12 May 2021
Breaking the bank: the rise of alternative credit providers in growth markets
Alternative credit providers in Growth Markets are ‘breaking the bank’, by separating the ‘funding’, ‘manufacturing’ and ‘distribution’ portions of the credit value chain. Traditional financial institutions have largely held a monopoly on converting customers’ deposits (‘funding’) into credit products (‘manufacturing’) and have then utilised this position to provide credit (‘distribution’) in growth markets.
Breaking the Bank
Over 70% of individuals either own or have access to a mobile phone in most African and South Asian countries, and mobile money services are available in 85% of countries where the number of people with an account at a financial institution is less than 20%.
A new paradigm
Alternative credit providers are focused on designing products (‘manufacturing’) that utilise innovative and low cost solutions on the ‘distribution’ side, and working with local participants (such as banks) and international participants (such as private equity and asset managers) on the ‘funding’ side.
The importance of credit provision in Growth Markets
The rise of alternative lenders that provide consumers and SMEs in Growth Markets greater access to formal sources of credit is important, as the availability of credit plays a vital role in the economic development of these regions. Credit can enable lower income customers to make investments in education, to create and expand businesses, to afford medical treatment, and to weather other setbacks, without falling deeper into poverty. This is the context with which this paper is presented, to outline the current and expected dynamics of the credit industry sub-vertical in Growth Markets.
Banks should recognise that the business environment has changed and should thus embrace the opportunity of the new technological environment to adapt their business model and leverage their own operating advantages.
We hope that you find this paper informative and ultimately useful in rethinking some of the current paradigms related to the provision of credit in Growth Markets. We believe that these innovative business models are set to become a major catalyst in both the market structure and growth of these economies by removing frictional costs of intermediation and providing access to much needed capital.