An Introductory Course to Digital Credit
CGAP has been tracking the proliferation of digital credit services over the past two years. It is obvious that there is huge innovation and creativity in this area, but (as should be expected) there are many cases where basic fundamental miscalculations have occurred.
Among a number of lessons learned, we have spoken with providers about the following six early errors made by digital credit pilots and deployments:
Offering credit without a strong remote identification system. When you can’t verify customer identity, offering remote services is difficult, especially at scale.
Poor targeting, where credit offerings attracted a high-risk applicant pool.
Cumbersome loan application processes that meant few people came forward to apply.
Credit scoring models that were too conservative and did not allow credit to be extended to more than a small fraction of applicants.
Poor product design, such as a transfer fee for moving money to/from a mobile money account that quickly made the product unviable.
An excessive focus on credit scoring but the absence of a sound collections strategy.
These are some of the early learnings CGAP aims to help address with An Introduction to Digital Credit, a self-directed, one-day course for practitioners, regulators and others with an interest in digital credit. The course material outlines basic concepts and provides an overview of new, emerging models. It provides tools to help practitioners and regulators better understand how the products work, including design and financial considerations.
The course is divided into five main sections.
An introductory session describes what digital credit is and distinguishes between two key models. One is new products – like M-Shwari – that are direct to individuals. The other is new digital credit services that are delivered via a merchant or value chain aggregator. These two approaches entail quite different risks and business models.
A second section covers credit scoring and uses of new alternative data, such as mobile phone call records, which are often part of the new innovation in digital credit. For those new to credit scoring, an introductory session describes how scoring is developed, how to tell if scorecards work, and various kinds of data for scorecard building.
A third section covers some of the product and service design considerations. This includes product details such as tenor, loan size and initial pricing. There is some early research findings on consumer protection concepts pioneered by CGAP – a particularly important issue given how fast digital credit can be delivered.
A fourth section covers some of the financial considerations. While digital credit can be extremely low on branch and staff costs, often requiring no physical infrastructure to reach clients, it still incurs other costs. This section details a basic financial model for how digital credit business models can be built and highlights some of the unique financial dynamics. There is an associated financial model in Excel that can help providers begin to model their digital credit products and costs structure.
The final section is on partnerships – most often the biggest source of failure and blockage to experimentation. This concluding section highlights critical roles and provides a basic tool for how interested parties can consider and build out potential partnerships.
Whether you are already operating a digital credit service or are planning to do so, the course aims to provide useful relevant content. It is a starting place to benefit from others who have tested and tried the idea. To access the course content, go directly to the course, An Introduction to Digital Credit, and if you would like a copy of the financial model in Excel, email your request to [email protected].