It’s 2024. Traditional banks and MFIs are no longer the major sources of capital for MSMEs. The proliferation of mobile money has democratized access to consumer credit. As of 2023, there were 548 million registered mobile wallets compared to an estimated 224 million registered bank accounts in Africa. Of course corporations are not going to get credit through their mobile network operator (MNO) but if banks do not increase their digital competitiveness to serve MSEs they may eventually completely lose market share. Through Momo, entrepreneurs can take out a personal loan in a few clicks and invest it in their business. If that loan isn’t big enough, they can turn to one of many digital lenders and neo-banks and take an unsecured loan in a day or two.
The world loves to talk about fintechs, but the most promising lenders for closing the small business credit gap are banks and MFIs that use technology to compete with the fintechs.
MFIs and banks actually have a competitive advantage over lending fintechs.
- Regulatory expertise: No matter who is doing the lending, the regulator will be involved. Banks have relationships to the central banks, robust compliance departments, and existing safeguards in place to allow them to best compete in such a highly regulated industry.
- Customer base: Banks already have customers who trust them to complete financial transactions. Compared to MNOs who may not offer everything that a customer needs for financial services and startup fintechs that have to spend money to both establish a brand and acquire customers, banks have an installed base whom they can serve.
- Deposits: Due to the high regulatory barriers and the costs associated with becoming a deposit-taking institution many digital lenders do not take deposits. This means that they are borrowing money from other lenders in order to make loans to their customers. Because wholesale lenders in Europe and the United States tend to have a bigger risk appetite, many of these lenders are borrowing in Euros and USD to lend in Naira, Cedi, Kenyan Shilling, and Rwandan Franc. The foreign exchange risks are huge and the cost of them are passed onto the customer, making the loans expensive. Banks and MFIs have the cheapest source of capital for lending.
- Offline support: Digital is great. It is convenient and has lower transaction costs. We all know though that not every customer is willing to trust their cash with an online-only provider. Hybrid solutions – that is a robust digital presence with some offline support– are the best solutions for the average African MSME.
Because of these advantages, Banks and MFIs who successfully adopt digital lending can win the market. You don’t need to start with an end-to-end automated solution (although that’s where you are going to want to get for some loan products). Start by mapping out your lending process today to identify the biggest bottlenecks and implement technology solutions to release them. Talk to your customers to understand what parts of the customer experience are frustrating and explore if digital can help you transform that part of the process into something delightful.
If by the end of 2025, customers can still only apply for a loan through a relationship manager in a branch, you will lose market share to fintechs. If you only offer secured lending, you will lose market share. If assessing a loan application is a subjective exercise that involves site visits and business plan analysis and site visits, you are going to lose market share. But if by the end of 2025, you’ve introduced new products, processes, and channels that meet customers where they are with digital lending products that meet their needs, then it’s the fintechs that need to be scared of losing out to the banks.
Next week, we’ll look at how you can assess if your organization is ready to start its digital transformation.
Oze specializes in helping banks lend to small businesses, understanding the unique challgenges and opportunities in emerging markets. By partnering with Oze, you can lay the foundation for the market you want while designing for the market you have, putting the customer at the center of your digital transformation, and working with a long-term partner incentivized to make the system work.
Get in touch with Oze today to explore how we can support your bank in achieving successful digital transformation and driving financial inclusion.