Financial Inclusion in Ho Chi Minh City, Vietnam

Angie Ngoc Tran
Oct 8, 2018 · 4 min read

Area of focus: Short-term unsecured personal loans

What’s now

In Vietnam, there’s a significant increase in demand for short-term unsecured personal (payday) loans. These loans tend to be urgent, especially for low/average income families and individuals who have little to no credit history. Banks set a large number of constraints on loans of this kind due to their high-risk, which results in a complicated and slow process that does not accommodate the consumers’ time-sensitive need. People in need are then forced to turn to loan companies (with unreasonably high-interest rates) and loan sharks that take advantage of their desperation.

The most common issue is that the borrowers get caught off guard with unexpected fees and penalties (for late payment or paying off before maturity) hidden in the lengthy and wordy contracts. Thus, they usually end up paying an amount 3–4 times the principle or get trapped in a never-ending debt cycle.

Who are the borrowers?

Low/average income residents of Ho Chi Minh City, Vietnam who are in urgent need of unsecured loans.

What to get loans for

  • Cash
  • Electronics
  • Motorbikes
  • Medical expense
  • Others (Education, fitness, flight tickets, household items, grocery, online shopping…)
  • Small business

Tenor: 6–36 months

Amount: Up to 70–80Mil VND (~35k USD)

Tenor, Approval Time and Max Loan Amount depend on the product types.

Borrow loans from banks

PROS

  • Lower interest rates
  • The bank pays for the loan insurance.
  • Security and credibility
  • Special programs (higher Max Loan Amount and faster approval rate) for top 500 Vietnamese enterprises’ or federal employees as long as their company has signed a partnership contract with the bank. If the company has a payroll account at the bank, the loan payment can be deducted straight from their employee’s monthly salary.
  • If the borrower already has an account with the bank and good credit, they might be qualified for an overdraft line of credit.

CONS

  • Banks are not open to small and short-term loan as it imposes high risk.
  • Banks don’t provide loans to those that have no credit history or bad credit.
  • Complicated and lengthy process (Once the borrower has applied, the contract has to be signed by multiple roles/departments and go through a screening process before the bank can disburse the money. It usually takes more than one day.)
  • Too many documents required
  • Borrowers who are not familiar with bank products or services tend to shy away from this option.
  • Hidden fees (since banks are expected to make at least 7% profit/year, but the interest rate is capped at 20% APR, they find other ways to increase profits from loan products.)

Borrow loans from Fintech companies

By law, it is illegal for Fintech companies to provide loan products, which results in two types of Fintech:

Type #1–B2C (Business to Consumer) model:

Using the Pawnbroker License to provide “black credit” loans. Those loans are under the format of a personal contract that is not legally required to have a cap for interest rates. Thus, the rates can vary from 108–360% per year.

Type #2–B2B (Business to Business) model:

#2.1 Only facilitate the lending process

between the consumers and financial institutes who are dependent on limited credit bureau data and outdated credit scoring technologies by providing digital experience and alternative credit score system (current leading firm of that technology Trusting Social).

#2.2 Partner with a bank

To legalize the lending services, utilize the bank’s capital and reputation, and retrieve the consumer’s information from the National Credit Information Centre of Vietnam (CIC) and CDD/KYC data system that only banks can access now. However, the Fintech company has to depend on the bank system that can be time-consuming and inefficient to manage their loans. They also have to do a full reconciliation with the bank periodically.

Why banks want to partner with a Fintech firm

  • Nurture good financial behavior consumers
  • The Fintech firm has to be responsible for Non-Performing Loans (NPL)
  • Learn the technology and operation from the Fintech firm then open their internal department

PROS

  • Always available, fast and convenient with a digitalized process (Disbursement can happen as fast as 10 minutes after the loan request is submitted).
  • Requires only 2–3 documents (national ID, driver’s license, salary records of the past three months…)
  • Don’t do credit check. Some use their alternative credit score technology to determine if the loan is payable.
  • Some partner with electronic stores to offer lower interest rates.

CONS

  • Overly high-interest rates with unreasonable hidden fees
  • Bad customer service. Some force the borrower to record a video of themselves making a promise to pay the loan on time. The video will be posted on social media if he/she fails to pay.
  • Threats from debt collectors, from multiple calls per day to visits at the borrower’s home or working place.
  • Law of Vietnam doesn’t accept e-signature so the loan contract can only become legal with an in-person signature, which disrupts the online process. Most of the borrowers are not aware of this regulation so that some Fintech companies get away with just online contracts.

Side notes: Law of Vietnam doesn’t allow cryptocurrency or P2P lending.

HOW MIGHT WE make the borrowers feel educated, protected and confident throughout the loan process, at the same time stay on top of their financial management?

1. Choose loan options

  • Aware of their loan capacity & financial situation to stop over borrowing
  • Make an informed decision on the loan package
  • Know their legal rights

2. Apply for loan

  • Smooth and seamless process

3. Pay monthly installments

  • Incentivize to pay on time or set up auto payments

The Fintech Landscape in South East Asia

My process blog for my thesis at SVA MFA Interaction Design.