Digital credit products are rapidly emerging in the digital financial services (DFS) market as a new, innovative form of accessing electronic money. Digital credit products differ from traditional forms of credit, using smart and feature phone technology or web platforms to register, score, approve, and distribute loans to borrowers. The Consultative Group to Assist the Poor (CGAP) identifies three unique features that differentiate digital credit products from other DFS or loan services: (i) digital credit loans can be applied for, approved, and disbursed remotely (often without any brick-and-mortar infrastructure), (ii) approval is automatic (minimizing the time and number of steps between registration and the distribution of loans), and (iii) approval is instant (often in less than 72 hours). Digital credit also increasingly considers nontraditional or alternative data to determine creditworthiness, in addition to traditional financial information like credit scores and bank account information.
Figure 1 illustrates the types of data considered in the credit scoring algorithms of 68 digital credit products from India, Kenya, Nigeria, Tanzania, and Uganda reviewed in an EPAR report on digital credit offerings in these countries (Technical Report #351a and data visualization).
Figure 1. Types of Data Used by Digital Credit Products to Determine Credit Eligibility
Source: Authors’ calculations, Product Websites
CGAP reports that digital credit loans often have relatively high interest rates, multiple fees, and short repayment periods (30 days or less). Some features of digital credit products differ by geography: Indian products, on average, typically offer longer maximum repayment terms and lower interest rates than African products, as seen in Figure 2. Additionally, digital credit loans in India more commonly rely on income verification and connections to a bank account than in Sub-Saharan Africa (SSA).
Figure 2. APR per Product, Maximum Days for Repayment, and Maximum Loan Size
Source: Authors’ calculations, Product Websites
Some products offer rewards on future loans for early repayment. This may add an extra incentive to borrow (and re-borrow), which can either improve the credit scores of borrowers if the provider reports that information, or damage the credit scores of borrowers who later default. Additionally, many of the digital credit products we identified rely on partnerships, including:
- Partnerships with banks and investment capital firms to provide initial and ongoing funding
- Partnerships with Mobile Network Operators (MNO), which allows mobile phone users to access loans through their phone service providers, usually in combination with mobile money services also provided by MNOs
- Retail partnerships, a type of partnership specific to Indian products which allows borrowers to request loans from a digital credit provider for the purchase of goods from a partner retailer
- Peer-to-Peer (P2P) lending (P2P), where individuals engage either as lenders or borrowers on the digital credit product platform
Some digital credit loans are also bundled with other services to offer borrowers a broader range of product options such as savings accounts, insurance, remittance transfers, or bill pay services.
Increasing Access to Credit
Research by the International Financial Corporation (IFC) and McKinsey & Company suggests digital credit products have the potential to expand credit to borrowers who would otherwise not be served by the formal financial system, allowing for unbanked and/or low-income populations to access loans and credit. The IFC reports that unbanked populations may include those who live far from brick-and-mortar branches, have limited time or financial resources to meet formal banking requirements, are without formal documentation, or lack traditional credit scores.
Digital credit products, as discussed by Omidyar Network and IFC, may expand digital credit offerings by reducing travel and time required to apply for loans in-person, broadening the loan-eligible population through the use of alternative data (as many people lack substantial financial histories in these countries), and providing alternative technology platforms that broaden accessibility to different consumer groups. Figure 3 summarizes regional trends in the use of three digital credit technology platforms—internet (via computer or mobile phone), smart phone app, and feature phone (via USSD, SIM card toolkit, or SMS)—among the products reviewed.
Figure 3. Technology Platforms Used by Digital Credit Products
Source: Authors’ calculations
Note: 14 products use multiple technology platforms and are therefore represented more than once. 11 use an app combined with an internet platform, and 3 use an app combined with a feature phone platform.
In terms of targeting, few digital credit providers (15 of 68) state that they target poor or rural populations or women, and none of these describe specific measures to reach these populations. Instead, many of the 68 products we reviewed target less vulnerable (and potentially less risky) populations, including urban residents, students with future income streams, business owners, uncollateralized youth, and the currently employed.
Due to limited loan volumes and performance data, it is currently unclear how these digital credit products might impact borrowers and markets. Because many of these products are less than a year old, there is little public information regarding their uptake and whether digital credit products successfully increase financial inclusion for target populations.
This is the first in a two-part series reviewing digital credit products and potential regulations, presenting findings from EPAR Technical Reports #351a and 351b. Part two explores new regulations addressing challenges from the growth of digital credit, summarizing findings from 20 regulatory documents in select Asian and African countries that address online, mobile, or digital products that provide credit and lending services.
By Kirby Callaway
Summarizing research by Travis Reynolds, Marieka Klawitter, Leigh Anderson, Pierre Biscaye, Kirby Callaway, Melissa Greenaway, Daniel Lunchick-Seymour, and Max McDonald