Digital credit has grown rapidly over the past 10 years, with over 800 new alternative lending companies established and $9.5 billion invested. Digital credit is defined as loans that are approved instantly through automated and remote processes without human review or a physical visit. In developing markets, mobile network operators play a dominant role in providing digital credit due to their existing customer access points and data sources. Successful digital credit programs can scale rapidly, with examples in Kenya and Tanzania growing to millions of customers within a few years. While primarily used for short-term liquidity needs, digital credit fills an important gap and has the potential to strengthen financial ecosystems and inclusion.

1. The Emerging Landscape of Digital Credit
Maria Fernandez Vidal
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Presented at CGAP’s learning event: Customer value & Customer risks: Emerging issues in Digital Credit & Data Privacy, February 2017, Paris

2. 2
• In last 10 years:
‒ 800+ new
alternative
lending
companies
‒ USD 9.5 B+
invested
• Fast growth: >50%
of total investment
made in 2015
• 7 “unicorns” (SoFi,
CreditKarma,
Klarna, Avant,
Prosper, Funding
Circle, Kabbage)
• Several IPOs (e.g.
Lending Club,
OnDeck)
Alternative lending options have grown rapidly in developed
markets over the past 10 years
Source: Tracxn, “Alternative Lending Report”, Dec 2015

3. Payment account
$
Data pool
0110101
1101010
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0010011
Balance Sheet
Access points
• Diverse players
• Deep data pools, multiple sources of
information
• Internet connectivity and smartphones
universally available
• Payments infrastructure (switches, ACH)
that disaggregate the value chain and
enable innovation
Credit bureau, Social
media, Internet
Banks, Prepaid issuers,
retailers, MNOs
Internet, Smartphone
apps, ATMs, ACH
Numerous sources
Developed markets Sub Saharan Africa
MNOs
BANKS
Fin Co’s.
In developing markets, especially in SSA, MNOs play a dominant
role due to the lack of alternative channels to reach customers
• In SSA, MNOs concentrate the key aspects
needed to reach customers with a credit
offering – except the balance sheet, but that
can be a “commodity” accessed through a
partnership or a lending license
• In many Asian countries banks have a
higher penetration in the low income
segment
Payment account
$
Data pool
0110101
1101010
0100111
0010011
Balance Sheet
Access points
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4. What do we mean when we refer to digital credit?
Defining attributes
of digital credit
Instant
Automated
Remote
1
2
3
• Loans are approved instantly, often
within seconds
• Individual decisions are undertaken
without a one-by-one human review
• Borrowers can receive funds and repay
remotely without visiting a B&M location
Additional
characteristics of
the space we are
focusing on
Collateral-free
Direct to individuals
Developing markets
Targeting the Unbanked
4
5
6
7
• Collateral restricts access and generally
requires an in person interaction
• Loans for businesses and P2P have
specific characteristics
• We focus on Africa, Asia and Latin
America
• Products that do not require a prior
bank account can reach the unbanked
4

5. Example: M-Shwari loan
.
. .
8 SEC
Turn around time on
account activation
6 SEC
Turn around time on
transaction processing
Kenya (2012)Country/Launch
Providers
Deposit into
mobile
account
Instant
Automated
Remote
Collateral-free
Direct to individuals
Developing market
No bank account
5

6. Though still concentrated in Kenya, Digital Credit is a growing trend
across emerging markets
Philippines
DRC, Ghana, Malawi, Niger,
Rwanda, Tanzania, Uganda, Zimbabwe
Kenya
Mexico
Pakistan
Indi
a
• Currently 22 live deployments
globally*:
‒ 18 deployments in SSA
‒ 5 offer Credit & Savings
‒ 6 have >1 M users
• Most:
‒ 2-4 weeks average tenor
‒ USD $10-$50 average loan
amount
‒ Interest rate 6 – 10% for
duration of loan
• Estimated 24M+ subscribers
‒ About 15-25% active
borrowers
• For example, M-Shwari in Kenya:
‒ 13.5 M customers
‒ NPL = 1.7 %
Note: These deployments strictly follow our definition
of digital credit. If expanding the definition, e.g. not
fully automated, P2P and SME lending etc., the
number of deployments increases to 50+.
As of January 2017
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7. Successful deployments can scale up rapidly, as illustrated on the
example of M-Shwari in Kenya and M-Pawa in Tanzania
2012 2013 2014 2015
M-Shwari Customers
(Million)
Includes savings and loan customers
Nov 2012:
M-Shwari Launch
2.9
9.0
12.5
M-Pawa Customers
(Millions)
May
2014
0.2 0.4
0.7
1.3
2.0
3.6
4.1
June
2014
Sept
2014
Jan
2015
June
2015
Dec
2015
March
2016
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8. And have can lead to significant growth for the players involved
Deposit Accounts
(Million)
Loans
(Million)
2011 2012 2013 2014 2015
0.04
1.06
5.65
9.35
12.93
0.01
0.89 0.90
1.85
2.69
Source: Central Bank of Kenya
Nov 2012:
M-Shwari Launch
Kenya
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9. Digital credit deployments typically offer small, short-term loans, but
there is some variation on the loan terms, amount, and pricing structure
LOAN TERM: 4 weeks 1, 2, 3, or 4 weeks 16 weeks4 weeks
Note: Data as of Dec 2015
USD $30 USD $10 USD $50USD $125TYPICAL
LOAN AMOUNT:
INTEREST/FEE: 7.5% monthly 0.5% a day 1.5% weekly
None 10%
initiation fee
One time
application fee of
$2 if approved
ADDITIONAL FEES:
5% handling
Transaction fees
for moving funds
to/from wallet
Kenya (2012) Tanzania (2014) Zimbabwe (2014) Philippines (2015)COUNTRY
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10. Digital credit is primarily being used for day to day needs and
emergencies
Reasons for taking loans by selected institution type (%)
Kenya, FinAccess 2016
34.2
6.7
14.5
10.7
18.9
5.9
3.2
40.9
8.1
10.5
11.8
46.2
5.2
1.8
6.8
5.8
15.2
3.6
45.9
10.5
36.5
21.5
17.1
8.2
11.5
40.1
34.1
51.5
37
36
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
House/Land
Emergency
Education
Agriculture
Business
Day to day needs
Banks Mobile banks Microfinance SACCOs Informal providers

11. There are unique aspects of the digital credit product that make it
different from traditional products like microfinance
Digital Credit Microfinance
Type of loan
Need being
addressed
Requirements
Short term
Short term liquidity need due to
irregular income
No collateral or formal proof of
income generally required
Medium term
Financing for an asset to be used
in a productive activity
A business plan or functioning
business and collateral are
generally required
Target Anyone that has a short term need
for cash
MSME owner, farmer, self-
employed
Breakeven loan
size
$10-$50 $300-$600
Breakeven
interest rate
? 15%-40%
Example:
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12. This business model requires higher annualized interest rates to
breakeven when compared to longer term loans
Term 1 month
Amount $20
Cost of
capital
0.5% per
month
(6%)
Operational
cost per loan
10c
Simplified example:
Assumptions:
Breakeven
interest rate
12.2% per month
(299%)
Breakeven
interest rate
6.3% per month
(109%)
Breakeven
interest rate
18.8% per month
(692%)
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Default rate
10%
Default rate
5%
Default rate
15%
Scenario A
Scenario B
Scenario C
Note: Simplified example for illustration purposes only, should not be understood as an accurate description of the cost of a digital credit product.

13. NBFI + MNO
NBFI scores,
underwrites,
and lends on
own balance
sheet
MNO
provides
data, wallet
and agents
TIMIZA
Jumo+ Airtel
TANZANIA
There are different types of partnerships in the market,
depending on the role each player takes in the value chain
Balance
sheet
Data pool
Payment
account
Credit
scoring
Product
Example:
Bank / FI
Mobile Network
Operator
Tech Firm/NBFI
BANK + MNO
+ Tech Firm
Tech Firm
provides
scoring service
Bank
underwrites
and lends
MNO
provides
data, wallet
and agents
Libiki
UBA + Tiaxa
+ Airtel
DRC
BANK+ MNO
MNO
provides
data, wallet
and agents
Bank scores,
underwrites
and lends
MSHWARI
Safaricom+
CBA
KENYA
BRANCH
KENYA
Tech Firm
scores,
underwrites,
and lends on
own balance
sheet
Uses MNO
wallet and
agents for
cash-in and
cash-out
Tech Firm + MNO
TELCO- LED MODEL TECH-FIRM LED MODEL
Access
points
Tech Firm
reaches
customers,
scores, and
lends on
own sheet
Uses
Internet
footprint
INTERNET
MARKETPLACE
KUBO*
FINANCIERO
MEXICO
Internet /
Banks
*Requires previous bank account ownership
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Smartphones or internet
as the Access Point

14. • Smartphone penetration: The availability of a direct digital channel through
smartphones or online enables the tech-led models to use apps as access points
• Digital footprint: The availability of digital data on potential borrowers enables
better scoring of applicants and helps manage the default rate
• KYC requirements: In person KYC requirements limit the expansion of tech-led
models and new entrants, that don’t have a physical channel they can leverage
• Interest rate caps: Regulation on interest rates that considers digital short term
loans in the same light as annual or multiannual loans can make the business
model for small liquidity loans unsustainable, as interest is only charged for short
periods of time and on small amounts
• Lending license requirements: Simplified processes to get lending licenses can
enable new players to enter the market without requiring a partnership with a
bank, increasing the competition
There are several factors that affect the business model and impact
the growth and evolution of the market
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15. • Digital Credit does not seem to be a passing fad, it is growing and becoming
more mainstream, offering banks and other formal FIs a role in developing the
digital ecosystem
• Digital Credit offers a source of revenue for providers and a clear value
proposition for customers, and therefore it has the potential to be a gateway
product that strengthens the digital ecosystem by bringing in more users and
providers to the space
• It is leading to a new kind of credit market, where Telcos, banks, MFIs and
Fintechs are participating, for a product that did not exist before but can fill an
important need for low income customers
• This new market poses new challenges for customers, providers and regulators,
as it follows a different business model, it evolves at a fast pace and it attracts a
more diverse group of players
Key takeaways
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16. Advancing financial inclusion to improve the lives of the poor www.cgap.org
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