking on this mission, CRBs must ensure that their technology is capable of withstanding not just current, but future scale of transactions.

Services Driven By Technology
For traditional banks, the current flow of checking for a credit report is via email. If a Banking Officer wanted to confirm the credit status of a potential borrower, she would have to send an email to a CRB, who will then typically provide a credit report in a matter of days. Although this may seem efficient compared to the system used in the 80s, it simply will not work for a time as this, especially with retail lending.

There is simply no space for this flow for the highly digitized efficient, quick and exponential volumes of transactions happening in the space of retail lending. To compete, technology needs to be at the core of CRB service offerings, not simply used as a crutch. Technology must drive everything.

There is a world not too far from now where lenders in aggregate, request credit checks for tens of millions of customers in seconds, with responses expected in fractions of a second. CRBs must have technology capable of handling these volumes and speed, and returning results in formats easily integratable into digital lenders existing credit checks to make a lending decision in real time. This is only possible via efficient technology integrations with infrastructure that can scale. Are any of the Nigerian Credit Bureaus building for this?

With combination of new technologies like blockchain and data science, CRBs are now uniquely positioned not just for efficient credit checks, but to drive a whole new suite of services. Should they reach enough penetration and scale across the retail market, in the future CRBs can morph into credit scoring companies, becoming another source of credit data across industries.

Price Right, and Sometimes That’s Lower
Achieving a massive base of mostly retail and new first time borrowers over time is a long term game, and sometimes that means revenue in the early days may not be impressive. There is a popular saying, “If it is free, you are the product”.

To get enough penetration, CRBs must consider digital lending companies as the product to helping them become the #1 source for aggregate credit data for the Nigerian economy. For almost all lenders to use your services, at the very least it should add value to their service offerings, and while CRBs are working on creating a strong value add, they must refrain disincentivizing with high prices. Digital retail lenders are more concerned with achieving high volumes than they are with gaining high margins per transaction. That is simply their business model.

Therefore, the pricing of credit facilitating services the CRBs have to offer must match the retails lending products of digital lenders. Some CRBs currently price checking the lending profile of commercial loans seekers can go as high as N1, 000 per check. This amount is a full loan in the retail space.

Therefore, it is important that CRBs align their pricing structures with the volumes pricing model by offering low prices that will result in significant revenue with significant transaction volumes. In the early days, as a penetration strategy, they should consider limiting the cost burden on the lenders in order to drive as much adoption as possible. Such limitations can be in the form of fee-free transactions for a certain volume of transactions and then super low prices that scale with volume. Once the value proposition of the CRB is significantly stronger, slightly higher pricing may follow.

Functional First, Then Legal
Historically, the value proposition of Credit Bureau as a service in Nigeria was created by need, and then deepened by regulation. For certain financial institutions, there is a regulatory requirement to check credit bureaus before the disbursement of loans to a commercial borrower. While the values of these mandatory checks are arguable, reporting requirement is definitely logical. With retail lending companies, these checks are simply not necessary because of alternative data points garnered through telephone data.

Because credit bureaus do not have a strong enough value proposition for digital lenders due to their sparse or outright unavailability of retail user credit data , most digital lenders leverage alternative means of data collection and analysis to determine the credit score of users without having to connect with credit bureaus. Credit Bureaus must build for scale in preparation for, because sooner or later, regulation may be enacted which may deepen or at the very least test, whatever value propositions they have initially solved for, and before that happens, now is a good time to design for how important CRBs want to be in this new era and importantly the future of digital lending.

This preparedness may enable them generate compound value over time. A recreation of past methods to solve past problems simply will not be useful in solving for modern lending trends and challenges as there is a wide chasm between traditional and digital lending methodologies. If CRBs do not innovate in response to the needs of rising digital lenders, as with everything else that does not adapt in the midst of innovation, they also will be disrupted.

Rotilu currently serves as the General Manager, Nigeria at Branch.co, helping to provide world class financial services via mobile phones to the underserved. She previously served as the Country Manager for Uber and Management Consultant at Deloitte. A computer scientist by education, she is also a Certified Chartered Accountant with ACCA, UK and pens her thoughts on the financial services landscape in Africa, and its intersection with technology.

Resources:
CBN Synopsis
BN Act No 24 1991Finance Company License
World Bank Methodology
Credit Reporting Act
Licensing Guidelines for CRBs