Building Communities To Improve Credibility
A 2019 research essay on online lending and borrowing habits and how we might improve them using communities
This is an old research essay for a client from January 2019, so some of the companies mentioned here have changed, but the processes and strategies mentioned here still work. Enjoy!
Growing up, borrowing money from friends was traumatic for me. I misplaced things a lot, including those of my friends, and with no way to pay back, owing people became a pain.
I looked at collecting loans from banks and lenders with even more disdain. With these loans, I would be owing someone who I had no personal relationship with. And after being conditioned by movies where banks kick out people owing loans from their houses, the fear of loans was properly instilled in me.
Recently, I am beginning to look at borrowing and giving loans from a different perspective, as it seems lending it is profitable for the lender. With interests rates of above 10%, lending gives a more certain return on investment for ‘investors’ with a low to medium risk appetite.
So maybe for a lender, loans are a good thing, but for the person receiving the loan, loans may not be a good thing.
“I will never borrow again,” he said, “I do not even wish my enemy to borrow. It is such a painful experience when you borrow, especially when things go bad and you can’t pay back. It is not like you planned to not pay back but then you lose your source of income, and the loan collectors come at you like you are an animal.”
He shakes his head and continues driving.
These were the words of an Uber driver who carried me home sometimes at the beginning of September 2018. He was clearly never going to borrow again, and in his words, he said: “even if I do not have money, I and my wife will manage like that.”
During my research, he wasn’t the only person who spoke badly about collecting loans.
Click here to read some of the chats.
So, this begs the question:
How might we make loan collection and repayment enjoyable for prospective borrowers?
They are currently good for the people giving the loans as they make returns on their investments, but from my findings, people who collect loans don’t ‘enjoy’ the process.
While this might seem trivial, an unenjoyable user experience reduces the defensibility of your business/product, which makes your business/product easy to improve on by replicating your processes and adding a better user experience. That reduces your value as a business to users and investors.
Research findings and insights
To carry out my user and product research, I used a guerrilla approach; combining product analysis, observations, one on one interviews and secondary research.
According to Wikipedia, secondary research involves the summary, collation and/or synthesis of existing research.
Online research insights
For the online research, I looked at the history of loans and lending. When did it start? Why did it start? Were there any notable news or developments from then till now? What new improvements have occurred since inception? And much more.
Below is a summary of the things I found most interesting.
Initially, small loans were not socially acceptable. They became socially acceptable around the time laws to make them more humane were passed. It was at this time banks started offering them.
So the Government policy that improved access to loans was pushed after social acceptance increased. There might be no correlation though.
The increased availability of loans and the ease of repayment increases one’s want to take a loan.
The interest rate provides an incentive for the lender to engage in the loan.
Issuing of loans is a source of funding for some companies.
User research insights
For the user research, I spoke to people I work with, Uber drivers, and a few friends. I also took a small loan to get a first-hand experience.
Excerpts from some of my chats can be read here.
Most individuals who borrowed needed quick bulk cash to pay for a specific item; like a new laptop, a new shop, house rent, a hospital bill.
Individuals who borrowed to carry out an activity that gives monetary returns (like a profitable business), were able to pay back the loans
This was key for me because some individuals borrow to pay house rent, buy a phone or other activities that do not directly help them recover the loaned money.
For individuals who were used to borrowing, single-digit interest loans where their biggest pull to a lending service
Some individuals found the follow-up process after a taking loan ‘unfriendly’ and said they would not come back for another loan.
Findings from product analysis
For the product analysis and research, I looked at the 2 companies I felt were using the most interesting systems to enable loans and lending as a service. They are FINT and Mines.io (KwikMoney).
Do note that this research was carried out in Q3 2018, so some product updates may have occurred, altering some of my findings. I have made a few updates to my original findings before publishing this essay, but these updates may not be conclusive.
FINT is an online lending marketplace for individual investors to make high returns on high-risk investments by giving loans.
They reduce the risk of these loan-based investments by:
insuring the investment,
doing a risk assessment on each possible borrower/investment, and
verifying each borrower.
They also provide context-based information to help prospective lenders/investors see what their investments will be used for, so they can make better decisions on who to invest in by giving a loan.
Basically, they connect verified income borrowers looking for access to affordable credit with lenders who are looking to fund the loans for attractive returns. And the whole process is insured.
The loans that are available on their marketplace range between N60,000 and N2 million with 18% interest rate for a 3 – 12 month period.
Mines.io does not give loans, instead, they built a system/platform to make giving loans easier.
According to this company overview on Bloomberg.com, they call this platform Mteka, a financial analytics platform for mobile data.
In more detail, Mteka is an in-memory analytics platform for the volume and velocity of mobile carrier data that processes terabytes of data in seconds to build predictive models and deploy them in real-time. Its analytics services help mobile operators monetize their data and financial institutions reach more customers.
The company’s credit scoring service uses algorithms to analyze mobile carrier data and assess credit risk for individual consumers based on mobile behaviour; scalable fraud detection service builds a per-customer baseline model and immediately flags suspicious mobile money activity in real-time, allowing the operator to either prevent or investigate the transaction; behaviour modelling and device fingerprinting services to increase customer identity confidence and enabling monitoring of money flows across different mobile network operators; and risk analysis and machine learning algorithms leverage mobile carrier data to price consumer risk, enabling insurance providers to personalized insurance premiums.
They used this platform to offer/deploy a digital banking-as-a-service platform called KwikMoney (formerly called KwikCash) to domestic banks, mobile operators, retailers, and payment processors. This platform includes components such as APIs, frameworks, consumer insights tools and expertise on best practices that enterprise partners can use to build transformative consumer credit services in emerging markets.
Some of the organisations they partnered with for this include:
Payment processors; Interswitch and NIBSS
Mobile network providers; 9Mobile and Airtel
Banks; Sterling Bank, Personal Trust Microfinance Bank and Accion Microfinance Bank
Federal Institutions; NCC, CBN and Bank of Industry
Basically, it is a USSD based banking service offering up to 500,000 NGN loans at 5 - 15% interest, and savings with annual returns of up to 10% interest.
From my product analysis, it seems they use public shaming to collect unpaid loans. Public shaming is one of the age-old methods used to retrieve loans from individuals, especially when done to the notice of the user’s employers.
This insight was key for me because after speaking to a few bankers, I realised one of the cons of lending and loans as a service is bad loans. This is when a borrower refuses or cannot pay back the borrowed loan.
One interesting feature their service had at the time of this analysis/research was to recommend a friend for a possible discount on your next loan. While this may seem like a user acquisition move, it might also be a way to bring in people like you. So if you are good with loans, the people you would associate with would also be good with loans.
The recommend a friend feature can also be a way to start a guarantor system, where people who refer others, serve as guarantors in the KwikMoney system to those they refer.
Insights on a possible solution
Small size loans are only useful for unemployed individuals. People who are employed only go for bigger size loans, because they can borrow small loans from family, friends and colleagues without interest.
This means platforms that offer small loans should target unemployed and underemployed members of the economy. This would also affect the way the product is built.
Paying back the loan should be as seamless and simple as possible else you risk borrowers churning at the point of repayment.
Applying for the loan should accommodate busy individuals who do not have time to visit physical offices, receive loan officer calls and carry around documents for scanning. This is especially key if the market the lending service hopes to serve is made up of employed individuals.
A more human-friendly process of collecting loans where the whole process is clearly and easily explained for intending borrowers to understand and accept. This is key because loan collection is the last touch point the customer has with a loan company. Improving this experience will improve customer retention.
The process for collecting the loan should also be executed thoughtfully and empathetically. A good last experience will make them come back for another loan and recommend a friend.
Recommendation for a possible solution
My recommendation is a modular platform that starts as an aggregator to create and grow a community of good borrowers, then it builds more tools to offer more services as the community grows.
In more detail:
Start with a platform that aggregates and nicely displays to users, all the key information with regard to loans and their services like:
best interests rates,
the best loan offers with respect to needs (school fees, start a business, ... ), e.t.c.
With this you aren’t spending much on product development, instead, you are pulling in users who will show/inform you what product features they need.
This platform would also offer ways to create, build and share a good credit profile, so as to allow individuals to get good loans faster.
This can be achieved using adtech and content education, and users would be profiled and educated while using the site. A good example of this will be a mix of NerdWallet and SimplyCredit.
This credit profiling solution is a less intrusive version of Mines.io’s Mteka.
Monetisation can be done by charging a fee to banks and loan companies looking to access the community of lenders or looking to white-label the adtech and content management systems.
At a later date, this platform can easily start giving loans, and from day one have good borrowers ready to borrow.
To start this, the platform would need a creative way to show interested lenders/investors that its community of borrowers are credible and good borrowers.
This is an improvement on FINT’s current platform. It would reduce the onboarding time to zero, as you already have the community with good credit scores.
So basically, to create an enjoyable experience for borrowers start by helping them be better borrowers through a community.
Next, connect them to possible lenders. This reduces the risks involved with bad loans, as the loans are from already existing external entities.
The platform makes money on each borrower and loan, and everyone is happy.