We were recently asked about how we assess risk in our business and especially customer risk. We don't do credit checks and don't look at affordability but are still able to assess each customer based on behaviour and extend subscriptions to every customer.
It's been an interesting and ongoing conversation, we've been asked some interesting questions and what we think about the future of customer risk profiling.
Here what we were asked and what we think at Rentoza
What are the risk acceptance criteria and gaps in the South African banking sector?
Traditional risk vetting looks like this. Financial institutions first check that you have no listing on the credit bureau they then do an affordability score which is based on financial commitments versus a gross income at level of around 35%. By all standards, it drives exclusion. The major gaps are that this doesn’t account for the under (minimal credit participation) or unserved (no credit participation). This combined total accounts for around 27 million people in SA. This spreads across all income groups and good earners with no or minimal credit history are excluded due to the inability to measure the credit risk.
How is this excluding South Africans from participating in the economy and improving their lives?
Basically, credit plays a role in allowing increased economic transactions and enhanced economic growth. The ability of a consumer to borrow money leads to a stimulation of consumer purchasing power for goods and services. So if people can’t access products they need through a credit mechanism it stops them from participating. This means that they can't play on a level field when it comes to acquiring what they need, they basically have to pay for everything cash. The big issue with that is well... In SA the savings level is only 13% of GDP with the global average at around 25.1%, the ability to save is also an issue for South Africans as household disposable income is dwindling due to unfavourable economic conditions. Its just a vicious cycle.
How do you believe risk should be defined in a new world of digital consumerism?
We believe it should not just be an affordability equation. It has to be a combined view of qualitative and quantitative information or data. So not only do you have to look at the financial data but also their preferences. As an example, take a person that is focused on their health and wellness. Although they might not have the indicators by traditional financial standards to access the products they need for their health and wellness; lets say fitness products, healthy food choices, health experts, advice and alike, we know from data gathered say from their purchasing behaviour that they will always prioritise these items and services in their lives. We should be taking this into consideration.
Information about behaviours and choices is more easily accessible in the digital age and can be used to augment the analysis done when they are reaching out to institutions for funds to support their lifestyle.
It's something we do for every customer when we put them through our behavioural risk model to extend a specific product to them.
How does the subscription model differ from regular bank loans in terms of accessibility to low-income workers and those with limited credit histories?
Firstly we are non-credit. So it doesn’t feature when we assess our customers. Subscription is a pure play, pay as you use model. You use an item, in the case of Rentoza, for a period of time that you needed it. No long term commitment, it’s month to month.
For low income earners you can access the products you need because you only pay a fraction of the actual cost of the item to use it. You’re not having to fork out R4000 for a phone you can pay as little as R200 a month to use a smartphone, not a feature phone a smart phone! When you don’t have the R200 in say 3 or 4 months time should your circumstance change you simply return the item. No penalties. The reason we're able to do this is because it's not a long term credit backed agreement. There's no long term commitment or liability for customers.
Basically people are taking on credit to acquire an item because they need to use it to achieve a certain outcome, why not skip the acquiring process and just focus on the utility you need from the product over that period of time. Again it’s not about your affordability it's about how to prioritise your needs.
How do subscription services plan to expand services in the future, and what impact could this have on the wider financial sector, particularly when it comes to traditional credit models?
We believe that subscription will grow to all aspects of consumerism, whether it be a service offering or more product offerings in future. A big push for many businesses is trying to reduce customer churn and the model that is emerging quite strongly is subscription. A much longer term value building model which reduces churn rate.
When it comes to the financial sector it's actually a major benefit. It starts to bring in a previously excluded segment of the market, or even a younger generation, who can now transacts on a regular basis. There is always a payments backbone that sits behind these business and by people transacting through new inclusive models like subscription they inadvertently add transaction volume to financial services businesses. If financial institutions leverage the information that they have passing through their systems, they will be able to figure out how serve a wider part of the population with a better set of information to then start building product that speaks to them and maybe figure out a different assessment criteria.
What changes could traditional banks make to remain competitive in this market?
Honestly, it's not about remaining competitive. Banks are for the most part solid institutions, especially in SA and they always have the lions share of deposits and transactions. I think it's more about how they support these new models effectively that will be the real win for everyone, including them.
Subscription and behavioural risk profiling is what we believe is the future and exactly what people need in emerging markets more than anywhere else.
Consumer credit is dead. Long live access over ownership.