The operators will have to acquire the means to internalise credit scoring services. Today, this service is provided by external providers. Apart from taking over an existing company, this could be achieved by recruiting industry experts and improving the skills of in-house teams.
Benoît Menard
In my first two articles, I wrote about how operators have diversified in order to offer financial services via Mobile Money. Then I looked at how operators are enhancing their microcredit offers by using mobile data to offer credit scoring services. To wrap up this series, let’s look at the threats that operators face in the credit sector and how they can ward them off.
Telecoms operators’ strengths in the microcredit domain
Telecoms operators are very well placed to offer microcredit solutions as well as not being restricted to acting as a mere distributor of financial services.
Firstly, operators have highly organised commercial resources. They are able to build on their expereince of offering traditional mobile money services i.e. transfers and payments. This is because the same users of e-money will also borrow using mobile money services. These clients are already familiar with the operators, their services and points of sale. They already trust them to deliver the money, and provide deposit, withdrawal and money transfer services.
Secondly, they have access to their clients’ telecoms usage data and mobile money usage data – a veritable digital gold mine. This data is absolutely key to effective credit scoring i.e. it makes it possible to assess a potential borrower’s creditworthiness. It also makes it possible to target people who may need a loan based on information held in telecoms and mobile money customer databases. Above all, the operators’ real asset is owning this data, which they are authorised to use for client prospecting purposes. Companies that do not own the data are required to ask permission from potential borrowers while the operators already have access to this data.
Finally, in certain countries [1], telecoms operators providing mobile financial services can acquire the status of “Electronic Money Issuers”. By complying with the regulatory requirements on payment systems and the issuance of money, they have been authorised to issue electronic money themselves. Their services rely on obtaining this authorisation. While this authorisation does not necessarily entitle them to grant loans to individuals, it does give them the possibility to partially do away with their current banking partners. In this way they acquire more control over the money they issue as well as strengthening their legitimacy in the financial services sector.
Threats for operators
However, operators face several obstacles that highlight certain weaknesses they will have to tackle.
By extending the range of financial services they can offer, telecoms operators providing mobile financial services target environments that, like credit, are more sensitive, more technical and therefore more regulated and complex.
In certain markets, the regulations could be even more unfavourable to the operators by refusing them the right to grant loans to individuals. In this case, they will be forced to work with an institution that holds an adequate licence or with a banking partner.
The operators could also suffer from a lack of agility in terms of deploying an innovative solution in a complex domain such as credit. Developing a credit scoring solution requires very different resources from those needed to provide transfer and payment solutions. Training and recruiting employees for the new credit services, and then developing a scoring solution could turn out to be a lengthy and costly affair. Again, joining forces with an existing specialist company may be easier and more relevant in the short-term.
Finally, telecoms operators providing mobile financial services are confronted with a threat related to recuperating mobile usage data from their customers by OTT actors. In countries where the smartphone penetration rate is relatively high, any mobile microcredit provider can access the mobile usage data of potential borrowers by requesting their consent. On a smartphone app, borrowers only need accept the service’s general terms and conditions to allow their data to be automatically downloaded by the provider. The provider can then use the data to assess the user’s creditworthiness. This means that telecoms operators lose out on one of their biggest advantages i.e. the monopoly over the data used to establish credit scores. In the best case scenario, the provider could ask the operator for its clients’ mobile money usage data. In the worst case scenario, it could access this data from its potential customer’s phone without the operator’s consent.
In this challenging context, telecoms operators must react quickly if they do not want to be relegated to second place when it comes to providing mobile credit services.
Which solution, where and with whom?
Despite their success in offering mobile transfer and payment services in developing countries, telecoms operators are restricted due to the regulations, their size and their risk of being bypassed by other actors.
Therefore, they will have to come up with a more strategic business model if they want to have a lasting impact on the development of mobile microcredit services.
If we project five years into the future, the smartphone penetration rate will increase massively and the threat of being bypassed by OTT actors will also increase. Conversely, the regulations may develop favourably i.e. allowing e-money issuers to directly grant loans to individuals.
Telecoms operators providing mobile financial services will have to launch two strategic projects if they wish to survive in this new environment.
The first project will concern the regulations
Telecoms operators must transform their mobile money activities to gradually bring them in line with ‘real’ banking activities. This development may result in the takeover of an institution that already holds a banking licence. This will require the implementation of significant compliance plans to meet the requirements of historical financial institutions. The aim is to limit the risks linked to amounts they have committed to on their mobile money platform (fraud, money laundering, funding terrorism, etc.), and to obtain the necessary authorisation to independently deliver advanced financial services such as microcredit.
The second project will concern business
The operators will have to acquire the means to internalise credit scoring services. Today, this service is provided by external providers. Apart from taking over an existing company, this could be achieved by recruiting industry experts and improving the skills of in-house teams. The aim is to do away with these external providers as they benefit from access to usage data. Data they have acquired through partnerships to improve their services while retaining ownership of their own technology. Data they have acquired from having a share of the turnover from microcredit solutions.
Finally, in markets where the smartphone penetration rate is low, operators have the opportunity to develop in the microcredit market without the risk of being bypassed by OTT actors.
It will be by relying on the development of regulations in their favour and integrating technical solutions, which are indispensable for providing credit solutions, that telecoms operators (providing mobile financial services) will be able to position themselves as vital players in the microfinance domain of tomorrow.
[1] Like those in the BCEAO zone [NB: Central Bank of West African States] (Instruction n°008-05-2015 governing the conditions and procedures for carrying out electronic money issuing activities in the Member States of the West African Money Union).
credits: Victor Estrade and Benoit Ménard
Benoît Menard
Sofrecom
