On the 20th of June 2018 in the year of our Lord, the Responsible Finance Forum(RFF), a global alliance of over 50 fintech investors and digital finance innovators, launched the Investor Guidelines* aimed at spreading more widely the benefits of the fintech revolution. The signatories included “Investors and Endorsers that have expressed their commitment to accelerate progress towards responsible digital inclusion, with Potential Actions undertaken as may be appropriate to Signatories’ investment objectives, digital finance operations and digital market infrastructures.”
My conclusion: balderdash!
The Rant
I have a few reasons to be negative about the so-called Forum. Firstly, I wasn’t invited. I ain’t no Groucho Marx who reputedly said: “I don’t care to belong to any club that will have me as a member”. I’m always happy to discuss @paylater so if we’re talking financial inclusion, where’s my invitation? Since I saw the announcement on social media, I was refreshing my spam folder but, a week later, I had to draw the inevitable conclusion that the invitation was never sent.
The second reason I am perturbed is that our competitors were invited! In this day and age, if you’re on the long path to becoming a unicorn, you need to win vacuous prizes like best mobile app/digital bank — or be a founding signatory to industry initiatives. Just like two of my peers had the opportunity to do when inking the forum’s investor guidelines. Instead, my valuation has shed $300mm just when I’m about to hit the fundraising trail. So, forgive the rant, but this may have cost us dearly.
The third and most important point though is that from what I have seen it was a waste of time. Caveat first, please. I can only base my judgment on the documents that I’ve read. I was not privy to any discussions held at the Connecting the Dots conference where the guidelines were launched. (Guys, if you had invited me I would have seen more.)
But for a group that included some savvy investors and credible fintech companies (some of whom I admire and am friends with), reading the press was a bit of an anticlimax. The guidelines read like what you get when bureaucrats and/or politicians meet to discuss meaty issues but for fear of being portrayed as controversial, release a long-winded statement that sounds important but says nothing substantive. If you don’t believe me, I challenge you to read the guidelines: I bet you fall asleep by the time you get to the 4th one!
Expressing a commitment to these noble goals is similar to me expressing my commitment to that girl at Ratcliffe College when I was thirteen. I didnt’ express undying love but I did profess my earnest and pure committment. Not surprisingly, nothing came of it and clearly, not beacause I wasn’t good looking. I suspect she sensed the words came to easily and there was no meat behind them
Now my greatest fear is that as I go to raise money from any of the signatories, due diligence will consist in part of how Paylater is going to meet the goals set out in this noble document. Shoot me now.
The Problem
I have written enough pitches and investment memorandum to know that when you want to fill in white space, there are no better words than: promote, enhance, ensure, and facilitate….I think you get the point.
My three main gripes are that the guidelines:
1. Do not go into sufficient detail. So you want me to improve the disclosure of terms & conditions (T&Cs)? How? We know that most borrowers do not read the T&Cs on their features phones when applying for a M-shwari loan. “Just give me the cash bwana so I can pay my three other micro-loans.”
What’s the proposed course of action? It would be great for the investors to talk about some issues they’ve faced in this area.
2. Lack numbers. Too many investors have a naive view about pricing. Tell me — what’s a fair interest rate when your cost of funds is 30%, inflation is 15% and your credit bureau and banks keep playing hide & seek? Let’s have a discussion about that especially as investors have divergent views on what’s a fair rate and what’s usury. If we just “express commitment to promote fair & transparent pricing”, we won’t get far.
3. Are not bold enough. Getting all parties to agree on positive steps for inclusive finance is the low-hanging fruit. I doubt if these steps are controversial amongst those who really are aligned to the goals of the Responsible Finance Forum
“So negative Ngozi”, people will cry. “What do you suggest then Mr. Smarty Pants?”. Good question.
I think there are meaty issues to discuss and the forum should have been braver about tackling issues.
My Minority Report
Whilst my suggested guidelines are shorter, I believe them to be more impactful.
1. Insist that all current and prospective companies report both positive and negative data to credit bureaus. Most lenders that I know don’t do this. It would have been refreshing to hear investors say they would compel portfolio or prospective companies to disclose all data. That definitely has more teeth than ‘prevent over-indebtedness and strengthen blah blah blah’. This measure would increase competition to give loans to good customers, driving down borrowing costs. If I charge 10% per month and a competitor and/or bank sees that my customer is paying down regularly, they might try to lure this customer away with a lower interest rate or better service.
2. No rollover loans in case of customer default. In the industry, there’s a common practice of loans that have not been paid. For example, let’s say that I borrow 1,000 shillings for 30 days. If I don’t pay back the loan on repayment day, many lenders won’t classify this as a bad loan. They will actually extend the tenor of the loan, say by another 30 days, or worse, charge a fee and re-issue the loan at the same rate. So now I have borrowed twice even though I have only received 1,000. Here are the three big problems with this:
- The customer is clearly struggling to repay. Whilst extending the tenor might help, slapping a fee (usually a high one) on the loan is pushing the customer into more debt.
- A bad loan has been transformed into a performing loan through financial abracadabra. TADA!
- And, the lender will tell the market they’ve given a customer two loans, both performing, whilst it is the same bad loan. Multiply this experience across thousands of customers and you can see that this is a huge problem. It’s no wonder many companies refuse to report both positive and negative data to the bureaus.
3. Lastly, include the customer’s point of view. Whilst the guidelines seem to be geared towards lending, they lack a holistic view, which is critical for success. A customer is at risk of default if they get sick and have no health insurance. Similarly, the introduction of innovative savings products may reduce the recourse to high cost loans. The need to borrow quickly if your machinery has broken down could be prevented if accident or general insurance existed.
Conclusion
I sincerely commend the signatories for their commitment to responsible finance and financial inclusion. The intro to this article may have been a bit harsh — it could be my form of click bait — but the challenges facing the industry are significant. We need to put pressure on the industry to reach higher and push harder to help the millions that have been excluded. I hope I am proved wrong and there are substantive outcomes or guidelines that will come out of the Forum to increase the efficacy of financial access via digital means. I look forward to being part of future collaborations. There are several ongoing discussions on devising common standards in the lending space, which is a promising development. There are a few renegades coming out and, despite my criticism, a forum like the RFF is needed to hold the industry accountable. It is said that many times, great is the enemy of good. Let’s start with simple committments: Full reporting to credit bureaus and recognising bad loans immediately are two simple things that the lenders and their investors can commit to immediately if they are serious. Everything else is gravy.
For reference: The Responsible Finance Forum’s Investor Guidelines:
