Rosebay consulting is a Fintech company which has worked in diverse markets in Southeast Asia: Indonesia, Cambodia, Thailand and Nepal to consult and deliver systems which assist in financial inclusion.
What is alternative finance?
Alternative finance is a term which was coined to describe the emergence of financial services driven by nontraditional actors – so excludes traditional funding by banks, stocks and bonds. AFL (Alternative Finance and Lending) is part of the “fintech revolution” which has gripped the world finance since at least 2010.
Most Asian countries are undergoing a boom in alternative finance. Alternative finance can play a significant role in the financial landscape. Most major economies of Southeast Asia have a CAGR of over 150% with Singapore and Indonesia leading in terms of volume. What’s difference between here and the developed countries is that for developing countries like Asia is home to a population of 4.4 billion people and large number of consumers. Micro, small and medium -sized enterprises (MSMEs) lack adequate financing due to lack of collateral and credit history. Alternative finance can fill the void of financing to those who are previously excluded by the banks & financial Institutions.
Many online alternative finance platforms have emerged across Asia Pacific region since 2013 which has changed the way individuals and businesses access, raise and invest money. The usage of alternative finance has been increased because of easy application process-no hassle, fast decision making, convenience, competitive rates & less documentation. Looking beyond the matured western world, Southeast Asia naturally becomes a very attractive option— home to a huge population of 620 million people, with a combined GDP of $2.4 trillion in 2013.
How does alternative finance disrupt traditional financial services?
If you go through the history of lending, and in particular bank driven lending you find that while the look and feel of banks have changed significantly, the basic methods used for lending have not changed much from a century back. What do we mean by this?
- Decision was made more on collateral basis that on actual ability pay back loans which would perhaps better correlate with cash flow than fixed assets.
- Collateralized lending and collections introduces overhead which makes it next to impossible to lend in small amounts.
- Credit modeling, the bedrock of lending decisions was driven by increasingly outdated techniques. Since 2000, internet and presence of data driven decision making has created an eco-system which has ripe for disruption and led ultimately to fintech – alternative finance being one of part of this.
Alternative finance disrupts the financial services market in three basic ways:
- a. Significantly lowering overheads so it becomes feasible to lend in small amounts.
- b. Use data driven decision making which means decision based on actual evidence rather than imagined models. This makes risk and credit prediction much more accurate.
- c. Use techniques and consider factors which are better correlated to the ability to actually pay back loans rather than presence of fixed assets.
Together with the pervasive adoption of mobile phones, this is a game changer. But it does not mean banks need to be left behind – innovative banks are already adopting the best lessons from alternative finance to gain a competitive edge over competitors.
And how is this disruption tied to financial inclusion?
Can it help Myanmar? Ok, so let’s think who benefits the most if banks or other financial institutions can lend in small amounts and without collateral? It’s the financially excluded. Most are financially excluded precisely because they have no fixed assets to put as collateral. Micro-lending financial institutions have to some extent filled this gap, but the inability of most micro -lending organizations to adopt the technological advances and practices I described before means they face the same fundamental problems as tradition banks – high overhead.
This has not permitted micro-finance companies to scale. Fintech permits exactly that – the ability to scale by changing the financial landscape and basic cost structures.But this is not a theoretical exercise -alternative finance has started to make significant inroads in India, Indonesia, Philippines within this neighbourhood. Myanmar would benefit, I would add very significantly given the lack of banking penetration from the fintech revolution. There are some very good takeaway lessons from the above countries on how to improve financial inclusion in Myanmar.
How can the financially excluded use this practically? Many financially excluded individuals/ small businesses that were declined by the bank for loans were often left with no choice but to borrow money from their friends and relatives or worse till from informal money lenders with high interests.
The emergence of the alternative finance and lending market has provided individuals and small business owners with a new way to seek an array of solutions and models for funding, meaning that a ‘no’ from the bank, doesn’t mean a ‘no’ for good. These fintech solutions have enabled borrowers to significantly speed up and obtain funding in days (or in some cases hours) as oppose to weeks.
One of the primary beneficiary of fintech are low-income salaried people (factory workers, laborers etc) who require small short-term loans to cover their daily living expenses till next pay period. These individuals typically require $ 20 to $50 every month. Our research in South East Asia have led us to understand the credit behaviour and find out why people are seeking for various forms of alternative finance. Interest free small short-term credit was primarily taken from family and friends and was promptly paid back once salary was received.
They seem to be comfortable borrowing from friends for smaller amounts; for larger amounts ($200 for example) the default tendency was to try and sell durable goods/assets. The second favoured option was to borrow from very trusted sources (again family and friends), but it was visible that their comfort level was less in taking large loans from family and friends (hence the focus on “from very trusted sources”).
What concrete steps can bank and financial companies take to use fintech to drive their businesses?
Banks and financial institutions can gain a large competitive edge by understanding the basics of alternative finance and design future products and strategies around these lessons. One is rational data driven decision making based on applicable parameters – they can adopt more modern techniques to complement their credit/ risk assessment practices. They can demand more data from customers with a promise that this data will be used to better understand the customer’s risk profiles. Going forward, they can organize the gained data more efficiently and adopt systems which help their staff understand their consumer behaviour better.
We have worked with several banks in the region to help them understand and implement practices and systems which contribute to the above; infact we are going to hold a workshop in Myanmar in May. I would recommend anyone who is interested on practical aspects to attend.
So data driven insights can help banks and the end-customers? Can you give examples?
Credit modeling and prediction, user experience enhancement, product planning. All these are heavily dependent on data driven insights, and they in turn make a difference in loan profitability, customer acquisition, and product strategy. The central foundation here is simple – decisions should be based on actual evidence of customer behaviour (represented by data) instead of traditional models which are based on assumptions of customer behaviour.
Data in Myanmar may be sparse compared to other countries how could a finance company make this work?
I would say the bank’s or financial institutions own dataset is its largest asset and we can get started with that. We can also apply web information aggregation techniques to start collecting data about Myanmar which over time, even if not immediately, can be used for benchmarking. We know that this is more difficult for Myanmar as online data is not yet big, but the earlier you start collecting the data, the larger head start you have over competitors. A big issue which will feature more heavily in Myanmar is of course online identity verification – the lack of tools for this make it more challenging in the context of Myanmar compared to other countries even within this region. Having said that it is a green field opportunity for any bank or financial institution who wants to corner the next generation finance paradigms.
How has this worked out in other countries in the neighbourhood?
What have the results been? Pretty good , In 2016, over $2 billion was distributed in Asia (excluding China) via alternative finance means, which represents a CAGR of over the past 163% over the past three years.
Alternative finance is certainly a disruptor – I mean you only have to look at Indonesia, India and Philippines and you see dozens of alternative finance companies operating to close the finance gap, both in consumer finance and SME financing. These are sectors which would traditionally never have been served by banks.