Microlenders who put their trust in algorithms say humans indulge in too much unacceptable risk.
It is becoming more and more commonplace to take care of arduous personal admin online — and loans are no different, with many websites offering people the opportunity to get a short-term loan within minutes and without even having to set a foot out of the door.
Applying for a loan online is as simple as providing some basic information, clicking a button to prompt an automated system to crunch the numbers and spit out an approval or refusal.
If approved, the money is immediately deposited into your bank account. It requires no supporting documents.
Convenient as it would seem, the idea may still be hard to stomach, especially when concerns are rife about reckless lending, high levels of consumer indebtedness and a possible credit bubble.
But Kevin Hurwitz, the chief executive of online microlender Wonga.com South Africa, says machines make better decisions about lending than people do.
Two South African-born entrepreneurs developed the world’s first automated risk decision-making lender, Wonga.com, which was launched in the United Kingdom in 2007 before branching out to Poland, Canada, Spain and South Africa.
Wonga.com claims to be the world’s first but it certainly isn’t the only paperless, automated online financier.
In South Africa, a quick Google for instant online loans will bring up websites such as getbucks.com, yuppiecash.co.za, wannaloan.co.za and boodle.co.za, which are all registered with the National Credit Regulator.
Hurwitz said Wonga.com arose from two incontrovertible truths — consumers no longer trust their banks, and they don’t want to be in debt for any longer than they need to be or for larger amounts. Also, the future is digital.
Exactly how Wonga.com assesses a client’s creditworthiness is a closely held secret, but 30 fields have to be completed and the client’s credit record is an important part of the assessment.
Sophisticated algorithms use the input to crunch thousands of pieces of data in order to assess risk and decide whether to grant the loan or deny it.
Wonga.com South Africa offers microloans of up to R2 500 for first-time applicants, which can be paid off at any time between one and 40 days.
Returning customers who qualify can get up to R8 000 at a time.
Getbucks, the online lender with the largest footprint in Africa, offers between R500 and R4 000 in South Africa with a repayment period of up to 45 days.
Wannaloan offers between R500 and R3 000 with a repayment period of up to 37 days.
Yuppiecash offers loans between R100 and R2 000 with a repayment period of 36 days and Boodle grants a maximum R2 500 loan, with repayment required over a maximum of 37 days.
All charge flat interest rates of between 23% and 25.3%, which is allowed by the National Credit Act.
According to the regulations, the maximum interest on an unsecured credit transaction is the repo rate (5%) plus 20% a year.
For short-term credit transactions, it is 5% a month, or 60% annualised.
There is also an initiation fee for unsecured and short-term credit transactions, which is limited to R150 per credit agreement, plus 10% of the amount of the agreement that exceeds R1 000, but the total fee can never exceed R1 000.
Getbucks director Gert Jonck said the interest rate on a small amount is higher than it is on a big loan as there are costs associated with checks before providing the loan.
Often microlenders have to lend the money and pay interest fees themselves, although both Wonga and Getbucks are privately funded.
If selecting the maximum amount and the maximum repayment period with Wonga in Canada, you will pay 21% in interest and fees. In the United Kingdom, it can be as high as 43%.
One might wonder if it is risky but, Hurwitz said, “we have no interest in lending to people who can’t pay us back”, hence Wonga.com South Africa’s 75% rejection rate of first-time applicants — “no human is doing that”.
Wannaloan reject 80% to 85% of applications. Jonck said their site approves between 10% and 20% of all loan applications.
They also use algorithms but may ask for documents in a small number of cases.
As a risk-related business, there is an acceptable level of debt built into the business plan.
For return customers, Wonga’s bad debt is between 7% and 8%, and that of first-time customers is also at a “very acceptable level”, Hurwitz said.
Some credit providers have default rates of up to 25%, he said.
PwC’s banking analysis for the reporting period ended June 2013 found that the combined credit loss ratio of the major banks was at 1.2% for the first half of the year.
Although banks are playing a bigger role in the short-term and unsecured lending sectors, online financiers say that, when it comes to lending, South African banks are stuck in the Dark Ages.
Varying interest fees
All major South African banks offer online loan applications but most require documentation and, although the assessments are automated, there is some kind of human interaction.
Interest fees also vary and are based on a client’s risk profile and an affordability assessment.
Nedbank’s prospective clients can apply online and will receive a call within 48 hours of their initial application to take them through the detailed application process. Clients can expect the disbursement of funds within 24 hours from submission of necessary documents.
At both Standard Bank and Capitec, depending on all requirements being met, the money could be deposited on the same day or within 48 hours of application.
At FNB, customers with an active FNB cheque account have access to pre-approved short-term loans. No application form has to be completed and the loan is credited to the customer’s account immediately.
The amount a customer qualifies for depends on his or her credit risk and is subject to the bank’s credit approval and affordability criteria.
The loans can be taken at an FNB ATM, FNB online, by cellphone banking or at an FNB branch.
If the loan is repaid within 31 days, there is no interest although there is an initiation fee.
Borrowers are ‘restrained’
Data collected from 12 500 of Wonga.com South Africa’s clients shows that those who were granted loans were restrained about the amount they borrowed as well as careful about what the money was spent on.
On average, Wonga users opted for substantially less than the maximum, with an average loan size of R1 565.
Offered a maximum of R8 000, return clients took an average of R1 959 and most went for the 25-day repayment option.
Twenty-two percent said they used the loans for household expenditure, 18% for other bills, 14% for school or college fees, 12% for motoring expenses and 10% for utility bills.
Only 1% used the loan for clothing, fashion and tech items or gadgets.
Forty-seven percent were single, 49% were young (between the ages of 25 and 34) and 30.5% gave English as their home language. — Lisa Steyn
In a previous version of the article we stated that
"PwC’s banking analysis for the reporting period ended June 2013 found that the banks’ impairment expenses were 6.7% for the first half of the year."
This is wrong, and has been changed to:
“PwC’s banking analysis for the reporting period ended June 2013 found that the combined credit loss ratio of the major banks was at 1.2% for the first half of the year.”
We apologise for the error.